U.S. Becomes a Net Natural Gas Exporter

by Bob Shively, Enerdynamics President and Lead Facilitator

The U.S. has traditionally been a natural gas importer that depends on pipeline supplies from Canada, and, to a lesser extent, amounts of gas via LNG tanker.

US gas imports vs exports

Source: Data from EIA website

But in recent years the shale gas boom has resulted in increasing pipeline flows into Mexico and Canada, and, beginning late last year, growth in LNG exports. As of mid-2017, the EIA projects that the U.S. will become a net exporter of natural gas.

US natural gas net trade

Source: EIA Short-term Energy Outlook, August 2017

 

Net Exports Are Expected to Grow in Three Ways

This fundamental shift is expected to intensify in the coming years:

  1. Pipeline imports from Canada are expected to continually decline as lower-priced gas supplies from the Appalachian Basin continue to displace use of Canadian supplies in the Midwest and Northeast. Meanwhile exports are expected to continually grow into eastern Canada as U.S. supplies can undercut pricing from Western Canada.

    US exports and imports to and from Canada
         Source: Data from EIA website

  2. Pipeline imports to Mexico are growing rapidly along with growing construction of cross-border pipelines into Mexico.

    US exports to Mexico
         Source: Data from EIA website

    Pipeline capacity into Mexico, which has grown more than threefold since 2010, is expected to again almost double by 2019.
     

  3. As LNG export projects currently under construction come online, LNG exports are expected to grow significantly.

US LNG export capacity

              Source: EIA Short-term Energy Outlook, August 2017


The EIA Short-term Energy Outlook for August 2017 forecasts 2018 exports of almost
4,000 Bcf.  To give you a sense of magnitude, this equals more than 80% of forecast residential demand or almost 50% of industrial demand. So, there is no doubt that exports are becoming significant.

Impacts on U.S Consumers Are Uncertain

Clearly the growth in exports will be a benefit to gas producers who will see markets expand. Classic economics tell us that as demand grows, prices must increase. But interestingly, given the current belief in robust gas supplies, the forward gas price does not reflect such an expectation:nymex-ng-futures.jpg

NYMEX natural gas futures prices as of August 10, 2017

Studies on the pricing impact of exports are varied. A 2015 study performed for the U.S. Department of Energy concluded that “in every case, greater LNG exports raise domestic prices and lower prices internationally.”[1] But a 2012 NERA study suggested that the increases would be small due to market factors: 

“Natural gas price changes attributable to LNG exports remain in a relatively narrow range across the entire range of scenarios. Natural gas price increases at the time LNG exports could begin range from zero to $0.33 (2010$/Mcf). The largest price increases that would be observed after 5 more years of potentially growing exports could range from $0.22 to $1.11 (2010$/Mcf).”[2] 

Industrial consumers in the U.S. are not convinced. The Industrial Energy Consumers of America (IECA)  group recently sent a letter to Secretary of Energy Rick Perry expressing concerns that growing exports will negatively impact U.S. manufacturing. Others have suggested that while overall price levels may not go up much, price volatility will grow significantly, thus subjecting U.S. consumers to severe price risk.

Many factors will impact future prices of gas including growth of gas-fired power generation (perhaps following by declines in use for power generation if renewables continue to grow), growth in industrial demand, levels of exports, amounts of domestic production, and global natural gas price levels. After many years of historically low natural gas prices in the U.S., we must carefully watch developments in the coming years.


Footnotes

[1] U.S. DOE, The Macroeconomic Impact of Increasing U.S. LNG Exports, p. 8, available at https://energy.gov/sites/prod/files/2015/12/f27/20151113_macro_impact_of_lng_exports_0.pdf

[2] NERA Economic Consulting, Macroeconomic Impacts of LNG Exports from the United States, p. 2, available at https://energy.gov/sites/prod/files/2013/04/f0/nera_lng_report.pdf

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ISO Markets Continue to Expand, Part II

by Bob Shively, Enerdynamics President and Lead Facilitator

Last week’s Energy Currents article discussed how organized competitive markets run by an Independent System Operator (ISO) are winning out over less-competitive unorganized markets centered around vertically integrated utilities, bilateral trading, and transmission wheeling services. We looked at how organized markets have grown in North America over the last five years and how they are poised for even more growth in the near future.

So, continuing this discussion, why the movement to organized markets?

It is all about saving money and integrating renewables. The bigger the scheduling footprint, the easier it is to maintain adequate reserves and quickly respond to contingencies. And the bigger the footprint, the easier it is to access flexible resources to respond to too little or too much renewable generation in any specific region at a specific point in time.

