Cold weather and price volatility in Northeastern power markets: Generators seek relief

The early days of yet another prolonged cold weather snap are causing concerns for grid operators along the East Coast.  Daily spot market prices are well above average, but that has not sufficiently dampened demand.

Yet again this month, demand response resources have been dispatched. In the PJM power pool that stretches from Chicago to the mid-Atlantic, 150 MW of emergency demand response was called the night of the 22^nd.  That number was increased to 500 MW on the 23^rd, and it was called upon again this morning, according to RTO Insider, a publication that monitors PJM.

RTO Insider noted that since Tuesday, PJM has issued numerous Post Contingency Local LOCM +0.62% Load Relief Warnings characterized as “advance notice to a transmission owner of the potential for manual load dump in  their area.”

PJM, in a January 23 press release calling on customers in the Baltimore and D.C. area to voluntarily reduce consumption, noted that “The prolonged cold requires some generating units to operate more often and for more hours than normal. It also stresses generator components. Any resulting unplanned shutdowns can further tighten power supplies.”

PJM Seek To Temporarily Lift Price Caps

The regional transmission operator is also seeking temporary relief from the Federal Energy Regulatory Commission (FERC) to temporarily lift the $1,000 price cap it can pay generators through March 1^st.  PJM is doing so because available power plants must in fact generate power and submit an offer of no more than $1,000 per megawatt-hour (MWh) into the grid.

However, with natural gas costs so high (a large portion of the generating fleet runs on natural gas), some generators’ operating costs are north of the price cap. Generation costs are high as a consequence of extraordinarily high gas prices. Normally in the $3.50 to $4.50/mmBtu range long-term, spot market gas prices this week have reached$140/mmBtu.

‘normal’ spot prices: Image: EIA

PJM’s request to the FERC will seek a retroactive waiver to apply to all resources dispatched this week, and make them whole for documented generation costs. It will not apply to operations during the first week of January. Going forward, PJM is requesting relief from the price cap to allow generators to bid in and set the Locational Marginal clearing price (though the price paid to demand response resources will remain limited to $1800/MWh). PJM said in a notice to its members that “PJM has consulted with counsel and believes the anticipated retroactive request will likely be accepted by the FERC.”

NYISO Following Suit

Further to the north, the New York ISO is seeking a similar FERC approval to lift its $1,000/MWh cap and compensate plants that can show their variable costs exceeded that limit, according to Energy Choice Matters. Unlike PJM, the NYISO is not seeking authority for generators to set either Day-Ahead or Real-Time spot-market prices.

NYISO stated that the waivers were “necessary to ensure the reliable operation of the New York State Power System” and noted that “weather and unprecedented natural gas market conditions have driven certain gas-fired generators’ fuel costs to previously unseen levels.”

The ISO recognizes that an increase in sport market prices will “increase the costs ultimately paid by Loads. However, such increased costs should not be viewed as ‘harming’ Loads because they are necessary to ensure continued, reliable electric service during extreme weather conditions.”

What About Customers?

Energy Choice Matters takes issue with this waiver request, noting that

“Customers are absolutely harmed by the increased compensation granted to generators. It changes a fundamental benefit of the bargain forced on customers, who are compelled to forward procure capacity to ensure “reliability.”

The publication further comments that the capacity payments made to generators was done so with the understanding that the capacity was to be available whenever necessary:

All of the capacity suppliers in New York are aware of the long-standing $1,000/MWh bid cap. Capacity suppliers who bid for the right to supply NYISO with capacity, and who cleared the market, took on the obligation of serving this future need knowing full well what existing market rules were.”

The generators also knew what market risks were as well, a risk they voluntarily took on, and could have hedged for on the gas supply side.

Energy Choice Matters comments “In fact, to grant the NYISO’s requested waivers would create a moral hazard freeing generation owners from undertaking any prudent management of their business. No longer would generators have to engage in practical management to limit their variable costs; so long as the power is needed to maintain ‘reliable operations’ of the grid.”

The longer this cold snap lasts, the more money will be at stake. Either generators or consumers will lose. The money comes from one pocket or the other. Despite frigid temps, expect the argument to heat up considerably on this one in the days to come.

http://www.forbes.com/sites/peterdetwiler/2014/01/24/cold-weather-and-price-volatility-in-northeastern-power-markets-generators-seek-relief/?ss=businessenergy