Managing the Energy and Utility Enterprise – August 2014

The ScottMadden Energy Industry Update | August 2014

Before last winter, few had heard of a polar vortex. But extreme weather events like last winter’s freeze harkened back to cold-weather events in the Southwest in 2011 and whether those lessons learned have been internalized by policymakers and the energy industry. Meanwhile, the western drought reminds us of how closely water and energy production are linked. Also, renewable energy in utility settings is growing up, or at least a maturity model can be articulated. Read more below.

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    • EPRIs Integrated Grid Vision
    • In early 2014, EPRI released a concept paper outlining the possible impact on the electric grid of distributed energy resources (DER)operationally, technically, and financially Some key points: DER and the grid are complementary In the future, DER will need to be both connected and integrated into grid operations DER, when grid integrated, is cheaper than when operated independently Germany offers a case study in consequences of DER growth without planning, coordination, and integration
    • Some quotes from EPRIs concept paper With increasing penetration of variable generation (distributed and central), it is expected that capacity and ancillary service-related costs will become an increasing portion of the overall cost of electricity Presently, most DER installations are invisible to T&D operators. The lack of coordination among DER owners, distribution operators, and transmission operators makes system operations more difficult, even as system operators remain responsible for the reliability and quality of electric service for all customers
    • EPRI Posits Grid Connection Is Cheaper When Integrated Versus Recreated by DER
    • Generation portion: ~$70/MWh
    • T&D portion: ~$40/MWh

$275 $430 $165 $262

  • Notes: *A/C is air conditioning Source: EPRI, The Integrated Grid: Realizing the Full Value of Central and Distributed Energy Resources (2014)

  • Gas-Power Interdependence: No Shortage of Studies, But Will the Industry Be Ready for Next Winter?
  • The polar vortexextreme cold weather in winter 2014has created renewed interest in gas-power infrastructure interdependence Since a series of events in 2011 and 2012 cast a light on mismatches in operating cycles between gas and power generation markets and pipeline capacity shortages, a FERC NOPR has been issued and multiple collaborative bodies have been formed to identify regional issues and propose possible solutions (see map at right) A number of RTOs have established task forces on electric and gas coordination, looking at information sharing, operations coordination, and process improvements More recently, after a gas-electric working group failed to agree on a new gas day start time to accommodate power generation, NAESBs board recommended three new intraday nomination cycles: 10 AM, 2:30 PM, and 7 PM*
  • Notes: *All Central time; different than proposed in FERC NOPR and excluding a proposed 4th nomination cycle proposed in the FERC NOPR Sources: Industry news; FERC Staff, Gas-Electric Coordination Quarterly Report to the Commn (Jun. 19, 2014); RTO; collaborative organization web sites

  • A Maturity Model Emerges for Renewable Energy
  • As renewable energy continues to grow, utilities are faced with important decisions regarding how best to meet growing compliance requirements and customer expectations while continuing to operate within existing regulatory frameworks Industry conversations have centered largely on technology, regulatory frameworks, and utility business model; however, little attention has been paid to the effect that the integration of renewables has had on utilities organizational models and staffing ScottMaddens Renewable Energy Organization Maturity Model, developed in conjunction with the Solar Electric Power Association, describes the general pathway utilities follow from initial renewable energy projects to fully integrated renewable resources
  • Renewable Energy Organization Maturity Model
  • Sources: ScottMadden; Solar Electric Power Association

  • A Maturity Model Emerges for Renewable Energy (Contd)
  • A variety of motivations, which can change over time, drive a utility through the maturity model Cross-functional teams are generally driven by compliance requirements or interest in customer service Dedicated renewable groups often form within utilities seeking a strategic positioning, but may also arise from compliance, customer service, or economic motivations Full integration is found in utilities engaging in renewables for strategic or economic purposes; the stage is characterized by a cultural shift within a utility, rather than a particular staffing design Expanding experience with renewable technologies (e.g., signing PPAs, owning renewable assets, etc.) plays a critical role in allowing utilities to refine operational and business models, thereby allowing them to advance to the next stage Regulatory complexity and rapid market growth are challenges that can prevent utilities from moving to full integration in the maturity model; these factors create significant uncertainty and/or a reactive environment for the utility
  • Motivation
  • Sources: ScottMadden; Solar Electric Power Association

  • The Polar Vortex: Can We Avoid Trouble Next Winter?
  • Observations and Issues Pipeline capacity was tight: Pipeline capacity was an issue in New England, even without significant gas burn for power generation. For example, at five key gas delivery points in the North, utilization was more than 92% on Jan. 2223 Many outages were not fuel related: In some cases, combustion turbines would not start Fuel issues were not limited to natural gas: Movement of barges and trains was hampered by freezing temps and coal; related handling equipment froze. Timely replenishment of oil inventories was difficult Fuel diversity was critical: Available gas capacity in the Mid-Atlantic, New England, and the Midwest was far less than advertised capability. In some cases, oil-fired units dispatched before gas. Coal and nuclear units were critical supply-side resources Generators faced significant fuel price risk: Mismatch between gas and power days led generators to assume gas price risk in advance of dispatch, even as gas prices soared to $100/MMBTU. Moreover, maintaining oil inventories is expensive, even as those units face uncertain dispatch during normal weather Will the Gas and Power Industries Be Ready for the Next One? Demand response (DR) uncertainty: More than 2,000 MWs of DR in PJM were called upon three separate days. It is unclear how system reliability might have been had that DR not come through Rethinking retirements: A significant amount of coal and oil capacity is slated for retirement beginning this coming winter. After last winters experience, further consideration is being given by ISOs of which units may need to be maintained, at least for an interim period, for reliability Gas/power alignment: Industry and regulators continue to work on making their power and gas supply operations compatible
  • In January 2014, extreme cold weather affected natural gas and electricity markets in the upper Midwest, the Northeast, and the Southeast for several days. For some regions, particularly the Mid-Atlantic, loss of available power generation nearly led to emergency conditions and gas pipeline capacity utilization was pushed to its limits.
  • Sources: FERC Technical Conference on Winter 201314 Operations and Market Performance in RTOs and ISOs (Apr. 1, 2014); PJM; AccuWeather; industry news; ScottMadden analysis
  • Jan. 2014 PJM-Wide Day-Ahead and Real-Time Power Prices vs. Temperature Difference from Average Low (F) (Philadelphia, PA)

  • Water and Energy: A Persistent Concern
  • Power Generation Withdraws Much Water and Agriculture Consumes Much More, But Both Uses Compete for Scarce Freshwater
  • U.S. Freshwater Withdrawals as % of Available Precipitation (2005)
  • Planned Additions of Generation Units by Cooling Technology (20132022)
  • U.S. Freshwater Withdrawals (2005) (in MM Gallons/Day)
  • Sources: EPA; DOE; Inside EPA; SNL Financial; U.S. Geological Service; EPRI; Bloomberg
  • Only 3% of Earths water is freshwater 68.7% of the freshwater is trapped in ice, glaciers, and permanent snow 30.1% of freshwater is in the ground 0.3% of freshwater is surface water (e.g., lakes, streams, rivers) The Great Lakes constitute 84% of North America’s surface freshwater
  • This years western drought is a reminder of waters linkage to energy

  • Water and Energy: A Persistent Concern (Contd)
  • Sources: EPA; Inside EPA; SNL Financial; U.S. Geological Service

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