Before organized markets, a system operator wanting to call on a resource in another region had to make a phone call and typically had to agree to take power from that resource for a minimum of two hours. Under the western EIM, the cheapest units are dispatched automatically for periods as short as five minutes. It is not hard to see the advantage. A study for the Mountain West Transmission Group suggested that in 2016 they could have saved $88 million in production costs by participating in a regional market. This graphic from the study indicates many of the benefits:

Brattle Group graphicSource:  Brattle Group, “Production Cost Savings Offered by Regional Transmission and a Regional Market in the Mountain West Transmission Group Footprint”

 

One final question: Will all of North America become an organized market?

The last key holdouts are certain regions of the U.S. Pacific Northwest dominated by Bonneville Power Administration (BPA), provincial utilities in Canada, and the southeast U.S. It is likely that the entities in the northwest will soon feel pressure to join the growing western organized markets, especially given the ongoing growth of renewables in the region.

Powerex, which covers the bulk of load in British Columbia, is already committed to the EIM, so most of western Canada will soon be tied to an organized market. So as far Canadian holdouts go, that leaves Sasketchewan and Manitoba, which historically had limited participation in cross-border trading; Quebec; and more isolated northeast provinces. With Quebec pushing for more transmission lines into ISO-NE, deeper integration may come in the future.

Meanwhile, it is perhaps the southeast U.S. that will take the longest to see benefits from joining an organized market. But within the decade, it appears likely that most, if not all, of North American will be part of organized wholesale electric markets. By then, we’ll be talking about organized markets on the distribution system!

 

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ISO Markets Continue to Expand, Part I

by Bob Shively, Enerdynamics President and Lead Facilitator

For the last 20 years, it appeared North America was locked into two paradigms on wholesale market design:

  • Less competitive unorganized markets centered around vertically integrated utilities, bilateral trading, and transmission wheeling services
  • Organized competitive markets run by an Independent System Operator (ISO)[1]

It’s becoming increasingly clear that organized competitive markets are the winning paradigm. Some regions such as the U.S. Southeast and Canadian provinces dominated by vertically integrated utilities are still holding out, but large markets continue to join or are on the verge of joining ISOs. And as use of renewable generation grows and dependence on baseload units fades, the benefits of ISO participation are becoming clear.

This week we’ll look at the recent history of organized market growth and the short-term future of such growth. We’ll continue the discussion next week with a look at why organized markets are winning out and what the long-term future may hold for North America’s organized market structure.

 

North American regions with organized ISO Markets as of 2017

2017 ISOs N America.png

 

 

Organized markets have grown substantially in the last five years

In the last five years, we have seen the following:

  • 2013 – Ten transmission companies from the south, including various Entergy utilities and CLECO, joined the Midcontinent ISO (MISO).  This added territory across parts of the states of Arkansas, Louisiana, Missouri, Mississippi, and Texas to the ISO that formally operated solely in the mid-west.
  • 2014 – The Western Energy Imbalance Market (EIM) was launched by PacifiCorp becoming a participant in the California ISO (CAISO) real-time market.   This meant that generation assets across parts of seven western states became available for real-time cost-based dispatch.  Subsequently, Arizona Public Service, NV Energy, and Puget Sound joined. Seven more entities including Powerex in British Columbia plan to join between now and 2020, and part of the Mexican grid in northern Baja California is studying participation as well.
  • 2015 – The Southwest Power Pool (SPP) added the Upper Great Plains region including parts of Iowa, Montana, Minnesota, Nebraska, North Dakota, and South Dakota.  Much of this system was previously operated by the Western Area Power Administration and this expansion marked the first time a federal power agency had joined an ISO.
  • 2016 – Mexico implemented electricity reform including creation of Centro Nacional de Control de Energía (CENACE), a country-wide ISO running day-ahead and real-time markets.

Organized markets are poised to grow significantly more in the near future

It doesn’t appear that growth in organized markets will slow anytime soon. PacifiCorp and CAISO are working toward PacifiCorp becoming a full member of CAISO. If it comes to fruition, it appears that other utilities may soon follow. Efforts continue to develop CAISO into a full western regional electric market. And recently, the Mountain West Transmission Group, comprising eight utilities and two WAPA divisions, announced a non-binding letter of intent to hold detailed discussions with SPP. SPP reportedly was selected after consideration of CAISO or PJM as possible partners. The entities could join as soon as 2019.

