Friday, February 12, 2016
Natural gas is so plentiful and cheap that an auction to ensure New England won’t suffer future brownouts drew prices lower than anybody was expecting, and lured enough new production to calm concerns about coal-fired and nuclear power plants shutting.
The annual auction also drew the first guarantee of electricity from an offshore wind farm in the U.S.: Deepwater Wind, under construction off Rhode Island, said it will produce at least six megawatts of power by 2019.
“Prices were less than our consultants estimated, and came in lower than industry observers expected,” said Robert Ethier, vice president of marketing operations at ISO-New England, the organization that oversees the region’s power grid.
Prices that ISO will pay for guaranteeing power supply in 2019-20 is $7.03 per kilowatt-month, 27 percent lower than the price of $9.55 in last year’s auction.
Under the auction, electricity producers and users bid to be paid in advance for guaranteeing that there is enough capacity to meet needs three years from now. Ethier said the low price of natural gas, through pipelines and shipments of liquefied natural gas, was the main spur for the low bids, since gas is used to generate half of the power production in the six-state region.
Such low prices might be expected to reduce the incentive for future development, but that doesn’t seem to be happening.
“Three new large power plants cleared the auction,” Ethier said, pointing to a trio of gas-fired plants coming to Rhode Island and southeastern Massachusetts that between them guaranteed to produce 850 megawatts, close to the output of Seabrook Station. “It’s really a good story all the way around, both in getting new resources and where those resources are located.”
The auction did not include Northern Pass or any other new lines carrying electricity from Quebec, although it did include some existing Quebec hydropower, Ethier said. Eversource spokesman Martin Murray said Northern Pass expects to participate in next year’s auction.
This year’s auction did include some 45 megawatts of production from large-scale solar power plants – none in New Hampshire – as well as the guarantee from Deepwater Wind and a number of wind farms on land. It also had five megawatts of guarantees from two fuel-cell power providers.
The auction included 2,700 megawatts of new and existing energy efficiency measures, which cut the need for electricity over long periods.
The low price doesn’t mean that electricity bills will be going down any time soon, however.
The capacity auction is a mechanism to give up-front payments for actions three years down the road, a market incentive for ensuring stability in an industry that has long lead times for building facilities. These prices don’t directly affect the daily or seasonal price of electricity, although they do offer some guidance for what will happen.
The system includes fines if a provider doesn’t live up to guarantees. That explains why the three new power plants that bid low enough to be part of the auction are “dual-fuel” plants, which can quickly switch to burning oil if there isn’t enough natural gas during the winter, when most gas is used for heating.
“It will cost you a lot of money if you aren’t there to deliver the energy when we need that energy. . . . They know they’re on the financial hook if they fail to deliver,” Ethier said.
During a conference call, Ethier said the low prices don’t change ISO-New England’s support for expanding pipelines or LNG shipments to bring more natural gas into New England.
“We have a run number of studies and continue to see a need for new gas infrastructure of some sort as our region’s gas needs grow and we continue to lose non-gas-fired resources,” he said.
ISO-New England predicts the region will need slightly over 34,000 megawatts of production by 2019 to meet the most extreme needs. One megawatt is roughly the power needed for 1,000 homes.
The capacity auction produced 31,371 megawatts of generation, including 1,459 megawatts of new generation; 2,746 megawatts of demand-side resources, 371 megawatts of them new; and 1,450 megawatts of electricity brought in from New York and Canada.
The results must be approved by the Federal Energy Regulatory Commission, which has never rejected the results of the previous nine forward capacity auctions.
(David Brooks can be reached at 369-3313, email@example.com, or on Twitter @Granitegeek.)