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November 13th, 2013

Keeping the Lights on This Winter -- Winter Reliability 2013/14

by Andrew Price, President & COO

The most obvious goal of our electricity grid is to get power to all who need it, in the most efficient and lowest cost way possible. An equally important goal of the grid, however, is to make sure that this access to electricity stays reliable. Making sure everyone’s lights stay on can come at a cost during the most energy intensive times of the year, which in New England are the summer and winter. The upcoming winter could place an abnormal amount of strain on the ability to generate and deliver adequate supplies of electricity in New England. ISO-NE has established what it refers to as the Winter 2013-14 Reliability Program as a short-term solution for the upcoming winter.

The winter of 2012-13 packed a lot of punches to the grid. Though it was not an unusually cold winter, system outages were caused by the timing of a cold snap in January, followed by winter storm Nemo in February, coupled with the temporary shutdown of the Pilgrim Nuclear Station. Though reliability was maintained, grid operators faced significant challenges managing the system.

New England’s increased reliance on natural gas not only for heating, but also for power generation, was a significant contributing factor to the problems. Record cheap natural gas prices in 2011 and 2012 meant many homes and business converted from oil to gas heat. Additionally, the cheap prices incentivized the building of new natural gas-fired power plants. Today, 50-60% of New England’s power on any given day comes from natural gas.  Further contributing to the problem is that production out of natural gas wells off Atlantic Canada has been low and falling.  Finally, historically, the regional winter peak gas demands have been met by imported Liquefied Natural Gas (“LNG”).  However, high worldwide demand for natural gas has pushed LNG prices on the global market to four times the price of pipeline gas in the United States.  As a result, the LNG that once was shipped to New England is now headed to Europe and Asia.

In a nutshell, New England has a natural gas pipeline problem – pipeline capacity into the region is not adequate to meet peak winter needs, despite the fact that the country, west of the Hudson River, is awash in natural gas.  Under the best of circumstances, the pipeline infrastructure problem will not be solved until at least 2017. In the meantime, ISO-NE has turned to oil generation to substitute for natural gas generation that cannot run when supplies are not available. 

As part of its Winter 2013-14 Reliability Program, ISO-NE held a competitive bid for enough energy from non-natural gas sources, to fill any projected “reliability gap” in the event of an extended cold snap or limited natural gas power plant performance. Oil-fired generators, generators that are dual-fuel units capable of burning either natural gas or oil, and new demand response resources were eligible bidders. The results of this bid were 2.29 million MWh of energy at a cost of $114.3 million. ISO-NE accepted 83% of this, meaning that if necessary, ISO can call upon up to 1.995 million MWh.  The cost of this program is estimated to be $78.8 million over the three-month period, December 2013 through February 2014.

So where does the $78.8 million come from to pay for this? ISO-NE and the Federal Energy Regulatory Commission (FERC) decided that the cost will be borne by load serving entities, a technical term referring to electricity suppliers that serve retail customers in New England. In turn, these suppliers are passing on the costs directly to end-users, depending on the terms of their retail supply agreements with their customers. The value of the charge is expected to be approximately $0.00235/kWh, across all electricity used within ISO-NE during these three months; however, the actual cost could be higher or lower depending on how the program is implemented.

Special thanks to CES Pricing and Products Manager, Abriel Ferreira, who researched and co-wrote this blog post. 

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