Elsevier

Energy Policy

Volume 121, October 2018, Pages 611-620
Energy Policy

Enhancing electric reliability with storage-field generators

https://doi.org/10.1016/j.enpol.2018.03.040Get rights and content

Highlights

  • Increased gas generation places new demand on gas infrastructure.

  • Coordination issues between the gas and electric industries reduce reliability.

  • FERC can encourage generators to locate at storage facilities to enhance reliability.

Abstract

The U.S. natural gas industry has experienced two significant changes recently. First, consumption has increased since 1995, as electric utilities substitute gas for coal. Since electricity use is summer peaking, this new consumption smooths demand over the year. Second, the shale gas revolution has increased production and storage since 2005. This decreased prices, encouraging the coal-to-gas substitution. Frictions between the gas and electricity industries have, however, decreased electric reliability. Just as locating generators at coal mines decreases the cost of transporting coal, locating gas generators at storage sites increases reliability by decreasing these frictions. But because the increased reliability is external, and thus ignored by generators and infrastructure providers, FERC must provide incentives to coordinate investment in generation and storage to realize these gains.

Introduction

The Federal Energy Regulatory Commission (FERC) regulates the interstate transmission of natural gas in the U.S. It introduced important restructuring with Order Nos. 436 (FERC, 1985) and 500 (FERC, 1987), which decoupled storage from pipeline transportation, and with Order No. 636 (FERC, 1992), which instituted open access for pipelines. Joskow (2013) reviews problems caused by regulation that spurred these regulatory developments. This restructuring set the stage for significant industry changes.

Historically, natural gas production was fairly stable over time, with storage injections and withdrawals accommodating seasonal demand swings. This allowed for smaller scale production and distribution with higher utilization rates than are possible without storage. Two recent developments, however, are disrupting this seasonal pattern: the electric utility substitution of natural gas for coal and the growth of shale gas production.

Increasingly stringent EPA emissions rules are leading electric utilities to substitute natural gas for coal, which have cleaner emissions than coal units. The EPA mandated decreases in various emissions with its Clean Air Act (EPA, 1970). The Clean Air Interstate Rule (EPA, 2005) decreased in SO2 and NOX emissions for large fossil fuel generators in eastern states (EIA, 2014b). This rule was replaced with the more stringent Cross-State Air Pollution Rule (EPA, 2015). The Mercury and Air Toxics Standards (EPA, 2011) decreased mercury and other emissions of large coal generators.

These rules increase fixed and marginal costs, as the required scrubbers and other hardware reduce efficiency. This pressures utilities to retire coal generators (American Public Power Association (APPA), 2010).1 While nuclear generators are not affected by these rules, they too are pressured into early retirement but for different reasons. Between 2006 and 2016, fifty nuclear power operating licenses have expired. Many licenses are not extended for political and environmental reasons (for example, see Rothwell, 2000; Lacey, 2015; Overton, 2015; Follett, 2016). Most of the coal and nuclear generators are being replaced with gas-fired generators and renewables (EIA, 2014a).

The shale gas revolution, almost symbiotically, has dramatically increased production and storage since 2005. This decreased natural gas prices, further encouraging coal-to-gas conversions. It has had an additional effect by impacting the price of the marginal fuel. The coal-to-gas conversion was not initially disruptive of the electricity market, as the high marginal cost gas units set peak prices based on high gas prices (Id.). But the subsequent drop in natural gas prices led to a drop in electricity prices. Hence, utilities that had been facing increasing costs were also then facing decreasing revenues, encouraging additional retirements (Id.).

Growing electric utility dependence on natural gas decreases reliability. Operational problems arise from trading day differences for electricity and natural gas, use of non-firm gas transportation to support firm electricity sales, and increased reliance on non-dispatchable renewables. Structural problems arise from the timing of the new electric utility demand versus Local Distribution Company (LDC) demand for natural gas, when the new demand competes with LDC demand during peak periods.

We explore how natural gas storage can enhance reliability if gas generators locate so that they have direct access to storage, an updated version of Joskow's (1985) and Kerkvliet's (1991) mine-mouth generators. Much of the friction between the industries that decreases reliability is then eliminated. This coordination requires FERC's involvement, however, as the cost to be economized on is an external reliability cost, and thus ignored by generators and other infrastructure providers. The analysis results in a policy recommendation for FERC to enhance reliability through coordinated investment in generation at storage sites, and in supporting infrastructure.

2 The changing natural gas industry, 3 Natural gas usage and electric reliability discuss the significant changes affecting the natural gas industry and the resulting reliability problems. Section 4 proposes that FERC encourage gas generators to locate at storage facilities to enhance reliability. Section 5 concludes.

Section snippets

The coal-to-gas conversion

Tightening EPA emission rules are creating turnover in the electric utility industry. Fig. 1 shows annual investment in generator capacity by fuel. Investment in coal capacity increased from the 1940s until the mid-1970s, decreased in the 1980s, and virtually disappeared by the early 2000s as the EPA's rules took effect. It subsequently recovered somewhat with higher gas prices. Investment in nuclear capacity spiked in the mid-1970s and mid-1980s, with little investment otherwise. Investment in

Recent electric reliability events

As the electric utility industry increases its reliance on natural gas, incompatible features between the industries decrease reliability. The natural gas pipeline and storage system were designed for LDCs serving heating demand, not for significant electric utility use. The increased and varied demand of gas generators, and the imperfect coordination between the industries, can stress the electric grid. We illustrate with several extreme weather events, where electric utilities shed load in

Storage-field generators increase reliability

Coordination between electric generators and natural gas storage facilities, specifically, locating generators at storage facilities, would improve electric reliability. This is an updated version of the mine-mouth generators discussed by Joskow (1985) and Kerkvliet (1991), among others.33

Conclusions

The natural gas industry has seen rapid growth in demand by electric utilities, and in production and storage. The growing dependence of electric utilities on natural gas and the coordination difficulties between the two industries is decreasing reliability. Storage-field generators offer the potential to increase reliability by eliminating much of the market coordination with something akin to internalized firm transactions. By siting generators at storage fields, the more demanding real-time

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    • The pricing of shale gas: A review

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      Citation Excerpt :

      Figs. 1 and 2 show annual data on U.S. natural gas production and shale gas production from 2007 to 2018. As the literature shows, the production of shale gas has increased the production of natural gas over the past 20 years, leading to a decline in the price of natural gas (Wan et al., 2014; Andersson-Hudson et al., 2016; Apergis, 2019; Cooper et al., 2018; Cronshaw and Grafton, 2016; Fuhui et al., 2017; Howell, 2018; Misund and Oglend, 2016; Savitski and Nuryyev, 2018; Tan and Barton, 2015; Spearrin and Triolo, 2014). Sovacool (2014) certifies gas prices in the U.S. have fallen from $13 per million British thermal units to $1 - $2 in 2012 as shale gas has increased.

    Sladjana Cabrilo, Sven Dahms, Herbert Hanreich, and Michael Shaw provided helpful comments. This paper was presented at I-Shou University's International College Interdisciplinary Seminar, and benefitted from participant comments. It has also benefitted from reviewer comments. All errors are ours.

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