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May 31, 2014

The Cost of Reliability

by Margie Miller

Under normal circumstances, the primary task of Regional Transmission Operators and Independent System Operators (RTOs/ISOs) is economic dispatch. This means meeting load needs at the lowest possible operating cost while maintaining system reliability. But under extreme conditions, RTOs/ISOs must switch to a different set of operating procedures focused purely on keeping the system safe and up and running.

I’ve highlighted the word “must” for a reason: with extreme weather like we faced this winter, RTOs/ISOs are required to follow special procedures in order to preserve market independence, remaining free from decisions that could benefit one market participant or another. And as we all witnessed, these mandated procedures typically come with a hefty price tag.

In response, the Federal Energy Regulatory Commission (FERC) held an April 1 technical conference to “explore the impacts of recent cold weather events on the Regional Transmission Operators/Independent System Operators (RTOs/ISOs).” Presentations from RTOs/ISOs, natural gas suppliers, natural gas pipeline operators, generators, local utilities and others outlined a cascading litany of recent disasters: how cold weather prevented the flow of natural gas; how pipeline operators notified RTOs/ISOs that gas would not be coming; how generators with gas were ready to produce electricity but were cut from the market. In one specific instance, PJM was forced to dispatch generation for the entire Martin Luther King Jr. holiday weekend to ensure that generators would be able to produce, ultimately forcing the system to pay for energy that wasn’t needed.

As stories of operational challenges like these mount—and with the prospect of further unpredictable weather in coming years—it’s important to remember this simple fact: the electricity market is not designed to provide the lowest price, but rather to deliver electricity on demand. Holders of firm contracts for natural gas who received supply without incident this past winter are proof of this.

Which begs this question: why doesn’t FERC require natural gas generators to purchase firm gas like it does for heating? This mandate would create the proper market signals to build adequate pipeline support for natural gas electric generation. RTO/ISOs operate real-time systems designed to respond instantaneously to generators that can’t produce what they promised—or as recent experience illustrates, can’t produce at all. In these instances, RTOs/ISOs must bring on expensive generation or issue make-whole payments to other generators dispatched on an emergency basis to keep the system up and running.

In other words, to meet FERC regulations that keep the power grid safe and reliable, RTO/ISOs must employ tools they are required to use—tools that come with a high premium at the most challenging of times.

Fortunately, FERC and RTOs/ISOs are investigating procedures that may alleviate this issue. Solutions include using demand response assets to relieve the system when necessary, and in some cases, to act as regulation assets. They are also investigating incentives offered through the capacity market to generators entering into firm gas contracts with natural gas suppliers.

PJM presented their cold weather report at their annual meeting outside of Baltimore, May 12-15. Our hope is that this will yield additional insights and recommendations that can be put into action before next winter comes blowing in. Ideally, by the end of June, all input from RTOs/ISOs will be complete and real dialog on how to solve this problem can begin. Our vote is for requiring natural gas generators to purchase firm gas. The load is going to pay for this one way or the other—let’s achieve it in the most efficient and cost-effective way possible.