This past winter, the New England region experienced significant price spikes in natural gas and, correspondingly, electricity, as a result of natural gas delivery constraints. The effect on consumers was minimal since most have locked in fixed price contracts for both commodities. There was, however, a significant threat to reliability on the electricity grid.
As we all know, our generating facilities are heavily gas dependent and some are unable to procure gas in the winter. On those days, the more costly oil generating units normally fill the gap of electricity generation when gas is unavailable. We also have known that – because of the cost – the oil units carry limited fuel inventory intended to provide sufficient fuel only for a short time. With a sustained demand for gas heating that made gas for electricity unavailable, the oil units were unable to run beyond the normal run time, causing significant reliability concerns. This was particularly troublesome because this was not an unusually cold winter. Indeed, we experienced below normal heating degree days. What will happen next winter, particularly if it is a normally cold winter?
The issues aren’t new and have been the subject of many discussions locally and nationally for years. The ISO has been developing several longer term solutions to be incorporated into the existing market structure for the region. This problem cannot wait until these broader approaches are resolved.
The ISO approach, in its simplest terms, is a mix of demand response and incentives for reliable oil-fired generation, with as little distortion to the market structure as possible. In essence, the ISO plans to conduct an auction to procure the energy needed for a December, January and February as cold as we’ve seen in the past ten years. This approach will provide the needed financial incentive for oil and dual fuel units to be available. Much thought and consideration has been given to the impact of this program on potential market distortions as well as ensuring a least cost outcome. While not desirable on a long term basis because of these market distortions, the approach does the trick for now and is a far cry from other more offensive proposals such as having the ISO actually procuring and storing fuel.
The one monkey wrench in all of this, of course, is who pays. For the coming winter, it is expected that this program will cost between $16 million and $43 million. The plan for this winter is to pass the cost of this program to all consumers through the delivery charges to customers. This is the one part of the ISO proposal that is wrong.
These costs should be incurred by entities responsible for serving the usage of customers, primarily the suppliers. This cost is a part of the normal cost of participating in the market, just as the suppliers incurred the spikes last winter. Customers who lock fixed commodity prices do so knowing they are paying a premium because suppliers are taking on the risks of the market.
These rules should be no surprise to the suppliers. They claim that they could not have anticipated the rules and that existing contracts for this coming winter do not reflect these costs. But that is not how the market works and the suppliers know it.
The suppliers buy and hedge their obligations constantly. The prices they quote to customers are based on the liquidity in the market, not the “fundamentals” of rules and ISO ruminations.
The cost of this program was priced into the market some time ago – well before anyone knew what the final rules would be for this coming winter. As a result, customers who have locked in prices for this period will pay for the program twice – once in their contracted price and again in their delivery charges.
National Grid should be commended for attempting to shift this cost to the suppliers. They are the only utility that did so. One would think that all of the region’s utilities, which have no skin in this game, would align themselves on this issue with their customers and not the suppliers.
It’s been generally agreed among many parties that customers will pay it for this winter but it is not acceptable for the future. What good is it to design a program with limited market distortions and then turn around and distort the retail competitive market? After all, the purpose of ensuring a fair market is to protect consumers, not market participants.