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Energy market does not need DOE 'central plan' to be resilient, economist says

The U.S. energy market does not need the prescriptions of a 2017 U.S. Department of Energy proposal that favored the onsite fuel storage of coal and nuclear power even if the grid takes on more natural-gas-fired power generation capacity, an economist said.

The Federal Energy Regulatory Commission terminated the DOE rulemaking Jan. 8 but immediately launched its own study on how to make the grid more resilient, especially during cold periods and other difficult times.

Among state regulatory commissioners, "many of them think high prices are bad," Sam Newell, a principal with the Brattle Group, said during a Feb. 13 panel on gas reliability at the 2018 winter meeting of the National Association of Regulatory Utility Commissioners. "I think they are necessary to provide signals for investors to do what is needed." He added, "In an economically efficient market, you don't over-invest to the point where there are never high prices."

Increases in energy prices during the past winter's "bomb cyclone," the "polar vortex" of 2014 and less celebrated cold snaps encouraged further investment in dual-fuel capability at power plants, alternative fuels, coal and other potential solutions, he said. LNG deliveries into New England are "not guaranteed," he added, but price signals might force market participants to prepare for winter by making arrangements for cargoes.

The pipeline industry has pushed for more investment in capacity in New England. On the National Association of Regulatory Utility Commissioners panel, Michael Moses, director of gas control and planning for TransCanada Corp., said his company and other pipeline companies have changed flows on their systems and offered new services to accommodate the needs of power generators.

Newell observed that for three days this winter, gas prices went over $100/MMBtu in the Northeast, and electric power prices for 10 days averaged roughly $170/MWh. "If you have a reliable source of low-cost fuel, you will be raking it in at those times," he said. "I expect investors will respond. I don't see it as a failure — the fact that we did see some high prices — I think that is good. That's what investors need to get the balance right."

Commissioner Donald Polmann of the Florida Public Service Commission took issue with Newell's focus on the market in a discussion that followed. "I would argue, and all commissioners understand, that we don't want to put the public in the position of relying on market forces to satisfy their needs for gas or electricity or whatever it is," Polmann said. "Because at the end of the day, if they don't receive the service, it may not be our fault, but it is our responsibility."

On the panel, Paul Bailey, president the American Coalition for Clean Coal Electricity, said there are problems with a big shift to gas as a generation fuel, including the difficulty of building pipelines, the vulnerability of pipelines to disruption, and the different regulatory models of the gas and electric industries. He agreed with the DOE warning of an "over-reliance on gas" in its 2017 notice of proposed rulemaking that promoted onsite fuel supplies.

Newell recognized that the market is not perfect. The Brattle Group, which provides economic, regulatory and financial analysis for corporations, law firms and governments, tries to identify where the market is vulnerable, he said. The market might need to be tweaked to prepare for unexpected events such as an attack on computer systems that control the power grid or a physical threat. He praised the work of FERC as it studies ways to make the grid more resilient and its decision to enlist the help of regional transmission organizations to assess risks.

But cold weather is a normal part of the energy market, Newell argued, and he disagreed with the DOE suggestion that power generators should keep 90 days of fuel supply onsite. "We have never had an event where you need 90 days of fuel supply," Newell said. "We have had lots of events where it is very helpful to have several days of onsite fuel."

"If you realize you have the right price signals, you don't have to define [supply] as in a central plan," Newell said.

Newell agreed with Bailey that generators should be designed to run on different fuels in case problems arise with a particular fuel, but he noted that PJM Interconnection has studied fuel diversity and found that "we actually could be reliable if we lost a lot more coal and had a lot more gas."

Moving to 100% gas for power generation would not be ideal for reliability, he said. But PJM, a regional power market that covers parts of the mid-Atlantic and Midwest, found that it could go to 86% gas in normal conditions. This amount drops to 66% gas in polar-vortex conditions, but even that amount is more than twice what the region has now, Newell said.

In his presentation, he said PJM did not have to shed load during the winter's cold weather — and PJM Director of Operations Planning Dave Souder agreed during his remarks — but ISO New England does have challenges.