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University of Pittsburgh School of Law Energy Law and Policy Institute 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.

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University of Pittsburgh School of Law Energy Law and Policy Institute Impact of Natural Gas on Electricity Markets

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  1. University of PittsburghSchool of LawEnergy Law and Policy Institute Impact of Natural Gas on Electricity Markets

    Ingmar Sterzing Director, Commercial Operations Westinghouse Electric Company August 1, 2013
  2. NERC Regions and Transmission InterconnectsNot all “markets” are the Same… Some restructured, some regulated
  3. The “Restructured” Electric Power System Competitive Competitive Regulated Transmission and Distribution Retail Demand Wholesale Power Supply Commodity kilowatts (kWs) Megawatts (MWs) Price ¢/kWh $/MWh
  4. Power Power Competitive Electric Market Managed by “ISO” Supply Supply Competitive Electric Marketplace Power Bilateral Contracts Demand Buy Buy Sell Power Sell Buy Demand
  5. ISO sets the market price of electricity using free market principles and marginal supply Electric Market Supply and Demand
  6. Market Price Example ERCOT Electric Market Supply and Demand Market price is set at $75/MWh Demand is at 51,000 MWs
  7. Economic dispatch - price determines when generators operate Market Price of Electricity (Nodal Price) Production (Fuel) Cost of the Plant B A 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
  8. Natural Gas Price Drives Power Prices Higher gas prices, higher power prices Marginal Cost of Power = CC HR x Price of Natural Gas 8.0 x 7.5 = 60.0 $/MWh Lower gas prices, lower power prices Marginal Cost of Power = CC HR x Price of Natural Gas 8.0 x 2.8 = 22.4 $/MWh Today: ~$3.44/MMBtu So, $29/MWh
  9. ERCOT Market Pricing on July 31, 2013High Temp Over 100⁰F
  10. ERCOT Daily Low Balancing Energy Service PriceNegative market price is seen frequently in ERCOT
  11. 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
  12. ERCOT Capacity, Demand, and Reserve ReportMarket Price is not sufficient to Support New Generation Investment Up to 50,000 MWs of New Capacity Needed by 2023
  13. Generation Reserve Margin
  14. Current Challenge Low, marginal prices do not support investment in new generation Short term marginal prices are on average too low to encourage sufficient investment in new generation. High short-term energy only prices are no guarantee of future prices 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.
  15. Proposed UK Reforms
  16. Proposed ERCOT Reforms
  17. 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
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