Transcript Impact of Natural Gas On Electricity Markets

University of Pittsburgh
School of Law
Energy Law and Policy Institute
Impact of Natural Gas on Electricity Markets
Ingmar Sterzing
Director, Commercial Operations
Westinghouse Electric Company
August 1, 2013
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
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Ingmar Sterzing, August 2013
NERC Regions and Transmission Interconnects
Not all “markets” are the Same… Some restructured, some regulated
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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The “Restructured” Electric Power System
Competitive
Competitive
Regulated
Wholesale Power Supply
Megawatts (MWs)
$/MWh
Transmission and Distribution
Retail Demand
Commodity
kilowatts (kWs)
Price
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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¢/kWh
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Ingmar Sterzing, August 2013
Competitive Electric Marketplace
Power
Bilateral
Power
Contracts
Demand
Supply
Sell
Power
Sell
Buy
Competitive
Electric Market
Managed by “ISO”
Buy
Power
Buy
Demand
Supply
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ISO sets the market price of electricity using free market
principles and marginal supply
Electric Market Supply and Demand
180
160
140
Minimum Demand
Peak Demand
Price ($/MWh)
120
Natural GasSimple Cycle
8.0-12.0 HR
100
80
Natural GasSteam
11.0+ HR
60
40
Coal
20
Natural GasCombined Cycle
6.5-8.0 HR
Nuclear
0
Hydro 0
10,000
20,000
30,000
40,000 50,000
&
Capacity (MW)
Wind
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
60,000
70,000
5
80,000
90,000
Ingmar Sterzing, August 2013
Market Price Example
ERCOT Electric Market Supply and Demand
180
160
140
Minimum
Demand
Market
price
is set at
$75/MWh
Price ($/MWh)
120
Peak Demand
Natural GasSimple Cycle
100
Natural GasSteam
80
60
Demand is at
51,000 MWs
Natural GasCombined Cycle
40
Coal
20
Nuclear
0
Hydro 0
10,000
20,000
30,000
40,000 50,000
&
Capacity (MW)
Wind
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
60,000
70,000
6
80,000
90,000
Ingmar Sterzing, August 2013
Economic dispatch - price determines
when generators operate
Price/Cost ($/MWh)
Market Price of Electricity
(Nodal Price)
Production (Fuel) Cost of the Plant
B
A
Hour of the Day
A – Plant should not operate because it costs less to buy from the market
B – Plant should operate because it costs less to produce than buy from the market
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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Natural Gas Price Drives Power Prices
Higher gas prices,
higher power
prices
Lower gas prices,
lower power
prices
Marginal Cost of
Power = CC HR x
Price of Natural
Gas
Marginal Cost of
Power = CC HR x
Price of Natural
Gas
8.0 x 7.5 =
60.0 $/MWh
8.0 x 2.8 =
22.4 $/MWh
Today:
~$3.44/MMBtu
So, $29/MWh
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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ERCOT Market Pricing on July 31, 2013
High Temp Over 100⁰F
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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ERCOT Daily Low Balancing Energy Service Price
Negative market price is seen frequently in ERCOT
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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Generation Supply Options
Baseload (75-95%), 500-600 MW
Baseload (85-95%), 700-900 MW
Baseload (95-100%), 1,100-1,300 MW
Baseload (85-95%), 10-100 MW
Intermediate (20-70%), 250-600 MW
Price if Gas Price
is $2.8/mmBtu
Peaking (5-20%), 40-100 MW
Intermittent (30-40%), 1.5-3.0 MW
Intermittent/Peaking (30-40%),
25-500 MW
Intermittent/Peaking (20-30%),
0-200 MW
Gas Price: $8.00
Coal Price: $2.50
CO2 Price: $15/Ton
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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ERCOT Capacity, Demand, and Reserve Report
Market Price is not sufficient to Support New Generation Investment
Up to 50,000 MWs of
New Capacity Needed by 2023
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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Generation Reserve Margin
Reserve Margin (%)
UK and ERCOT Generation Reserve Margin
20%
15%
10%
5%
0%
UK
ERCOT
2013
2014
2015
2016
2017
13.9%
14.3%
8.7%
9.8%
6.6%
6.9%
4.2%
6.5%
4.8%
5.8%
Year
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
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Ingmar Sterzing, August 2013
Current Challenge
•
Low, marginal prices do not support investment in new generation
–
•
High short-term energy only prices are no guarantee of future prices
–
•
Short term marginal prices are on average too low to encourage sufficient investment in new generation.
