Natural gas now serves two masters: electricity and heat

Electricity, heating both make demands on the fuel

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On Feb. 9, the temperature in Boston dipped 15 degrees below freezing. Much of New England was under the white embrace of a brutal nor'easter, and electric utilities and gas companies struggled to keep their power lines pumping heat and light.

The utilities fought each other for natural gas, which supplies more than 50 percent of electric plants in that area. And while widespread blackouts were avoided, in the end, the prices of both electricity and heat quadrupled when they were most needed.

That is a cautionary tale for Pennsylvania and the electric grid that serves it -- Valley Forge-based PJM Interconnection, which is expecting an influx of new, gas-fired power plants and the retirement of more than a dozen coal plants over the next several years.

When gas is used for electricity and also for heat, there needs to be enough space in the pipeline to serve both masters.

In the days following that blizzard in February, a megawatt hour of electricity in PJM went for about $35. In New England, it exceeded $250. Natural gas in that region was triple the price being charged in other parts of the country.

"New England is, in some ways, a canary in the coal mine," said Don Santa, CEO of the Interstate Natural Gas Association of America, a Washington, D.C., group that represents pipeline operators.

"It's a market that's heavily reliant on gas-fired generation. It's also a very big space heating market and it's capacity constrained."

The PJM isn't there yet -- gas-fired power plants now supply only 29 percent of the capacity on its grid. But that percentage is rising quickly.

In last year's capacity auction, which secured electricity supply for the years 2015 and 2016, more gas-fired generation was offered and accepted than coal. Gas, for the first time, was the cheaper fuel.

"It's kind of new for us to see all the gas," said Ray Dotter, a spokesman for PJM. This month, the grid operator announced it was looking for a consultant to study exactly what this will mean for the 60 million customers on its system.

Capacity factor

Oil and gas producers, as well as pipeline companies, project that power generation will be the largest and fastest growing use for all the new shale gas coming out of the ground, and they welcome it with open arms.

Over the past five years, Houston-based Spectra Energy, which operates the Texas Eastern pipeline system that runs from the U.S. Gulf Coast through the width of Pennsylvania and into the Northeast, has seen a fourfold increase in gas slated for power generation running through those pipelines.

Yet few natural gas generators hold "firm capacity" contracts, which means the gas supply they're buying can be interrupted if another customer with priority needs it or if supply is somehow constrained.

Firm capacity contracts guarantee that the volume a generator is buying will be delivered at the time needed. Consequently, they're more expensive than interruptible supply.

In 2011 and 2012, firm capacity deals accounted for about 23 percent of the gas that power generators needed during the summer peak. "It's a low number," said Richard Kruse, vice president, regulatory with Spectra. "Most of what they use, they borrow from [local gas utilities]."

The market evolved that way because historically, gas-fired power plants have been used only for periods of peak demand. They can be turned on and off much quicker and more cheaply than coal or nuclear plants, so gas generators are used to complement baseload generation on very hot or very cold days.

But gas baseload plants, the kind that run day and night, are multiplying. Several are under construction in Pennsylvania. More than 60 percent of the plants planning to join PJM over the next few years are gas facilities.

The problem is, according to Mr. Kruse and others in the industry, gas generators are incentivized to cut as much overhead as possible in order to be competitive when bidding into the electricity market each day.

That means they prefer not to have a firm contract for a fuel that may or may not be needed.

Coal plants can reach into their coal piles when called upon or they can let the unburned fuel sit for another, more lucrative day. Gas must be burned when it arrives as on-site storage isn't an option.

"A system that for economic reasons encourages decisions that decrease reliability should be a concern to regulators," Mr. Kruse wrote in comments to the Federal Energy Regulatory Commission, which has been studying this issue for several years.

He suggested that grid operators look for ways to allow gas plants to recover the cost of firm capacity contracts, but the trick would be to do so without putting other fuels at a disadvantage.

Mr. Kruse said everyone in the gas industry wants the fuel to be reliable however it's used. Plus, there's a massive economic benefit to encouraging more firm contracts. The more capacity that's needed, the more pipe that companies like Spectra can put in the ground.

"We make our money by selling transportation, and right now, we're pretty much sold out," Mr. Kruse said. "If people need firm contracts, we'll have to build more."

The Interstate Natural Gas Association of America estimates that about $5.7 billion in transmission pipeline additions will be needed each year through 2035 to accommodate the growth in shale gas supply.

The energy day

Because gas is a real-time fuel -- meaning it needs to reach the power plant just in time to be burned -- scheduling gas delivery is a much more complicated process than, say, arranging coal or even nuclear fuel supply.

In addition, there's the mismatch in the gas day and the electric day, which overlap by only 12 hours.

The gas day begins at 10 a.m. Eastern Standard Time. That's when suppliers and customers can start to arrange the price and quantity of gas needed for the following day.

The electric day isn't uniform across the U.S. In the PJM grid, arrangements for next day's electricity begin at midnight EST and generators nominate their plants to run by 4 p.m. EST. Powerplants offer their bids, the grid wizards crunch the numbers, and by early evening, generators are committed for the next day.

There's a concern that generators may have to secure their gas supply hours before they'll know if they've been selected to produce electricity for the following day.

Mr. Santa said the natural gas association's members are open to negotiating a single energy day. It's a concept that's been proposed by JP Morgan Energy Ventures and explored by the Federal Energy Regulatory Commission.

But so far, as Mr. Kruse put it, the different energy sources continue to live in different days.

businessnews - marcellusshale

Anya Litvak: or 412-263-1455.


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