Wednesday, June 19, 2013

Marrying Apples and Oranges: A High-level Look at the Evolving Natural Gas Industry and Electric Industry Coordination


By Daniel E. Cooper, P.E.

A Change in the Electric Industry Affects the Natural Gas industry

A combination of changes in environmental regulations and economic factors is driving a change in the electric utility industry. While coal has historically been the predominant fuel for electric generation in most parts of the United States, natural gas has now generally become the fuel of choice for new fossil-fired electric generating units. The resulting dependence on the natural gas industry as a fuel supply medium for electric generation is causing a reevaluation of the relationship, business practices, and regulatory requirements between the two industries. This article will present a simple, high level look at the practices of the two industries and the challenges that are appearing in developing a closer, more interdependent arrangement between them.

Challenges to Coordination

The physical, technical and business practice challenges affecting coordination between the electric and natural gas industries largely flow from a fundamental difference between their products – natural gas and electric energy. Natural gas can be stored at utility scales, while electricity can’t[1]. Since the structures and business arrangements for the natural gas industry and for the electric industry were each built around this basic fact – one assuming use of storage and firm transmission as a backbone, compared to one where storage isn’t available and fuel usage and transmission flows vary on a minute-by-minute basis as needed to meet demand – those structures and business arrangements are significantly different:
  • Natural gas supply and transportation arrangements are based on nominated (prescheduled) supply and transportation arrangements. The end user, either directly or through supplier charges, pays for any storage used to buffer variations in need and to take advantage of seasonal diversity in demand. Balancing arrangements and financial penalties for differences between scheduled and actual deliveries are an inherent part of the process. A “gas trading day” is defined nationally as 9:00 a.m. to 9:00 a.m. central time, (8:00 a.m. Mountain time and 7:00 a.m. Pacific time). Natural gas deliveries and transportation can typically be scheduled twice before each gas day and modified or updated twice during each gas day at industry standard intervals.
There is a variety of natural gas transportation products available that allow for flexibility in delivery or hedging of variances. Products ranging from “No-notice” service (delivery as needed to a citygate or burnertip point), and “Parking” and “Loan” interruptible services that allow a user to deliver or receive to the pipeline different amounts than nominated are available. Operational Balancing Agreements and Imbalance Resolution mechanisms serve to determine procedures and charges to address how differences between nominated and actual deliveries are balanced financially and through compensating exchanges. However, both economics and reliability concerns weigh against these types of product being used to supply fuel on a variable or unscheduled basis to a large volume electric generator required to support the electric system.
  • Electric utilities have historically designed their generation and transmission systems to supply a forecasted peak load, plus a cushion. The utility then operates its resources to maximize economics (minimize overall longer-term production costs) using the available resources. Electric utilities use a combination of on-site fuel storage and just-in-time fuel delivery arrangements for coal and fuel oil to meet moment-by-moment variations in electric demands. Since the electric demand varies substantially even on an intra-hour basis, a significant degree of flexibility in fuel supply is required. This is reflected in the typical scheduling arrangements for electricity. An “electric trading day” runs from midnight to midnight, generally based on local prevailing time. While schedules are typically for a full day (24 hours), that schedule will include a separate scheduled amount for each hour in the electric trading day. Further, changes and additions to electric schedules can be made hourly, as little as 30 minutes before the start of the hour in some cases.
There are some factors that are changing that affect the ability of the electric industry to forecast fuel needs. The increasing amount of variable wind and solar generation included in the generation mix tends to increase the variability of fuel needs, as fossil-fueled generators (typically natural gas-fueled) must stand ready to offset the swings in supply when weather changes cause fluctuations in the output of variable resources. There are also efforts being made to reduce the variability in electric demand and supply, or at least increase the accuracy with which electric demands (and resulting fuel requirements) can be forecast. Especially in Regional Transmission Organizations (RTOs) with organized central markets, pre-scheduling requirements provide an incentive for end users to accurately forecast their load to gain more control and certainty of pre-scheduled (“Day Ahead”) prices, limiting exposure to “Real Time” electric prices. RTOs are also working with wind generation developers to encourage installation of equipment to provide more ability to control the output of wind farms. Finally, RTOs and electric utilities, at the direction and urging of the Federal Energy Regulatory Commission (FERC) are putting tariff provisions in place to encourage and compensate entities that can control their level of demand (Demand Side Resources) to allow a limited ability to reduce electric demand in peak load and emergency situations.

