Cold snap tests Perry’s subsidy plans

Source: Benjamin Storrow, E&E News reporter • Posted: Thursday, January 4, 2018

Energy Secretary Rick Perry likes to warn of the dangers of a second polar vortex while promoting his plan to subsidize coal and nuclear plants.

Now, the frigid weather encompassing the Northeast is testing that argument. Perry has argued that subsidies are required to keep open plants that are needed during periods of extreme cold but struggle to make money at other times in today’s wholesale power markets. Coal and nuclear plants have closed in great numbers in recent years, as more natural gas and renewables come online.

But U.S. grid operators appear to have made considerable strides since the 2014 cold snap, when plunging temperatures caused a slew of unexpected power plant outages. Unlike in 2014, Northeastern grid operators said their systems had ample power reserves and were largely untroubled by the freezing temperatures of the last week.

“We’ve seen much better generator performance than what we saw during the polar vortex, for sure,” said Chris Pilong, director of dispatch at PJM Interconnection, the grid operator for 13 states running from Maryland to Illinois.

A series of reforms account for the improved performance. PJM now conducts tests of power plants that sit idle for the summer and fall months to ensure they are prepared for the cold. Many grid operators have taken to issuing cold weather warnings and boast better communication with power plant owners than in the past. And grid operators like PJM and ISO New England have incentivized power plant owners to ensure they have backup generation. The practical result: Many natural gas plants have installed oil-fired backup to ensure reliability.

ISO New England, which manages the grid in six Northeastern states, said it was operating under “normal conditions.” That declaration came in the face of the longest sustained cold snap in the region since 1918, according to local weather reports, with Boston failing to record a temperature above 20 degrees Fahrenheit for seven days.

“The winter reliability program is again serving as a critical support for reliability,” said Marcia Blomberg, a spokeswoman for the grid operator. “The program provides incentives for oil-fired generators to stock up on oil before winter began and to replenish their fuel supplies as necessary prior to March 1.”

A host of regional transmission organizations, former federal regulators and power companies have dismissed Perry’s argument as hogwash. Their position was bolstered by federal regulators, who reported in October that they did not anticipate any market disruptions this winter on account of cold weather.

Both Perry’s supporters and detractors are likely to see vindication in the freezing cold.

Natural gas prices have surged amid increased demand from the residential and commercial sectors.

Prices at Algonquin Citygate, the New England benchmark, leapt to $35.35 per million British thermal units on Dec. 26, 2017, an increase of 230 percent in day-over-day prices, according to Genscape, an analytics firm. Wholesale power prices responded in kind. Day ahead power prices crested above $200 per megawatt-hour yesterday afternoon, according to ISO New England.

That has led power plant owners to burn a disproportionate amount of oil. Oil accounted for roughly a third of all New England power generation yesterday afternoon, compared to roughly 1 percent in all of 2016.

The increase in gas prices resulted in higher coal burn in PJM. Coal generation accounted for nearly 40 percent of the grid operator’s power generation yesterday afternoon. That was the most of any fuel and represented an increase over the 32 percent of coal generation PJM averaged through the first 11 months of 2017.

“It tells me we are at a crisis state here over closing down the next plant,” said Brynne Kelly, a market analyst. “Every plant they close and pipeline they don’t build continues to make the electricity prices the most expensive in the country.”

An expansion in pipeline infrastructure could help reduce prices, she said. Still, pipelines can only be expanded so much in the crowded Northeast, where land is at a premium, Kelly said.

“There are areas where it makes more sense and the cheaper unit is a nuclear unit or a coal unit,” she said.

Others said the cold snap showed that Perry’s concerns are unfounded and argued that the weather showed the effectiveness of grid operators’ recent reforms.

Coal has been all but eliminated in New York and New England, where the fuel accounted for 6 percent and 2 percent, respectively, of power production in 2016. Those figures increased gradually to 8 percent in New York and 5 percent in New England yesterday afternoon.

New England nonetheless had an abundance of power reserves, said John Larsen, an analyst who tracks power markets at the Rhodium Group. ISO New England said yesterday it had about 25,000 megawatts of supply available to meet roughly 20,000 MW of expected demand.

“What I see is RTOs [regional transmission organizations], when faced with challenges to operations and reliability to past experience, have the capability to react and respond in a way that can incentivize better outcomes,” Larsen said.

The biggest test may come later this week, when a winter storm and frigid temperatures are expected to batter the Atlantic coastline. Oil reserves will be necessary to see out the cold snap, but oil generation is limited by emission limits and dwindling supplies, said Blomberg, the ISO New England spokeswoman.

“As oil inventories are depleted, replenishment of these fuels will be important given the uncertainty around weather and future fuel demands for the remaining two months of the winter period,” Blomberg said.

The ability of the Northeastern power sector to fend off sustained cold may ultimately depend on how long the freezing temperatures last.