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. 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.
- 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.
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
- Coordination of maintenance schedules for natural gas transportation, electric transmission and electric generation facilities
- Emergency communications
- Limits on transportation and transmission capacity
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.