High short-term energy only prices are not guaranteed to result in new generation when needed. Investors are still
reluctant because of timing issues, by the time the plant is on-line (3+years) the price could drop again. High prices
now do not guarantee high prices when the plant is operational. This issue is even more problematic for longer term
projects that require a 6-8 year duration for development and construction.
Capacity markets have problems
–
A capacity market tends to fund existing generation and is not directed specifically at new generation investment.
Therefore, the majority of the capacity market benefit flows to existing generators not to new generation investment.
•
Year-to-year shortages and emergency conditions are not viable for a robust,
growing economy
•
New generation investors are seeking revenue certainty in the first years of
operation of a new facility
•
No long-term contracting incentive
–
Retail electric providers do not want to contract long term because they are benefiting from purchasing low average
power based on marginal pricing. Power purchase agreements with terms of 5-10 years are too risky for competitive
retailers.
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
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Ingmar Sterzing, August 2013
Proposed UK Reforms
Feed-in-Tariff,
Contract for
Differences
(CfD)
• Long term (15+ years) instrument used to provide long term revenue
certainty to encourage investment in low carbon generation
• Load pays when market price is below strike price, load receives
payment when market price is greater than strike price
Targeted
Capacity
Market
• Near term mechanism to assure generation adequacy
• Targeted capacity market will focus only on a limited capacity needed
to assure reliability during periods of high demand, or with large wind
fluctuations
Carbon Price
Support (CPS)
and Emissions
Performance
Standard (EPS)
• A carbon floor price will be established to provide carbon pricing
certainty not present in the EU trading scheme
• EPS to limit the amount of CO2 emitted by new fossil fuel power
stations as a regulatory backstop to CPS
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
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Ingmar Sterzing, August 2013
Proposed ERCOT Reforms
Energy
Only
• Maintain energy only market and allow price levels to rise as needed
to provide sufficient revenue for new entrants
• Modify existing mechanism to minimize price intervention
• Provide expanded security measures for emergency periods
Capacity
Market
• The current proposal includes a three year forward capacity market.
• The market would operate across the entire region.
• The design would seek to maintain Energy Only scarcity price signals.
Demand
Response
• Proposed reforms recognize the importance of an efficient Demand
Response mechanism to support an Energy Only market
• Current mechanisms are in place to provide the system operator with
demand response capacity during periods of reliability.
• Policy reforms are focused on improving the participation of demand
in energy markets
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
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Ingmar Sterzing, August 2013
Conclusions
•
•
•
•
•
•
•
•
•
•
“Low” gas prices are driving low power prices
“Restructured” markets did not consider that prices could be too low
Good for consumers in the short term… but shortages and reliability issues may cause
unplanned, less efficient response
With low gas prices, the electric market pricing is not sufficient to incentivize new generation
Seeing premature closure of less economic generation, primarily older coal units
Generation shortfall will drive power prices to unsustainable levels and incumbent generators
will make significant amounts of money during peak times
Generation developers (Merchant and IPP) will want to add low-capital, short development time,
natural gas peaking units to take advantage of high prices
New generation will come from Natural Gas in the near-term thereby increasing the
concentration and dependence on a volatile resource, creating a long term economic concern
With brownouts and sky rocketing prices, Political pressure will be applied by the
public/consumers on politicians to do something about the problem including changing the
market structure
If generators are not willing to make the investment risk then government/regulators will have to
step in and provide some incentive or risk mitigation mechanism
Natural Gas in Baseload Generation and the Impact of Shale Gas on Electricity Markets
Univ. of Pittsburgh School of Law 2013 Energy Law and Policy Institute
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Ingmar Sterzing, August 2013