Source: ZE

In recent years, the electric power industry has been on a rollercoaster ride with the emergence of new nodal markets, the strengthening of regulatory oversight on power trading activities, the “smartening” of the grid, and the birth of electric cars.

The generation stack is being impacted upon by government support of renewable generation and the tightening of environmental regimes. North American markets are likely facing the shrinking of the traditional coal-fueled generation base and uncertainty over the future of nuclear-powered units. And an unprecedented growth in natural gas-fired electricity generation has been adding to the overall strain.

It’s likely that most of the future growth in the demand for natural gas will come from the electric sector. What’s not clear though is how much this consumption will increase and whether there will be any dramatic impact on natural gas prices. A lack of clarity comes from the fact that this pending growth is affected by multiple factors; a combination of which creates a diverging impact on the outcome. These include:

  • The retirement of coal-fueled units supported by environmental regulations especially those limiting emissions of mercury and carbon;
  • The improvement in energy efficiency leading to decreased electricity demand;
  • The growth of renewable generation powered by renewable portfolio and clean energy standards;
  • The potential implementation of commercial-rate electric storage equipment reducing the need for natural gas units to be used as ancillary services and peakers; and
  • The unclear rate of the actual growth in natural gas production from shale plays, which is affected by various factors (see our series on complications for prices forecasters of Shale Gas for further information on this: article 1, article 2 and article 3).

Meanwhile, regardless of its expanse, the general trend for the growing capacity of natural gas generation will hold and the electricity industry’s dependence on natural gas delivery systems will only increase. Competition between power generators and other customers for capacity on natural gas pipelines will increase and will only get more acute at times when demand for both commodities surge simultaneously. Such situations usually occur during weather-related events such as hurricanes, but especially during sudden drops in temperature known as “cold snaps.” Thus, during the 2003 cold snap, disruptions on gas pipelines in Texas had a significant impact on generating capacity that sent electricity prices through the roof (see Figure 1).


Figure 1: ERCOT Daily Electricity Prices (graph created with ZEMA)

In 2012, the growing interdependence between the natural gas and electric industries led FERC to introduce an initiative to improve coordination between the two sectors. The preliminary results show that gas-electric interdependence concerns are more acute in certain regions. In some jurisdictions, this coordination is a novice concept while for others it has already been thought over, implemented and is being adjusted as the need arises. This difference depends on a large part on the current status of gas-fired generation and its future development in each particular region. The states that account for the majority of electric sector gas consumption are further along in optimizing their coordination between the gas and electric industries. Regions that are increasing their use of natural gas because of the growth in renewable generation are mostly concerned with any misalignments between these sectors.

While infrastructure inadequacy (capacity shortage) is an important concern, an even more serious problem arises from non-aligned communication and operational processes. Communication between the two industries is an extremely sensitive issue. Deregulation of both sectors has created this difficulty. Almost every piece of information on operations that has some economic value becomes proprietary information and causes concerns over the loss of competitive advantage as data is shared.

A major misalignment between the two industries exists in daily planning procedures, the daily nomination process, also referred to as “Gas Day” and “Electric Day” (see Figure 2).

Figure 2: Misalignment of Natural Gas and Electric Scheduling

Figure 2: Misalignment of Natural Gas and Electric Scheduling

The electric day planning is generally completed by 6pm of the current day, and this is where the discrepancies begin. Since the pipeline deadlines for nominations is 10am of the current day, power units have to schedule their gas nominations with pipelines eight hours before the time when the balancing authority confirms the dispatching order. Therefore, power units must base their requests for gas on estimates rather than a confirmed power schedule. This discrepancy creates a large risk which is even larger for high-capacity generators. Sudden weather events that raise demand increase this risk.

No doubt, harmonization of gas and electric daily operations can lead to greater operational efficiencies in both industries; however, how and to what degree it can be achieved is yet under question. To learn more about misalignments between two industries and what has been done in different regions to mitigate these discrepancies, read our in-depth article Coordination of Gas and Electric Industries: Increasing Transparency? in our most recent DataWatch issue.