WAPA map.pngSource:  WAPA website

 

Next week we’ll continue this look at ISO expansion and answer two key questions:

  1. Why the movement to organized markets? 
  2. Will all of North America become an organized market?


Footnotes:

[1] In this blog we are using the term ISO as a synonym to a Regional Transmission Organizatoin or RTO

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When Will the U.S. Natural Gas Market Turn?

by Bob Shively, Enerdynamics President and Lead Facilitator

Natural gas prices in North America are closely watched by industrial corporations, electric generators, marketers, gas utilities, and now even international marketers and consumers of natural gas. These prices have remained historically low despite various factors that could work against them including the expansion of markets for U.S. gas to include exports to Mexico, exports worldwide via LNG, and gas-fired units’ dominance as an electric generation source in the U.S. Will low prices be a long-term phenomenon, or are we nearing a tipping point that will result in a rapid price increase?

As Enerdynamics Instructor Belinda Petty wrote in a 2013 Energy Insider article:

“In North America, natural gas is a commodity whose price is driven by fundamentals. The value of natural gas, or price level, is determined by the perception of the supply and demand picture. Long supply, meaning suppliers are producing more supply than required by market demand, pushes prices down since buyers are able to negotiate price among multiple suppliers who need to sell for cashflow. Short supply means that production is equal to or less than demand. This results in buyers bidding up the price so they can get supply before another buyer does.” 

Key fundamentals include perceptions of current and future supply/demand balances:

Supply Demand
Current production levels Weather forecasts
Current gas reserves Business activity
Gas in storage Storage injections
Imports available Alternate fuel prices
Transpotation capacity Electric generation market
  Potential export volumes

For future prices, additional factors include:

Supply Demand
Rig counts Forecast growth in gas-fired electric generation
Drilling efficiency Forecast growth in other demand sectors
Forecast production levels Capacity for pipeline and LNG exports including new planned projects
Capacity for pipeline and LNG imports Economics of pipline and LNG exports
Economics of pipeline and LNG imports Long-term weather changes

 

Gas prices have historically been volatile but seem less so now

 HH First of Month

Historically gas prices have changed quickly with large fluctuations in pricing levels. But since the emergence of consistent shale gas production early in the current decade, prices have stayed within a historically low range of $2 to $4 except during extreme winter weather events. And looking at the future price curve, it is the current expectation of the market that prices will stay in that range through 2024.

CME Group HH Natural Futures

 

Why are prices expected to be so low?

According to the 2017 EIA Annual Energy Overview, U.S. demand for natural gas  in 2024 (including demand for exports) is expected to be 20% higher than 2016 levels:

Natural gas demand

Meanwhile, natural gas rigs in operation are at very low levels relative to historic numbers:

U.S. Natural gas rotary rigs

Of course what isn’t being shown here are the dramatic productivity improvements by gas exploration and production companies that translate to significantly more gas per well drilled. Indeed, while rig counts have fallen, gas production has risen:

U.S. Dry natural gas production

 

So if rig counts and demand/export growth suggest that prices should rise, why aren’t they? Clearly the current market has a strong belief in the ability of gas producers to continue to efficiently pump out new gas supplies. Until that belief changes, we can expect continued low prices except during extreme weather conditions.

Want to learn more about gas markets? Enerdynamics offers Gas Market Dynamics as an online course or as a live seminar for groups. Call 866-765-5432 ext. 700 or email info@enerdynamics.com for more details.

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Is the Value of Demand Response Growing or Declining? Depends on Where You Look

by Matthew Rose, Enerdynamics Facilitator and Director at EMI Consulting

The value and business rationale for demand response (DR) varies depending on where Concept for spend on electricityyou look. In certain parts of the country, there seems to be a growing focus on DR; in others, market forces are reducing the value of DR. In some areas DR is viewed as a resource competing in capacity markets whereas in others it is a resource included in utilities’ integrated resource planning.

  • In the Pacific Northwest, the focus has traditionally been only on energy efficiency, but the current 20-year power plan prepared by the Northwest Power and Conservation Council indicates demand response could offer billions in cost savings.
  •  In California, the state’s Investor Owned Utilities (IOUs) now participate in the state’s Demand Response Auction Mechanism (DRAM) program.
  • DR also is unfolding in the Northeast with both utility and ISO programs.

