The Ripple Effect
Q&A With Skipping Stone President Greg Lander
Q: Could you discuss the operational and economic disconnects between the natural gas and electricity markets. Where does that come from, and why is it a lasting issue?
A: First, the two markets’ “economic” or “pricing” days are different. The electric market’s economic “day” starts at midnight in each time zone. The natural gas market’s economic “day” starts 9:00 AM Central Time regardless of time zone. So to start with, the two markets have 18 hours of their respective “days” that don’t synch up economically. In short, the first 7-10 hours of each electric day are the last 7-10 hours of “yesterday’s” gas market; and the last 7-10 hours of “today’s” gas market are the first 7-10 hours of tomorrow’s electric market. And, if this weren’t complicated enough, the electric market prices tomorrow’s market in hourly increments, while the gas market for the most part has one price for its “next day gas” and largely opaque prices for within-day (i.e., intraday) gas.
Now combine this with how we got here. Less than 20 years ago, electric generation was primarily the domain of oil, coal, and nuclear plants. In the past 10 years, natural gas fired generation has grown 61 percent while coal fired generation has shrunk by 17 percent, according to the US Energy Information Agency. In places like New England, this shift has been particularly abrupt. Less than 10 years ago, electric generation was primarily the domain of oil, coal, and nuclear plants. Today, natural gas dominates the generation mix, with its share just over 50 percent and growing.
The reasons for this are simple. Natural gas is cheap and abundant and it burns cleaner than coal and oil. In addition, gas-fired generation plants are cheaper and quicker to build and, once built, can be turned up or down in a matter of minutes compared to the significantly longer ramp times required with coal or nuclear.
This operational ramping up and down of the gas-fired plants conflicts with the way the vast majority of pipeline capacity is sold. Pipelines, for the most part, sell their capacity under contracts which provide for levelized hourly flows. This is where the operational rub between the two industries comes into play. Back when gas-fired generation was a much smaller component of total pipeline loads, the variations in burn (from ramping up and down) could largely be dealt with; however, as ever more gas-fired power plants are located along these pipelines, this ramping poses often severe challenges.
This was not a problem for a long time because the pipelines were built to serve peak day loads – which rarely occur. This rarity led power plant developers to build… and build… and build, without signing up for expensive expansions of the pipelines. Now, however, with the continued growth of the gas-fired generation component of the electric market, things are getting more challenging.
The ramping service provided by the pipelines to generators has always been critical to power generators (i.e., varying above and below levelized flow – and sometimes to zero); and here critical means valuable. However, this flexible delivery service is largely an unpriced service. Today, as in the past, pipelines provide this flexibility when they can, and don’t when they can’t. And, because flexibility is unpriced, there is no price signal to inform investment or innovation to provide more of it. Why? Because, no one can compete with or invest money to provide any more of an un-priced service. The problem is… the formerly plentiful “flexibility” is being used up more frequently.
Q: What does this mean?
A: This means there is increasing demand for pipeline service provisions that would permit greater fuel delivery variability from ratable (levelized) delivery, thus enabling improved coordination.
Moreover, these ramping challenges are only going to increase as renewables penetration means that gas plants will run at normal load fewer total hours in each day, but will need to ramp up and down more dramatically.
Q: And what about a solution? Is there a way to coordinate or regulate the gas and electric wholesale markets in such a way that they become synchronized?
A: Gas and electric wholesale markets should be economically and operationally coordinated so that products and services in each market generate effective and actionable price signals in and across these two markets, and so that appropriate, right sized, investments are called forth in a timely manner. In particular sub-day variable delivery service, to the extent it becomes priced, will lead to a more vibrant and transparent sub-day gas market akin to the real-time electric market.
Regulations, wherever possible, should be aimed at establishing self-correcting market structures that allocate variable delivery capacity to those who value it most. This will further serve to support the generation of appropriate price signals that will in turn incentivize market players to meet established policy goals.
Accurate and efficient price signals in both the gas and electric wholesale markets will determine the correct mix of investments. As among gas pipeline capacity, supplemental/alternative fuels, electric transmission capacity, demand response, energy efficiency, energy storage (gas or electric), and distributed energy resources, correct price signals in the two markets will best direct capital and service investments.
Q: You’ve given us a lot of great information today, but we know you also have an extensive presentation on this subject. What is that titled, and where can someone who’s interested find it?
A: A launching point for price formation is discussed in the presentation, Market Implications and Considerations for Enhanced Scheduling Flexibility… and we’ll have more on market harmonization and the implications for market operations aa well as related data management systems in future editions of Ripples.
Greg Lander, President Skipping Stone
Greg Lander is the President of Capacity Center, as well as President of Skipping Stone, which owns Capacity Center. In addition to starting the company, originally as TransCapacity, he also started one of the first independent gas marketing companies, Citizens Gas, where he was President and Chairman. Greg was a founding member of GISB (Gas Industry Standards Board – now NAESB).
As President of Skipping Stone, Greg is responsible for Strategic Consulting in the merger and acquisition arena with numerous clients within the energy industry. Generally recognized in the energy industry as an expert, he has given testimony at numerous FERC, State, arbitration and legal proceedings on behalf of clients and GISB (predecessor to NAESB).
As Founder, President and Chief Technology Officer of TransCapacity LP, he was responsible for conceiving, planning, managing, and designing Transaction Coordination Systems utilizing EDI between trading partners. As a founding member of GISB, he assisted in establishing protocols and standards structures, chairing the Business Practices, Interpretations and Triage Subcommittees. Greg is the longest standing board member of NAESB.