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Waiting for the Next Polar Vortex

How recent events could prove a harbinger of winters to come.

Fortnightly Magazine - June 2014
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With spring turning to summer, most of us just want to forget about the Polar Vortex, an extraordinary event that was profitable for some but painful for many. Electricity and natural gas demand hit local highs, operators and regulators were forced to take emergency actions, and power plants once thought to be out of the money got a chance to mint gold.

But simply turning the page would be an enormous mistake, papering over a disturbing truth: recent events may be a harbinger of future emergency winter events. In fact, the disturbances of the Polar Vortex might become the new normal in coming winters.

What the Polar Vortex brought to light is that we have had a distorted view of system capacity due to market rules and regulatory assumptions from the U.S. Federal Energy Regulatory Commission (FERC) that have failed to properly value (or consider) reliability. In spite of several FERC decisions since the Polar Vortex to correct these problems, five on-going trends belie assumptions that the grid has sufficient capacity to meet winter peak demands without emergency actions. These trends belie the ability of grid operators to respond to severe winter weather events and thereby raise overall market risks and price volatility:

Figure 1 - U.S. Total Natural Gas Consumption

Coal Plants. Continuing retirements, concentrated in specific markets, possibly accelerating

Natural Gas Delivery. Most gas-fired power plants in deregulated markets lack long-term firm gas supplies 1

Back-up Fuel Requirements. Not defined, even for gas-fueled power plants receiving capacity payments 2

Demand Response. Overly optimistic expectations for winter capacity contributions from interruptible load programs, 3 and

Renewables. Overly optimistic expectations for winter capacity contributions from renewable generation. 4

The heightened risk from these trends and FERC policies raises serious questions for utilities, midstream natural gas and natural gas shippers, regulators, and investors alike. Using the Polar Vortex as a lens to examine these trends will help all of these stakeholders to give more urgent consideration to FERC actions to alleviate the risks, including reconsidering the definition of "firm" to reflect the structure of the natural gas market, crediting back-up fuel's contribution to reliability, and implementing new policies to encourage natural gas pipelines to get much needed natural gas supplies to market. 5

Overall, the Polar Vortex created a lot of firsts in the

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