Despite new areas of DR attention, there are signs that activity levels are tapering off in some of the more mature markets. A review of the current market for demand response points to a fragmented landscape affected by varying aggregator activities, changing market rules, and a capacity market that has notable swings in capacity requirements and value. The Regional Transmission Organization or RTO known as PJM Interconnect (which provides system operations in 13 Mid-Atlantic and Midwestern states) is one example of such. Here’s a closer look:

The status of demand response by looking at PJM

PJM is a key place where demand response has been a viable resource. Over the past decade, PJM has successfully facilitated markets open to DR resources including its energy, capacity, and ancillary services markets. However, despite continued market activity, PJM has seen some recent reductions in DR market impacts. This is especially evident in the commitment of DR in its forward capacity market, which remains the most heavily transacted of PJM’s DR markets and accounts for more than 90% of PJM’s DR revenues.

A key metric that looks at participation of DR in the PJM Interconnect is the results of the just-completed Basic Residual Auction (BRA). The auction saw significant declines in capacity prices across most of PJM’s market for the 2020-2021 delivery year with resources clearing at $76 MW-day across most of the grid (as compared to last year’s auction where most of the grid cleared at around $100 MW-day).

Successful DR in PJM

The BRA auction directly reflects the impact of DR in PJM’s forward capacity market. Demand response as a resource continues its trend of decline over the past few years. Some experts point to changes in PJM’s auction rules that require year-round operation of resource reduction as part of its Capacity Performance construct. This was seen as particularly challenging for DR resources that traditionally focused on summer months when prices and activity levels are usually high. Auction bidders now must bid year-round offers requiring creative solutions in packaging varying types of DR to cover the entire year.

In addition to lower capacity prices, activity levels of some of the more prominent curtailment providers continue to demonstrate market uncertainty:

  •  EnerNOC has seen its energy efficiency management software strategy stumble. This has led to some company retrenchment and a recent agreement for EnerNOC to be acquired by the international power company Enel.
  • Comverge was recently sold (again), this time to Itron, which further contributes to an uncertain landscape. It appears that lower capacity prices make it more challenging for companies to make money on a predictable basis.

Where are we today?

A few signs of change in the DR market include:

  • The notable forward capacity markets in PJM, ISO-NE, and NYISO continue to deliver greater levels of respective grid capacity, even to the point of oversupply (above its required reserve margin). Greater availability of capacity results in a general trend of lower prices available to DR providers.
  • The Midcontinent ISO (MISO) auction results cleared at the incredibly low value of one dollar and fifty cents ($1.50). This is a stark reduction from the regional prices that rose as high as $150 MW-day in some MISO regions the prior year.
  • The NYISO also saw auction capacity prices reduced through most of its grid with the exception of the New York City and Hudson Valley zones.

Despite these challenges, DR is not going away. There remain areas in the country where capacity is constrained or limited and DR remains a viable solution. There also are utilities and curtailment providers offering larger “packaged” benefits to their customers beyond just offering and bidding DR.

Opportunities also exist for targeting DR to offset transmission and distribution assets (rather than generation). The Bonneville Power Administration in the Pacific Northwest recently announced it will not construct a proposed 80-mile, 500-kV transmission line but will instead turn to non-wire alternatives including DR. The New York State utilities are advancing numerous non-wire projects as part of REV demonstration efforts, and Consumers Energy in Michigan is carefully examining distribution assets facing constraints and considering targeted DR solutions.

As with any market solution, the viability of DR will vary in accordance with location, regulation, prices, and customer needs. While today the activity levels may seem to be slowing in some places, it is not unrealistic to envision a future in which DR offers increasing reach and wider participation.


 

References:

Jeff St. John. EnerNOC Seeks Alternatives Amid Software Slump. Greentech Media. March 14, 2017.

Robert Walton. What’s The Future for Demand Response Under PJM’s New Capacity and Aggregation Rules? Utility Dive. May 31, 2017.

Amanda Cook. All Zones at $1.50/MW-day in 5th MISO Capacity Auction. Rtoinsider. April 2017.

Personal communications. P. Langbein. PJM. June 2017.

PJM. 2020/2021 RPM Basic Residual Auction Results. May 23, 2017.

Northwest Power and Conservation Council. 7th Northwest Power Plan. February 2016.

David Steves. BPA Cancels Controversial Line in Southwest Washington. Oregon Public Broadcasting. May 18, 2017.

Julien Dumoulin-Smith. PJM Take 3. Teasing Out the Key Learnings for the Future. UBS Global Research. May 31, 2017.

Robbie Orvis. The State of U.S. Wholesale Power Markets: Is Reliability at Risk from Low Prices? Energy Innovation. May 22, 2017.

EnerNOC Press Release: EnerNOC Enters Into an Agreement to be Acquired by the Enel Group for over $300M. June 22, 2017.

