The first part of this 2 part series addressed 3 factors that will impact natural gas and electricity prices in 2013 and beyond. Part 2 explores the challenges faced by the power sector in terms of future grid reliability, summer weather outlook and the impact of continued drought conditions on power prices.
The Capacity Challenge
Independent System Operators (ISOs) around the nation are grappling to make sure there is sufficient generation capacity to meet future demand. The electricity industry’s goal is to always have more supply available than what is required; however, forecasting demand is not an easy task, and building generation takes multiple years. To assess resource adequacy around the country, ISO’s monitor supply using the reserve margin metric, which is the excess capacity over projected peak demand. This number is compared to predetermined target levels to assess supply adequacy. The Energy Information Administration (EIA) chart below shows 14 regional reserve margin estimates and the target reserve margins for the summer of 2012. Except for ERCOT, the reserve margin estimate exceeded the target in every region. EIA derived the map from the North American Electric Reliability Corporation (NERC) 2012’s Summer Reliability Assessment. One interesting statistic from NERC’s 2012 study shows that in 2012 Summer In-Peak Generation mix was:
- 38% Natural Gas
- 29% Coal
- 13% Hydro
- 10% Nuclear
- 5% Oil
- 5% Other (Non Hydro Renewable Resources)
In May, we expect to see NERC’s 2013 Summer Outlook.
In 2013, ERCOT, which is the only ISO in the U.S. where there is retail competition and no capacity market, is projected to have a reserve margin of less than 9% heading into Summer. This figure is well below ERCOT’s target reserve margin of 13.75%. Insufficient reserves during peak hours might lead to a high risk of declaring emergency operation events, including the possibility of load shedding and even rolling blackouts. The map also shows that California’s reserve margin was projected to be at the target in 2012. Even though California and Texas have worked hard on mitigating reliability risks, maintaining enough generation reserves will be challenging in 2013.
Extreme weather conditions and higher than normal forced outages will certainly increase reliability risk. At Acclaim Energy, we view these risks as potential opportunities for some end users that can participate in demand respond programs or participate in peak load response. Current conditions create a need for a comprehensive energy risk management product strategy that allows end-users to capitalize on the existing market constructs through the use of tailored energy supply products with an optimization of demand response. Contact your energy consultant to discuss if you can benefit from these options.
2013 Weather Conditions That Can Impact Electricity Markets and Prices
For several years, the High Plains (Kansas, Colorado, Nebraska, Wyoming, South Dakota, and North Dakota), and Texas in particular, have suffered from extreme drought as seen in the map below. Currently 22.2% of the High Plains area under Exceptional Drought Conditions, and 54.8% of the area is under Extreme Drought Conditions.
This lack of water creates challenges for power generators, especially at times of peak demand. For instance, to generate 1 MW consumes approximately 700 gallons of water and a natural gas plant needs roughly 200 gallons of water to produce the same amount of electricity. This means water consumption equates to roughly 1.2 million gallons of water assuming a peak demand of 59,000 MW per hour. This water use, combined with severe drought, has significant impacts on the availability of power plants, leading to what is known as a “de-rating”, or a reduction in output due to insufficient water supply. As lower cost generators are unavailable, power costs increase and could, in extreme cases, result in loss of power as generators are unable to meet demand due to insufficient water. In 2012, there was a high correlation between severe drought conditions and very high temperatures during the summer in the High Plains. Will this pattern repeat in 2013?
The latest National Oceanic and Atmospheric Administration Summer 2013 outlook shows above normal temperatures during July-August across most of the continental U.S. with higher probabilities in the Southwest (see chart below).
Conclusions
The power sector faces numerous challenges in 2013. Among these is the supply of natural gas available as a result of fracking, which should put downward pressure on natural gas prices. Counter-balancing this, however, is the increased displacement of traditionally low cost coal power by natural gas fired generation, which increases the demand for natural gas. In addition, nuclear power plant outages are increasing and lasting longer, requiring additional natural gas generation to replace the lost capacity, further increasing demand. Beyond these fuel challenges there is a tightening of supply and demand in some electricity markets across the country. As a final level of complexity, extreme weather conditions add stress to the grid. These 5 fundamental price drivers for 2013 are likely to persist in to the future. Given all of these factors, there is an increasing need for end users to develop energy risk management strategies to minimize the impact on their energy costs going forward.
Copyright © 2013 Acclaim Energy Advisors. All content and functionality on the Site, including text, graphics, logos, icons, and images and the selection and arrangement thereof, is the exclusive property of Acclaim Energy Advisors or its licensors and is protected by U.S. and international copyright laws. All rights not expressly granted are reserved.
