Cost of Hiding Energy Supplies

May 20, 2020
Flickr/spinster cardigan
Mike Jacobs
Senior Energy Analyst

A robust energy supply should perform just as well in winter as it does in summer. The electric grid should use the added efficiencies that come with cooler air to lower costs and improve reliability when physics makes those efficiencies available. The way that grid operators’ rules include or exclude this physics can hide or help modernizing the grid and keeping costs low.

A wide variety of equipment works better in cooler weather, as the air is heavier and can absorb more heat. This benefits electric generation, as well as does electric transmission and distribution. We usually hear about the inverse, that generation is “de-rated” in hot weather.  Manufacturers routinely describe how equipment performance improves with lower temperatures with no added costs or equipment.

In the New England and New York electric grids, generators are listed with a summer rating and a winter rating, and reliability assessments use the relevant number. Planning for reliability is increasingly watchful of times other than the summer peak. That planning, and the policies, prices, and market responses that follow, are all better served by having more information about actual conditions, rather than less.

In the PJM grid rules and markets, most generators do not have a winter rating to define how power plants can increase supply in colder weather. Not coincidentally, PJM has been making a series of changes to its market rules because of concerns that there are potential shortages in the cold weather. This week we expect a PJM rule change for “reserves”, which is a measure of the short-term readiness of the electric supply to increase output.

You Get What You Pay For

My father used to say “You get what you pay for.” He would also make a list of what he wanted to buy, which is logical  to ensure that you are getting and paying for what you intended to get. In the debate about the PJM change to reserves, and its plan for an “Operating Reserves Demand Curve” two steel producers (Nucor and Steel Dynamics) sent comments to the Federal Energy Regulatory Commission, supporting the need for a reliable grid, but noting the cost of this reform is expected to be between $550 M and $1.7 Billion per year.

What Do We Need?

PJM made the case that it has not been great at pricing and procuring reserves. I don’t know if the new PJM plan will cost consumers a billion dollars a year. I’m just saying that how much supply is available and how much is needed would be better informed if we included the increased output from generators in cold weather.

Advanced Class

In order for a generator to provide more reserves in cold weather, one key issue is any limits set on how much energy each generator is allowed to produce and inject onto the grid. Rather than ask a new generator about winter and summer capabilities, the PJM interconnection process uses the values provided by the generator for Capacity (what is firm and deliverable in summer), Energy (i.e. non-firm capability), and Maximum Facility Output. The interconnection studies that follow test that the generator will not overload or harm the grid when running at these levels. Since 2002, about 20 of the studies requested by proposed gas-fired generators (gas fuels the vast majority of the new plants built in PJM these past 2 decades) have used a higher number for Energy than for Capacity. This choice makes sense, as the colder weather that enables the higher energy output is neither firm nor available in summer. What doesn’t make sense is the 200 studies for new gas generators that used the same number for Capacity injection, Maximum Facility Output, and Energy injection. We can hem and haw about whether this is really 90% of the gas units that have been built in PJM, but its much more than half and it doesn’t happen in the nearby systems of New York and New England. Winter ratings across the U.S. are typically 5%- 15% higher than summer.

Estimated 10% increase from gas generation that omitted temperature-adjusted rating.

Market Rules?

Most responses to this I hear reiterate that the Capacity number needs to be conservative, and a higher injection request can create higher transmission costs. Capacity is measured in summer, and that’s long been the time when supplies were most needed. All true, but not actually addressing the question “Why do PJM generators lock the upper limit of what they can sell as energy (i.e., non-firm) at the level of their summer, firm capability?”

Especially interesting are the cases I found where three very different generation owners, Old Dominion Electric Co-operative (serving Virginia, Delaware and Maryland), PSEG (development arm of New Jersey utility with same name), and Dominion (aka Virginia Power) have multiple times asked for their generation to be studied and allowed to run with a higher number for Energy injection than for Capacity injection. Three very different kinds of companies making the choice that 90% of their peers did not.

A safe and adequate energy supply is a good thing. This chart  shows an estimate of how this practice keeps some 8,000 MW of capability hidden at gas generators around the PJM system. This isn’t only relevant to this week’s decision on reserves. And I’ll be exploring if there is more to this issue and a few more billions of dollars that we might not need to spend to keep the grid reliable in cold weather.