Energy Markets Update 

Weekly natural gas inventories

The U.S. Energy Information Administration reported last week that natural gas in storage decreased by 219 Bcf. The five-year average withdrawal for January is about 158 Bcf. Total U.S. natural gas in storage stood at 2,591 Bcf last week, 10.6% less than last year and 1% lower than the five-year average.

Musing on the New England Grid

Debate over the reliability of the power grid in New England has become more frequent and louder ever since the Texas grid failure last winter that left millions of customers without power and heat.

New England has its own weaknesses and strengths in its electric grid. For one, the area has a secondary market for backup power, an insurance policy against times with the highest demand. Additionally, the region’s power plants and equipment are insulation to combat the predictably harsh weather of the winter. However, it’s not all robust. The grid has a strong dependence on natural gas, the primary fuel for most plants in the area, and it is increasingly neglecting that infrastructure as it pursues electrification and other environmental goals. Furthermore, the difficulty in siting infrastructure of any kind is a growing concern. 

Heating consumers get priority for natural gas delivered into the region by pipeline, meaning cold weather can strain the supply of gas available to power generation on cold days. To compensate, grid operators will tap into oil turbines or the sole remaining coal plant in New England to supply electricity to the region. That was the process heavily utilized in both 2014 as well as the deep freezes in 2017-2018, and now again in January 2022.

ISO New England has been accused of under addressing the reliability issue with a supply chain so weak. For example, the New England States Committee on Electricity just recently sent a letter to put pressure on the ISO to create a concrete plan for energy reliability.

Unfortunately, while these weaknesses have been known for some time, little has been done to address them and they are poised to become worse in the coming years. With much of the earlier proposed solutions seeming to revolve eclusively around a shift to renewables, regulatory issues have got in the way. The region’s first offshore wind farm is several years behind schedule and Maine recently voted to knock down a 1000 MW plan to import hydroelectricity from Canada through a new transmission line (…we scratch our heads as to why critical energy infrastructure, of any variety, should have been put to ballot in the first place...). We have retired much of our nuclear fleet and will soon be shuttering Mystic Station, the largest plant in the Boston area and one of the largest in the region. All the while, states move on with plans to increase grid demands further via electrification. ISO New England predicts a doubling in electricity demand by 2050 and both time and available solutions are starting to run short.

The region still imports liquefied natural gas from abroad when regional natural gas is likely to be in short supply. The problem is that this LNG is on offer to the global market and simply brought to the highest bidder, which is not always New England. Over time, this creates an energy pipeline that is more and more vulnerable. 

There are solutions. We could build another pipeline or even bolster existing ones. We could contract for LNG as a region and even seek relief from the Jones Act to land cheaper and more reliable cargoes here. We could even lobby to get preferential contract provisions from LNG exports (e.g., let us not send US gas abroad before local base requirements are met).  We could allow regulators and policymakers to site projects that need to be sited and not concede this responsibility to voters and/or any objector with an attorney and an email account. We could better coodindate policy objectives with physical realities of our grid buildout overtime. None of these solutions are easy. Many of them can't be described in short soundbites like "green energy is the future". They will take significant political leadership, coordination and urgency, all things that have been lacking over the past 10 years.

PJM Seeks to Delay Capacity Auction, Again

PJM on January 21st requested approval for a four and a half month delay of their upcoming forward capacity auction in order to implement rule changes devised by the FERC. This capacity auction for the 2023/2024 delivery year would be delayed from January 25th to June 8th after already being delayed in an earlier cycle.

The request comes in response to an order by FERC on Dec. 22, 2021 to require a backward looking energy and ancillary services offset for PJM’s capacity market construct. PJM uses an energy and ancillary services offset in order to calculate the net cost of a new entry. This represents the cost net of other revenues of building and operating a new generator.

PJM uses these auctions to plan out power supplies to provide reliable energy for nearly 65 million customers three years in advance. Auctions were significantly delayed over the past 2-3 years because of litigation around the Minimum Offer Price Rule (MOPR), which can often dictate the ability of new resources to enter the market. All told, the auctions are now a over two years behind schedule; they are supposed to be a 3-year ahead procurement mechanism. The grid operator expects to return to the normal three-year forward auction schedule by May 2024.

McKinsey’s Wild Guess on Net Zero Cost

McKinsey Consulting has stated that in order to get to net-zero carbon emissions by 2050, it will cost the world around $9.2 trillion annually in energy and land investments over the next 30 years.

Consumers would pay nearly 20% more for power and face increased costs for consumer goods backed by production and shipping using lower-carbon fuels. However, much of these cost increases would be balanced by reductions in electric vehicle prices happening over this decade. There is also a cost to inaction, one that can be estimated (i.e., guessed at) in financial terms, but also in terms of human life, as we as ecological and environmental terms. The National Oceanic and Atmospheric Administration reported that climate change cost the U.S. $145 billion in 2021 alone. Presumably, this is just the beginning.

Also, the McKinsey headline is not the entire story. With current policies in place, the world is already expected to spend $250 trillion on energy and land investments already. This is compared to $275 trillion, or a 9% increase, in order to get to net-zero emissions by 2050.

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