The 2014 New England Energy Debacle; PJM

If I remember, I will post updates at this post regarding the energy situation in New England, beginning in the winter of 2013 - 2014.  It looks like the story will not soon end.

The stories are all over the internet; the question is this: "why is this happening? Why are all these power plants closing?"

Updates

February 18, 2014: regular readers know what RBN Energy has to say about the New England energy debacle -- it will take up to six years to get the infrastructure in place to meet the energy needs of New England.

February 6, 2014: SeaCoastOnLine is reporting:

The retirement of several power plants in New England is reducing power supply and driving up prices, the region's electric grid operator warned Wednesday.

A regional auction to buy power for 2017 and 2018 in so-called capacity markets — comparable to an insurance policy that ensures power is available in the future — ended with a shortfall in megawatts for electricity used by businesses and homes, ISO-New England said.

In the auction that ended Monday, ISO secured a commitment of 33,700 megawatts, off from 33,855 megawatts of capacity required. One megawatt powers about 1,000 homes.

The deficit in megawatts available is a first for New England, which has had a surplus in megawatt capacity since the forward capacity market was established in 2006.

"The region abruptly went from a capacity surplus and low prices in previous auctions to a capacity shortfall and relatively high prices," said Gordon van Welie, ISO New England's president and chief executive officer.

February 5, 2014: Forbes provides background to just how screwed up things have become in New England under the Obama administration. Obviously this is not "directly" Obama's fault, but it is the kind of thinking that Obama fostered during his terms in office.

The wholesale price of electricity in New England is exploding.

In recent months, nearly 10% of existing power plants in New England have announced plans to retire over the next three years.

The result: capacity deficits and rising wholesale prices.

“The region abruptly went from a capacity surplus and low prices in previous auctions to a capacity shortfall and relatively high prices,” ...

On Monday, the ISO New England completed the eighth annual Future Capacity Market (FCM) auction for 2017 and 2018.

The total cost of capacity for New England rose to $3.05 billion at this year’s FCM. To put the scale of this increase in perspective, the total cost of capacity for the previous seven auctions ranged between $1.06 billion in 2013 and $1.77 billion in 2009.

The major power plants planning to retire in New England in the next three years “include Brayton Point, a 1,535-MW power plant located in southeastern Massachusetts; Vermont Yankee, a 600-MW power plant located in southern Vermont; Salem Harbor, a 750-MW generator in northeastern Massachusetts; and Norwalk Harbor, a 350-MW power plant located in southwestern Connecticut.

The FCM sets the price of capacity, one of the major components of wholesale power prices, for new and existing resources. It is held three years in advance to provide time for new resources, which include both traditional power generation or demand-side resources, to be developed.

Capacity payments provide economic incentives to attract investment in new and existing supply-side and demand-side capacity resources to ensure that sufficient capacity is available for reliable operation of the bulk power grid.

The first seven auctions ended with a significant surplus of regional capacity. By contrast, Monday’s FCM auction concluded with a deficit of 155 megawatts of capacity required for the 2017 and 2018 commitment period.

“The slim capacity margin and the resulting auction prices are a clear signal to the marketplace that the region needs more power generation and demand reduction capacity."

In deregulated electricity markets, there are two main products: electricity; and capacity.

Capacity is effectively a call option on electricity where a resource is paid to be on standby in case it is needed to meet demand.

In regions with accentuated peak loads, capacity markets are crucial to keeping the lights on during spikes in demand. Other than Texas, which relies on an energy only market structure, most regional grid operators have some type of capacity market.

The article does not say it, but I would assume that there is a certain cost in keeping generators on standby, in case such power sources as wind or solar are not available.

Original Post

This has to do with the recent energy debacle in New England.

For background:

• President's war on coal vs Mother Nature
• Introduction to PJM, Platts
• The president keeps his promise to kill the coal industry
• RBN Energy: part 2 of the 2014 New England energy debacle

SeekingAlpha has a great update and much background.

How did this effect spot pricing for electricity [in New England]? As with most supply and demand equations, when demand picks up and supply is curtailed, spot prices move higher. According to the Reuters articles, the 5-year average January next-day delivery electricity price in the PJM territory is in the mid-$50s per megawatt-hour. On Tues Jan 7, the next-day delivery price was $240 per MWh. Real-time power prices were running much higher at $1,000 to $1,500 per MWh.

Who is PJM? PJM is the managing oversight body for power generation and transmission in the Mid-Atlantic and parts of the Midwest. Based in Valley Forge, PJM Interconnection controls a series of power grids fueled by natural gas, oil, nuclear power and coal. 

The article goes on:

Gas utility companies that are expanding their pipeline infrastructure in the Mid-Atlantic are: National Fuel Gas with their extensive Marcellus acreage footprint; Dominion Resources soon-to-be spun off MLP; Spectra Energy East Tennessee and Texas Eastern pipeline; and Kinder Morgan Tennessee pipeline. Most of the planned added pipeline capacity will carry additional production from the Marcellus and Utica shale natural gas fields.

While natural gas-fired capacity in PJM's territory will continue to grow, so will the problems of sufficient fuel. AEP and EXC offer coal and nuclear generating exposure in the Northeast/Midwest. NRG operates 17,500 MW of non-natural gas facilities in PJM's jurisdiction, or about 37% of total company capacity.

 Regular readers of the blog, through links to RBN Energy, already know this story but the SeekingAlpha graphics are very nice.

The SeekingAlpha article targets investors interested in pipelines to New England. I'm really not interested in that angle. What interests me is where the natural gas that is so sorely needed by New England is coming from. It's coming from the Marcellus and the Utica, both reliant on fracking. A ban on fracking is the end of the domestic oil and gas industry (someone else said that, not me).

A lot of story lines in this SeekingAlpha article and the RBN Energy series on the New England situation.

Bottom line: relief won't reach New England until 2016 (two more winters) and the relief that comes on line in 2016 won't be enough to solve all the problems. (And Cape Wind will not be the answer, either.)

By the way, The New Hampshire Union Leader reported that New England pays 40% more for energy than the US average.

Economic growth in New England will be constrained by the lack of natural gas pipelines in the region for at least another two years, and perhaps longer, according to a group of energy experts speaking at St. Anselm College on Monday.

"Growth in jobs and income will lag the national average despite many other advantages we do have in the region," said Lisa Shapiro, chief economist at the law firm of Gallagher, Callahan and Gartrell in Concord.

Shapiro was one of several speakers at the workshop "New England's Energy Future and its Effect on the Regional Economy," which was hosted by the New Hampshire Institute for Politics.

Natural gas delivered to New England can at times cost seven to 10 times higher than the national average on the continental U.S., she said, given the high demand for transmission and the lack of space on pipelines, particularly in the coldest months.

"We really are at such a comparative disadvantage compared to the rest of the country," she said, when businesses size up the cost of energy in planning an expansion or relocation.

From 2010 to 2012, energy prices in New England declined 6 percent, she said, but the region remains the highest-priced market for energy in the U.S. "We are now only 40 percent above the national average, but we had been at 50 percent," she said.

North Carolina, Texas, even California are options for companies wanting to relocate.