POWER February 2016 - 17

Challenges of Increasing
Dependence on
Gas-Fired Generation
Glenn Benson
U
Rachel Block
se of natural gas for power generation in the U.S. is skyrocketing.
From 2005 to 2015, the share of energy produced
from gas has increased over 80%, with gas now
comprising about 35% of the fuel mix. This rapid escalation in
dependence on gas presents challenges for generators, independent
system operators (ISOs)/regional transmission organizations,
and regulators.
Perhaps the most salient issue is how to maintain reliability
and limit price spikes in areas like the Northeast on cold winter
days. On such days, gas pipeline capacity is often constrained
and gas utilities and power plants compete for limited supplies.
Considerable efforts are being made to manage these challenges-increased
coordination, pay-for-performance standards, and
innovative pipeline funding reforms-but success on these initiatives
requires navigating through stakeholder resistance, a
maze of regulatory complexities, and other obstacles.
Harmonizing Timing
First, the Federal Energy Regulatory Commission (FERC) issued
a rulemaking in April 2015, requiring pipelines to defer the
timing for their daily nomination deadlines, enabling electric
transmission operators to complete day-ahead scheduling and
gas-fired generators to receive electric market dispatch instructions
before pipeline nominations are due. FERC also required
adjustments to the posting time of ISO day-ahead energy market
results to facilitate gas procurement and scheduling by generators
that clear.
In response to strong gas industry opposition, however, FERC
withdrew a proposal that would have aligned the nationwide Gas
Day with the electric operating day. FERC's objective was to relieve
gas-fired generators that have committed across a single
electric operating day from having to procure gas supply and
schedule gas transportation across two Gas Days. It also was intended
to address difficulties arising from the fact that the start
of the Gas Day occurs in the middle of the morning electric load
ramp. This initiative was challenged on various grounds, including
that it would increase costs, harm reliability of gas service,
raise safety issues, and cause operational problems.
Capacity Market Adjustments
Second, ISO-New England (ISO-NE) and PJM Interconnection
(PJM) have modified their respective capacity markets to reward
generators that reliably deliver power during tight system conditions
and more strongly penalize those that do not. ISO-NE has
redesigned its market to correlate a generator's capacity payments
to performance during scarcity conditions through adoption
of a two-settlement process, with the objective of providing
incentives for generators to pursue cost-effective measures to
ensure they have the fuel to come online when needed.
The redesign has been challenged as, among other things, unnecessary
and unduly risky, saddling consumers with unnecessary
February 2016 | POWER
costs, discouraging investments, encouraging generators to add
oil-gas fuel-switching capability to the detriment of environmental
goals, and discriminating against resources without quickstart
capability. Pending the outcome of litigation, the redesign
is scheduled for implementation in 2018.
PJM is phasing in a new Capacity Performance Resource product,
aimed at improving incentives to deliver energy reliably.
Capacity Performance Resources will be subject to charges for
poor performance and eligible for credits for superior performance.
Like ISO-NE's redesign, numerous parties are opposing
PJM's initiative on a variety of issues, including costs to consumers
and discriminatory treatment favoring certain resources.
Subject to the outcome of litigation before FERC and likely the
court of appeals, PJM's program will be fully implemented by
the end of 2018.
New Pipeline Contracts
Third, pipeline companies Kinder Morgan and Spectra are relying
on an innovative strategy to develop projects they say are needed
to supply the New England market: They are seeking long-term
firm transportation agreements, not just with prospective shippers
on their pipeline projects, but also with electric distribution
companies (EDCs).
The theory behind these arrangements is that although EDCs
have no need for pipeline capacity themselves, they can release
the capacity in the secondary market to meet the needs
of gas-fired generators on which they depend for reliability. The
pipelines seek EDC contracts because generators are unwilling
to enter into the long-term agreements needed to finance a
pipeline project. To control costs and enhance their own competitiveness,
generators typically rely on less-expensive interruptible
pipeline service or unneeded firm capacity re-sold in
the secondary market.
The Massachusetts Department of Public Utilities has approved
the concept of EDC contracts, and proceedings are under way
in other New England states to do the same. EDC contracts are,
however, controversial. Detractors assert they unfairly favor gasfired
generation and can subject consumers to unnecessary costs.
Critics further contend that reliability concerns can be better addressed
with more efficient utilization of existing resources. Like
the ISO reforms discussed above, any EDC contract filed for state
commission approval appears destined for litigation.
How these issues and proceedings are resolved will go a long
way toward determining the effects that increased reliance on
gas-fired generation will have on reliability, prices, and the operation
of the markets. They may well determine how large a role
gas will play for many years to come. ■
-Glenn Benson (glennbenson@dwt.com) is a partner in Davis
Wright Tremaine LLP's energy practice in the firm's Washington,
D.C., office, and Rachel Block (rachelblock@dwt.com) is an associate
in the firm's Seattle office.
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POWER February 2016

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