FERC Initiatives and Areas of Concern

FERC recognized the shift to natural gas-fueled electric generation holds the potential to impact the reliability of the electric supply system. FERC initiated an on-going proceeding under AD12-12 to investigate natural gas and electric coordination. The goal of the proceeding is to determine potential or existing coordination issues, encourage an inter-industry dialog on the issues, and identify areas where FERC actions can facilitate coordination or remove impediments to coordination. Activities to date under AD12-12 have included two technical conferences, as well as requests for comments and input from the natural gas and electric industries on the matter. Industry initiatives are also occurring, such as the EIPC Study of the Natural Gas Electric System Interface that included participation by the ISO New England, New York ISO, PJM, MISO, TVA and Ontario’s Independent Electricity System Operator.

Several areas of concern have been identified so far in the process:
  • Delivery and generation scheduling
As noted above, the delivery days for natural gas and electric delivery schedules do not line up. That, coupled with the twice a day schedules for natural gas when the electric industry uses hourly scheduling results in both commercial and institutional hurdles for coordination of natural gas deliveries with electric generator fuel supply needs. Since the scheduling days and requirements each individual industry uses work well for them, and since those arrangements are incorporated in existing contracts and agreements in each industry, neither industry is rushing to change its basic practices.
  • Coordination of maintenance schedules for natural gas transportation, electric transmission and electric generation facilities
Both the natural gas and the electric industries are used to scheduling resources to meet needs. The addition of consideration of the maintenance requirements of the other industry represents a change in the number of variables to balance, not a new concept. Still, the FERC proceedings under AD12-12 have shown that work is required in at least two areas. First, standard usage terminology differs between the natural gas industry and the electric industry. In some cases, the same words are used differently or have different meanings in the two industries. A “common language” must be assured to allow the two industries to communicate effectively in this area. Further, the FERC Standards of Conduct limit the distribution of critical infrastructure and commercially sensitive information. An effort is underway to make certain these limits don’t hinder effective communications between the industries.
  • Emergency communications
The same issues exist between the industries concerning inter-industry communication during emergencies that hold for maintenance coordination. The communications during emergency are much more critical and time sensitive, however. Gas well freeze-ups and pipeline interruptions may affect fuel supplies for electric generation, requiring utilities or RTOs to be notified so corrective measures can be taken. Emergencies on the electric system may raise the operation of some electric generators to a critical “must operate” status regardless of nominations. This type of information needs to be relayed to affected natural gas suppliers, storage operators, and pipelines in emergency situations. This will require the “common language” discussed under coordination. Beyond that, standing processes need to be developed, maintained, and regularly tested to provide assurance that effective natural gas/electric industry communications can and do occur during emergency situations, with that the communication occurring is a timely and expeditious manner.
  • Limits on transportation and transmission capacity
The present electric transmission system was designed mainly for delivery of electricity from generators to local loads. While the regional planning requirements under Order 1000 will help mitigate the limitations, the electric transmission system generally can’t reliably move massive amounts of electricity from gas producing regions to electric users across the country. Similarly, the natural gas transportation system wasn’t built with consideration of supplying large amounts of natural gas to electric generators (at least in most areas). The addition of large scale natural gas-fired electric generation could result in regional and local pipeline capacity constraints with the use of pipeline capacity for electric generation fuel supply competing with pipeline usage for industrial/commercial and home heating needs. While more transmission and transportation capacity is an obvious answer, the reality of the time and expense incurred in obtaining permits, rights of way, and constructing new natural gas pipelines and electric transmission lines means that this is an area where both constraints and solutions are likely to be long-term matters.

Looking Ahead

The experiences with FERC’s AD12-12 proceeding show expanding gas/electric coordination will not be a quick and easy process. While both industries have strong reasons to coordinate, there are significant institutional and business model differences to address. FERC has targeted areas where it can readily take action, such as facilitating information exchange and addressing potential barriers to coordination from the Standards of Conduct restrictions. Organizations such as the North American Energy Standards Board (“NAESB”) have and continue to work on harmonizing business practices and arrangements. As more electric generation is fueled by natural gas, utilities, independent developers, regional electric supplier groups, and natural gas suppliers and pipelines may evolve agreements to use pooling or redirection arrangements to reduce nomination and actual delivery differences. New gas pipelines and electric transmission can and will be built. But all of these activities will take time – and in some cases a lot of time. During that time, business, technical and operational experiments, fixes and workarounds are likely to be needed as part of a continuing and challenging process.

[1] While utility scale storage options continue to be actively pursued in areas such as utility-scale battery storage, flywheel storage, and compressed air storage, none of these technologies have reached a level of commercial proof and economics that has resulted in large scale electric utility use.
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