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October 2017 Exclusive Story

Power Generation

Economics Favor Natural Gas

WASHINGTON–Between 2002 and 2016, 132,000 megawatts of electric generation capacity–15 percent of the total U.S. installed base–was retired. According to the U.S. Department of Energy, the economics of natural gas-fired generation, not burdensome regulations or renewables, was the biggest factor in retiring those coal and nuclear plants.

Low-cost, abundant natural gas and the development of highly efficient natural gas combined-cycle generating facilities helped gas-fired plants become the new base load competitor to coal, nuclear and hydroelectric plants, states the Staff Report to the Secretary of Energy on Electricity Markets and Reliability.

The study comes from an April 2017 memorandum issued by Energy Secretary Rick Perry on electricity markets and reliability to evaluate the nation’s current system and lay out changes needed to ensure the system remains reliable, resilient and affordable going forward, DOE says. The memo required the study to examine:

  • How wholesale electricity markets have evolved, including the extent to which federal policy interventions and the changing electricity fuel mix are challenging the original policy assumptions that shaped the markets’ creation;
  • Whether wholesale energy and capacity markets are compensating attributes such as on-site fuel supply and other factors that strengthen grid resilience; and
  • How much regulatory burdens, as well as mandates and tax and subsidy policies, are responsible for forcing the premature retirement of base load power plants.

Markets And VREs

While centrally organized wholesale electricity markets have achieved reliable delivery with economic efficiencies in their short-term operations, the DOE study says changing circumstances have challenged both wholesalers and, to a lesser extent, vertically integrated markets.

“To date, wholesale markets have withstood a number of stresses,” the Staff Report describes. “While markets have evolved since their introduction, they currently are functioning as designed–to ensure reliability and minimize the short-term costs of wholesale electricity–despite pressure from flat demand growth, federal and state policy interventions, and the massive economic shift in the relative economics of natural gas compared with other fuels.”

The report notes that the resulting low average wholesale energy prices, while benefitting electricity buyers, represent a crucial juncture for many base load generation resources and their role in preserving reliability and resilience.

The study quotes former Federal Energy Regulatory Commissioner Tony Clark as saying while affordable power was the goal when the markets were created, many state public policy makers now are working toward other objectives, including increasing the number of in-state jobs, promoting “green” energy or other politically favored resources, or retaining substantial tax revenues to state and local governments. “[Markets] were never designed for job creation, tax preservation, politically popular generation, or anything other than reliable, affordable electricity,” he said.

Market designs may prove inadequate, given potential future challenges, the Staff Report suggests, pointing to variable renewable energy (VRE) sources as likely to lower wholesale energy prices because of near-zero marginal costs. The analysis warns if VREs achieve high penetration of markets, they would put additional economic pressure on revenues for traditional base loads and nonbase load resources.

Wholesale electricity markets need further reforms to address the future services essential to grid reliability and resilience, the study urges, with efforts reflecting the urgent need for clear definitions of reliability- and resilience-enhancing attributes.

Generation from VRE sources can change widely during the course of a day, which requires dispatchable power plants to be operated more nimbly, the report states. Additionally, it points to the possibility of overgeneration from those sources at some points, which would drive prices to almost zero while simultaneously requiring quick-ramping assets when VRE power subsides.

“Taken together, these trends have placed a premium on flexible output rather than the steady output of traditional base load power plants,” the Staff Report describes. “This flexibility is generally provided by generation resources. However, nongeneration sources of flexibility–such as flexible demand, increased transmission, and energy storage technologies–are being explored as ways to enhance system flexibility.”

Reliability And Retirement

While the nation’s bulk power system continues to provide reliable and affordable energy, DOE cautions that several reliability issues may require attention, including maintaining the control processes that oversee frequency response, voltage support and ramping. It says technological and institutional changes now affecting the electricity sector will require new levels of coordination and collaboration.

Fuel assurance is a growing consideration for the electricity system, the report states. Maintaining onsite fuel resources improves that assurance, but it says most generation facilities have experienced fuel delivery challenges in the past. Although coal-fired facilities typically store at least 30 days’ worth of fuel on site, extreme cold can freeze stockpiles and disrupt train deliveries, DOE points out. Meanwhile, capacity challenges on natural gas pipelines, combined with difficulties in siting and building new infrastructure as well as competing uses for gas, have created supply constraints and could affect reliability, the report assesses.

Severe weather events during the past few years have demonstrated the need to improve system resilience, the report says, with improvements needed to handle high-impact, low-probability events. For the power generation sector, the report urges designing wholesale electricity markets to recognize and incentivize investments to achieve or enhance resiliency.

The unprecedented jump in natural gas-fired electricity generation, the increase in renewable power sources, flattening electricity demand growth and a range of policy issues including regulations, mandates and government subsidies have combined to negatively impact traditional base load generation, particularly coal and nuclear power plants, the report describes.

Recommendations

The Staff Report concludes with a series of recommendations, which DOE notes includes some actions that fall within its authority and others that depend on actions by other government agencies or private organizations. Among the recommendations are:

  • FERC should expedite its efforts with states, electric grid managers and other stakeholders to improve energy price formation in centrally organized wholesale electricity markets.
  • FERC should recommend regulatory changes to compensate electric grid participants for services needed to improve reliability, with DOE providing technical and policy support to strengthen those efforts.
  • DOE should support utility, grid operator and consumer efforts to enhance system resilience, including disaster-preparedness exercises by transmission entities, and the North American Electrical Reliability Corporation, the international regulatory authority that oversees the bulk power system in the United States, Canada and parts of Mexico, should consider adding resilience components to its mission statement.
  • DOE should promote research and development of the next generation of grid reliability and resilience tools.
  • Utilities, states, FERC and DOE should support increased coordination between the electric and natural gas industries to address potential reliability and resilience concerns associated with organizational and infrastructure differences. DOE and FERC should support well-functioning commodity markets for natural gas by expeditiously processing liquefied natural gas export and cross-border gas pipeline applications.

“This report highlights the importance of a policy framework that promotes sufficient and timely pipeline capacity to meet the needs of electricity generation,” says Don Santa, president and chief executive officer of the Interstate Natural Gas Association.

This story is a complement to the print edition of The American Oil & Gas Reporter. For other great articles about exploration, drilling, completions and production, subscribe.