Demand Response for Natural Gas: Is It Feasible? Could It Make An Impact? Is Capacity Manipulation an Issue? Proposals for Integrating Natural Gas and Electricity Markets

Demand Response for Natural Gas: Is It Feasible? Could It Make an Impact? Is Capacity Manipulation an Issue? Proposals for Integrating Natural Gas and Electricity Markets

With more natural gas powering the U.S. grid system the gas supply in certain areas could potentially be constrained by winter and/or summer demand peaks as well as in daily peaks cycles during high demand seasons. Natural gas storage fields sited near populated areas are filled from spring through mid-autumn and tapped from mid-autumn through the winter (Nov. 1 through Mid-March on avg.). With more gas powering the grid there is increased demand for winter heating and summer cooling with potential for higher demand peaks from individual events like cold snaps as well. This suggests a potential growing need for local storage. Demand response for long-term seasonal demand is provided by storage fields where applicable but further from those fields a need for more short-term event-based storage can arise. Demand spikes due to inadequate pipeline infrastructure can lead to price spikes during these short-term events like cold spells or anything that disrupts supply. The more voluminous is the local pipeline infrastructure the more local gas storage there is to fill short-term demand. Thus, pipeline storage often aids local short-term demand response capability. Lack of local storage adjacent to demand areas has also been an issue in recent cold-snap years with propane. Propane/LP gas can also be stored by shipping by truck or rail to storage sites so shortage issues can be due to lack of preparation or possibly even deliberately to trigger price spikes. Has there been capacity manipulation for propane? I don’t know. Temporary price spikes have traditionally been a way to make money in short stock trades and commodities like natural gas and propane are certainly vulnerable to such manipulation. There are propane underground storage fields as well that are sited to limit supply/demand issues but in recent years new or expanded ones have been difficult to build due to environmental backlash.

New York City and the Northeast region in general are places where price spikes due to short-term supply/demand imbalances have been a common issue, mainly in the winter. More pipeline infrastructure is one thing that would help. With the Marcellus gas field there is an inexpensive supply of gas nearby but only so much can be delivered at a time and packed in the local pipes. There has been significant transitioning from fuel oil to much cheaper natural gas in these areas which increases overall gas demand. Propane is also cheaper than fuel oil. However, New York state and the Northeast in general have been reluctant to build pipelines, often citing environmental concerns. There has been resistance to growing dependence on nat gas even with a local abundant source which also keeps prices low, or at least should.

A pilot demand response project by National Grid and AutoGrid in New York City and Long Island will involve commercial and industrial boilers, furnaces, and other nat gas powered equipment to be outfitted with load control devices so that these devices can be throttled back or powered off during times of high demand. Although the current pilot is small with only sixteen commercial and industrial customers, it can be expanded. Digital automated control will allow these devises to avoid manual shut-off. Planned closures and retirements of both baseload and peak capacity in this area will lead to shortfalls in demand peak response in the future if other measures like building new peaker plants, investing more in energy efficiency, demand response, or adding more storage are not adopted. Re-powering older plants is also on the table. Nat gas demand response should help, although its overall potential is probably small. AutoGrid already provides demand response software control and management for electricity and this will be the first time it will be used for nat gas.

In California, during the natural gas shortfall due to the Aliso Canyon gas storage field being offline, there was some demand response and some storage deployed. Recently in that area utilities have contracted 70MW of energy storage, including some lithium-ion battery storage from Tesla and 50MW of “peak load reduction from fine-tuning smart thermostat controls across tens of thousands of homes.” Such home thermostat control might work in California where winter temps are not too cold but would likely be more problematic in colder areas of the country. If nat gas demand response can become more widely deployed and tested through extreme weather events then it could help save utilities the cost of future upgrades. The GreenTech Media article referenced below notes that such demand response for natural gas can potentially improve grid reliability by lowering peak demand of natural gas.

Natural Gas Capacity Manipulation in the ISO-New England system via Algonquin Pipeline

Fred Krupp, president of Environmental Defense Fund (EDF) recently penned an op-ed in the Wall Street Journal (referenced below) that called attention to gas pipeline system capacity manipulation by local utilities to create false shortages and spike prices. This involved canceling deliveries at the last minute before cold snap demand spikes. A study by economists from EDF and three universities concluded that local utilities in New England charged their customers $3.6 billion over three years in these inflated charges.

“Markets have not kept up with the needs of a dynamic energy system. Legacy gas contracts give some utilities excess leverage, while new innovators are often placed at a disadvantage,” said EDF Senior Economist Kristina Mohlin, one of the authors. “Out-of-date trading systems risk saddling ratepayers with expensive new pipelines the market might not actually need, and they stifle fair competition from cheaper, cleaner, more efficient solutions.”

Apparently, two local utilities, Eversource and Avangrid, would order and reserve gas a day ahead and then cancel leaving unused open capacity on the Algonquin pipeline when demand was high which required buyers to buy gas on the less transparent and highly fluctuating spot market. Doing this is known as “down-scheduling” and tends to happen too late for other utilities to utilize the unused pipeline capacity. According to the study the down scheduling by these two local utilities (the only two doing this on the Algonquin system) led to 20% higher average electricity prices for ISO-New England system customers over the three-year study period. The study did not determine if such capacity manipulation and subsequent price distortion broke any laws and followed rules for contracts. The study’s authors point out that this matter requires new regulatory frameworks to prevent it in the future as it appears it is currently legal and to many eyes it certainly seems unfair. They also suggest that it makes the local wholesale electricity market less efficient and that it may make proposed new pipelines less necessary than it currently appears. The solution, according to EDF, is new regulatory frameworks to integrate natural gas pricing and wholesale electricity pricing. Wholesale electricity markets use dynamic pricing that changes hourly while nat gas pricing is indexed on a daily basis. If gas was priced hourly such down-scheduling would not occur, they argue. Current pricing does not take into account the hourly variability of actual flows from pipelines to power plants but simply assumes consistent flow throughout the day and night which is not the case. This inefficient utilization of available pipeline capacity results in unnecessary costs incurred by customers. This can also affect local grid reliability: “Reliability is threatened on the coldest days because the market does not efficiently reconcile supply and demand.” They also argue that it stifles competition and innovation.

At the Gas Electric Harmonization forum at the North American Energy Standards Board (NAESB) EDF and others proposed a “shaped nomination” approach where gas usage could be modeled and priced hourly on such modeling:

“In other words, shaped flows would provide granularity and visibility, and help evolve the natural gas market commercial rationale from one which primarily values and prices pipeline capacity, to one which is also structured to convey and transact for the time-varying value of gas receipts and deliveries. EDF’s proposal was broadly supported by energy market participants and voting members of NAESB but was not carried to fruition due to the opposition of one out of five industry segments.”

The bottom line is that current pricing and built-in inefficiency due to “market design obsolescence” is basically unfair to paying customers while unnecessarily enriching some local utilities and potentially pipeline companies.

References:

National Grid and AutoGrid Test Demand Response for Natural Gas in New York – by Jeff St. John, in GreenTech Media, Nov. 21, 2017

How Local Utilities Gamed the Natural-Gas Market – by Fred Krupp (Environmental Defense Fund), in Wall Street Journal, Nov. 16, 2017

Study: New England Customers Paid $3.6 Billion in Inflated Electric Bills Due to Regulatory Disconnect Between Natural Gas, Electricity Markets – by Environmental Defense Fund, Oct. 11, 2017

Aligning U.S. Natural Gas and Electricity Markets to Reduce Costs, Enhance Market Efficiency and Reliability – by Environmental Defense Fund, authors N. Jonathan Peress and Natalie Karas, Sept. 2017