Natural gas is one of the key fuel inputs for electric power generation. New technology, particularly combined-cycle technology, has made the natural gas power plant the energy system of choice in recent years-and gas remains a leading fuel of choice for future power plants as well.
Gas Plant Advantages: Lower Emissions, Higher Efficiency
|Power generation is one of the leading natural gas consuming sectors in the Northeast region. Air emissions from power generation in the region have dropped in the past decade thanks in part to the use of cleaner-burning and more efficient fuels such as natural gas.
The comparative advantages of natural gas power generation include higher efficiency, lower heat rate, shorter construction lead times, and reduced air pollutant emissions compared to other fossil fuels.
The rise in natural gas use in power generation is leading to substantially lower air emissions, from sulfur dioxide to carbon dioxide. Energy-related carbon dioxide (CO2) emissions in 2012 were the lowest in the United States since 1994, at 5.3 billion metric tons of CO2. One of the central reasons has been the decline in coal-fired electric generation and the rise of natural gas for power generation, resulting in lower carbon emissions. In 2013, after years of decline, U.S. carbon emissions rose, as higher natural gas prices resulted in greater coal-burning by power plants. The U.S. EPA in mid-2014 introduced its proposed "Clean Power Plan" regulation. When implemented, this regulation is expected to lead to retirements of older and dirties power plants, to be replaced by by newer and more efficient plants, such as natural gas and renewables.
At the regional level, the same dynamic is in play. In New York State, from 2000 to 2013, NY ISO reports that emissions rates from the power sector have seen a 41% decline in CO2, an 81% decline in NOx, and a 94% decline in SO2. In April 2014, ISO-NE reported that "an increase in natural-gas-fired power generation and the implementation of emission controls on the region's fossil-fuel-fired power plants have resulted in significant reductions in air emissions in New England." As noted in the 2012 ISO New England Electric Generator Air Emissions Report (issued January 2014), total emissions for sulfur dioxide (SO2) and nitrogen oxides (NOx) declined from 2001 to 2012 by 92% and 66%, respectively, while carbon dioxide (CO2) emissions decreased by about 21%.
This is good news for the environment.
Gas Seen as Leading Power Sector Input in Coming Decades
Natural gas is positioned to be among the leading fuels for electric power generation in the next decade (and beyond), along with renewables. Gas is also a key fuel input for new technology options like fuel cells, combined heat and power, and distributed generation. Natural gas is also seen as the key "back-up fuel" to offset the variability and intermittency of wind power and other renewables.
Source: U.S. EIA, Feb. 2014. Metric tons
Gas plants today remain the leading fuel type for new proposed power generation capacity in the generator queues in New Jersey, New York and New England. As the fossil fuel with the lowest carbon content, and with an outlook of abundant North American (and global) supplies, gas appears well-positioned as a reliable, cost-effective, environmentally responsible option.
As one example of the increasing recent role of gas in power generation, and its potential for growth, The New York Independent System Operator (NYISO) in its June 2014 report entitled "Power Trends 2014," noted:
To support such growth, additional pipeline capacity is needed. Infrastructure projects are under construction in NY and NJ, and several are proposed in New England. The long-standing inability of the power market to invest in pipeline capacity, however, especially in New England, remains a market (and reliability) challenge.
- "Power plants fueled primarily by natural gas account for more than half of the electric generating capacity in New York State."
- "The NYISO interconnection queue shows that projects using natural gas account for more than 70 percent of all proposed generating capacity."
|Chart: U.S. EIA, 11-13
Natural Gas Impact on Electricity Prices
The increase in U.S. domestic production of natural gas engendered a much lower commodity price position for the fuel in recent years. This is good news for consumers of natural gas at all end-uses, including power plants.
In New York, "the average wholesale electric energy price for 2012 was the lowest in the 12-year history of New York's competitive markets for wholesale electricity," according to the NY ISO - thanks in great measure to recent low natural gas prices. In New England, where natural gas accounts for 50% of total power generation capacity, the average price of wholesale electricity in 2012 was 23% lower than the previous year, and at the lowest annual level since 2003.
Commodity prices increased in 2013 and 2014. While the regional price can be quite low at certain months of the year, as Marcellus production continues to rise, the delivery price of natural gas to Northeast markets can be quite volatile and high during high-demand periods of the summer and especially the winter.
The Northeast spot price volatility reflects delivery constraints during high-demand periods of intense hot or cold weather. Natural gas utility customers are generally protected from the daily impact of spot prices, but the power market in the region, which operates with high levels of interruptible gas capacity held by many gas generators in the region, is subject to these spot market fluctuations, and that in turn impacts electricity customers.
The last two winters resulted in very high power prices in the region, most especially in the "polar vortex" winter of 2013-14, when regional natural gas points yielded a daily spot price at historic levels - from $80 to $120 per MMBtu on several occasions.
For the winter of 2014-15, the major price impact is forecast to be on electric consumers in New England. For the period starting January 2015, New England electric utilities estimate that electric bills will be 25-50% higher than last year, reflecting higher costs in the wholesale electric market, which stem in great part from the reliance of gas generators in the market on non-firm or interruptible/secondary pipeline capacity. This contracting situation leaves the gas generators subject to the volatile natural gas spot market price. At the same time, natural gas utility bills in the region are generally expected to be stable - and in some cases lower.