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Is Solar Plus Batteries Cheaper than Natural Gas Generation?

by Bob Shively, Enerdynamics President and Lead Facilitator

Tucson Electric Power (TEP) recently announced a Power Purchase Agreement (PPA) solar panels on green grassfrom NextEra Energy Resources for a 100 MW solar project combined with a 30 MW/120 MWh battery storage system. The all-in price is reportedly less than $45/MWh. Why is this news? Because TEP can purchase solar power, store it, and shift it to the system peak at significantly less than the cost of running a gas peaker. This begs the question: Are solar/battery combinations poised to displace gas peakers as a resource for meeting system peak demands? Below are some key discussion points that may help answer this question.

  1. Solar PV prices have fallen dramatically
    Recent price reductions on PV solar power have been nothing short of phenomenal and are expected to continue. Costs for utility-scale solar PV have dropped by 85% since 2009 according to the widely used Lazard Levelized Cost of Energy studies. And according to Bloomberg New Energy Finance New Energy Outlook 2017, costs are set to drop another 66% by 2040.

    Mean Levelized Cost of Utility Scale PV

    Source: Levelized Cost of Energy Analysis 10.0, Lazard.com

  2. Solar costs are now competitive with traditional generation sources

    What was recently considered an expensive fringe technology is now among the cheapest sources of new power supply:

    Levelized Cost of Power Generation

    Source: Levelized Cost of Energy Analysis 10.0, Lazard.com

  3. Solar is cheap, but what about serving peak loads?

    The main issue with solar power is that it reaches its maximum in the middle of the day, which does not correspond to the system peak:

    Net Load and Flexible Capacity Needs.png

    source: California ISO presentations

    Currently system operators tend to compensate by using gas combined-cycle or gas peaking generation to ramp quickly and pick up the system load in the late afternoon and evening.

    Now that solar power is economic, the possibility that net load curve shapes (net load curves are the remaining amount of demand served by traditional generation sources after renewable power has been taken into account) will change quickly and dramatically may result in a generation system that is not suited to grid requirements. The State of Arizona has even considered creating a Clean Peak Power portfolio requirement to ensure that growing solar power must address the peak issue, although the proceeding is currently suspended. This concept would result in different levels of renewable energy, with renewable energy that could be delivered on-peak being more valuable than traditional renewable energy.

  4. Can storage step in to fix the problem?

    Until recently, electric storage has been considered too expensive to help much with solar power’s timing issues. But battery costs, especially for lithium-ion batteries, have dropped at a rate similar to that of recent PV costs. With TEP’s announcement of a PPA for $45/MWh that includes battery storage, it appears that at least in the ideal conditions of Arizona and with current tax credits, batteries can become a mainstream technology solution[1].  If more projects can be built at costs similar to TEP’s deal we may soon be discussing not only the demise of coal but a coming demise in gas generation as well.

 


 

Footnotes:

[1] For an explanation of how it may be possible for the low PPA price to work, and also for what the price might be without subsidies, see Utility Dive, How Can Tucson Electric Get Storage + Solar for 45¢/kWh?

 

 

 

 

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eLearning Portal, a New Enerdynamics Product, to Debut This Fall

by John Ferrare, Enerdynamics CEO

Enerdynamics’ newest business acumen training product is set for release in early Fall 2017. It combines our various learning options into one full-service source of energy business training. The eLearning Portal can be licensed for periods of one year or more and will contain all of the following:

Learning In Depth
Learners have access to up to 30 (or more) of our online training courses. Actual content can be customized to your business or industry segment. Courses can be combined into learning paths, which present comprehensive studies of various aspects of the energy industry.

Learning In a Nutshell
Learners have access to 10-minute condensed versions of available courses. These are designed for those wanting a quick overview of a topic as well as for those who have already taken a full course but just want a refresher on what they’ve learned.

Resources
Resources will include a glossary, acronyms, infographics, and our Energy KnowledgeBase encyclopedia of energy terms and concepts. Additional resources (e.g. content from our industry books) will be available to some learners depending on industry segment or customization chosen.

Current Events
Learners can access relevant and current blog posts, newsletter articles, and other content based on industry segment and customization chosen.

Enerdynamics eLearningPortal.png

Enerdynamics’ eLearning Portal provides one-stop access to important information about the energy industry. It is perfect for new hires, employees moving to management positions, or just about anyone who wants a better understanding of how the energy business actually works. And all learning is available on multiple devices including mobile, tablets, and desktops.

For more information on this exciting new product, contact us at info@enerdynamics.com or 866-765-5432 ext. 700.

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