The regional economic impact of high electric prices is summarized well by ISO-NE: "For the three months of winter 2013/2014 (December, January and February) the wholesale cost of power totaled about $5 billion in New England. By comparison, for the entire 12 months of 2012, when natural gas prices were at record lows, the wholesale cost of power totaled $5.2 billion, with winter 2011/2012 making up $1.2 billion of the total. The following winter, 2012/2013, which included a January cold snap and Winter Storm Nemo, totaled $2.9 billion. As mentioned above, many New England ratepayers will soon start to see the impact of last winter's price spikes when they open their electric bills."
Additional pipeline capacity into the region would help to alleviate constraints and reduce the regional price volatility. It would also be helpful if the New England power market could resolve its market design issues to facilitate this.
Additional natural gas infrastructure investments would relieve this price pressure.
The regional power generation fleet in the region has become highly reliant on natural gas and may well become more so. There are however several unresolved power market issues that continue to challenge the market.
A central challenge is that - especially in New England - most power generators do not contract for firm gas pipeline capacity under their unilateral control and instead rely on "if and as available" gas non-firm capacity, or, in some cases, capacity held by third parties. Pipeline capacity has routinely been added to meet the needs of gas customers who desire firm service and are willing to execute firm contracts for such service.
The majority of gas-fired power generators in New England opt for non-firm gas transportation services. The generators have long observed that the electric market does not provide the proper incentives to enable them to contract for firm transportation. NGA has encouraged the development of solutions to this power market dilemma, which causes uncertainty for the entire regional energy market.
(Also, as many generators are more reliant on interruptible capacity it is extremely critical that parties comply with pipeline operating rules, as well as the pipeline's tariff-required gas scheduling rules, so that system integrity is maintained to ensure that those customers that do contract for firm capacity receive that service.)
Another issue is the difference in the timing of commitments for the gas and electric day; efforts are under way on the national level at NAESB to explore means to better synchronize the markets.
The U.S. Federal Energy Regulatory Commission (FERC) initiated in 2012 a new proceeding on gas and electric market coordination. The FERC issued an order on gas-electric communications in fall 2013, and continues its review.
The New England region is seen as the area facing the most immediate coordination challenges owing to the "interruptible" nature of most of its natural gas-fired power generation capacity. Discussions have been underway on this topic for over a decade, and received new impetus in 2012-2013 through a forum held among natural gas and electric industry participants, along with state regulators in the region (through its NESCOE affiliate).
In February 2014, the New England Natural Gas Industry, representing pipelines, LNG importers, LDCs, and NGA, filed joint comments with FERC on a New England electric market issue. In that filing, the gas participants noted this key point: "Many if not all of the problems with gas-fired electric generation units... [cited by the electric market] are actually problems of gas-fired units that lack firm transportation, not problems of gas-fired generation per se. If gas-fired generation seems like "just-in-time" delivery, it is because generators are contracting for just-in-time delivery or relying on just-in-time delivery from a spot capacity release market. Natural gas can play a valuable long-term role if parties contract for firm transportation and develop the requisite pipeline infrastructure that comes along with that firm contracting."
In early 2014, a proposal was made by the New England Governors to the electric grid operator to try to resolve this and other energy infrastructure issues. On January 23, 2014, the New England Governors announced that they were seeking to develop transmission infrastructure that can deliver clean energy into the region's electric system and expand pipeline capacity to bring more natural gas to New England. On behalf of the governors, the New England States Committee on Electricity (NESCOE) asked ISO-NE to assist the states as they request proposals for transmission infrastructure to deliver at least 1,200 MW and as much as 3,600 MW of electricity from clean energy sources into the grid, as well as to develop a funding mechanism to support investment in additional pipelines to bring natural gas from the Pennsylvania region into New England. As the region's power generation becomes increasingly reliant on natural gas, noted the governors, infrastructure investments will help ensure adequate and competitively priced supplies of gas and clean energy from diverse sources while lowering the cost of electricity for residents and businesses. This proposed initiative, which remains under discussion as of late 2014, in NGA's view represents a positive opportunity for New England.
Electric & Gas Industry Coordination
The natural gas and electric system operators in the Northeast continue to increase communications and coordination. NGA and ISO New England, for instance, jointly administer an Electric & Gas Operations Committee (EGOC) to increase understanding and information exchanges (on publicly-available information). The EGOC includes the NY ISO and PJM as well as other stakeholders.
NGA also updates the electric grid operators regularly regarding the coordinating work of NGA's Gas Supply Task Force.
With natural gas remaining a significant fuel going forward for electric generation, coordination efforts such as these - both regionally and nationally - are to be encouraged.
For Further Information
FERC Proceeding on Natural Gas-Electric Coordination
NESCOE Web Page on New England Natural Gas-Electric Discussion Group
NGA Background Paper: "Gas-Electric Market Challenges in New England, April 2012" [pdf]
Northeast interstate pipelines' electronic bulletin boards (EBBs)
ISO New England
New York ISO
Northeast Power Coordinating Council (NPCC)
North American Electric Reliability Council (NERC)
Interstate Natural Gas Association of America (INGAA)
North American Energy Standards Board (NAESB)