Gas & Power Coordination: Growing Pains in Time of Transition

Mark Stultz, BPNatural Gas Supply AssociationOPSI Annual MeetingChicago, IllinoisOctober 13, 2014

Natural Gas Supply Association

Represents major integrated producers, large independent producers and LNG suppliers.

NGSA members’ business models differ – Some primarily focused on getting gas to

first liquid point – Others optimize gas assets through

marketing and trading

Today: provide gas supplier/marketer perspective on how to address gas-electric concerns

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Increasing Gas Demand Creates Transitional Phase for Power Sector

Abundant supply of clean-burning natural gas

Well-functioning natural gas market with competitive prices

Advantages of natural gas leading to significant demand growth– For many years, generators capable of

securing affordable gas without firm contractual commitments

– Now, regional pipeline capacity constraints limiting previous system flexibility

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2014 INGAA Foundation StudyCanadian gas power consumption in 2035 is 4 Bcfd of the total 43 Bcfd.

Natural Gas Industry Can Address Generator Needs

Flexibility can be afforded through:– Commodity options: physical “call” options, shaped-

product offerings and pipeline asset optimization– Flexible Pipeline services: no-notice, storage, non-

ratable flow, enhanced nominations, park-and-loan, and operational balancing arrangements

Flexibility needed by generators requires:– Gas supplier to “stand-ready” by reserving supply and

physical assets– Expanding infrastructure if existing system cannot

accommodate increased needs

Such services are typically premium services due to added reliance on storage and other assets

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Just-in-Time Reliability: Riskier in Capacity-Constrained Regions

Absent advance arrangements, generators:– Risk lack of pipeline capacity– Pay spot market price for gas

Gas production is sold in advance– Producers sell all available gas to ensure there are no

disruptions in physical flow • Bulk of production is sold on term or monthly basis • Remaining “swing” is sold in the Timely Cycle

– Unexpected gas needs primarily met by pipelines and marketers with local assets (storage and line-pack)

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Generators in Organized Markets Must Balance Economic vs. Reliability Risk

Ultimately generator decides best portfolio mix to meet its obligations based on individualized risk assessment

If generator accepts risk, “can’t get gas” becomes economic decision --- NOT gas curtailment– “Curtailment:” physical supply cut off

Sympathize with generators: difficult to economically justify firm contract investments– Lack of adequate compensation in organized power

market structures– Uncertainty of long-term generation commitments– Firm service may only be needed on limited number of

days

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Organized Market Rules Can Help Support Increased Fuel Reliability

RTO should ensure rules and pricing structures– Create stronger link between performance and

capacity market obligations– Provide incentives for generators to contract for

reliable gas services – Permit generators to recover costs of reliable fuel

commitments

Investment in fuel security through pipeline contracting, in turn, supports new gas infrastructure

PJM recognizes issue– Considering solutions in capacity market for generators

to recoup costs associated with firm fuel investment

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Gas Industry Transitioning to Better Serve Power Market Needs

Infrastructure is key: producers stepping up to back new pipeline projects to market hubs

Natural Gas Council process instrumental to broadly-endorsed gas schedule proposal– Later Timely Cycle for generators to submit

nominations to pipelines– Increased opportunity for customer

nominations/adjustments later in the day

Continuing to connect with customers to address needs

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Final Thoughts

Transition growing pains until:–Adequate gas infrastructure in place–Generators can better align pipeline

capacity contracts with expected generation commitments

Product/price/reliability issues will sort out with proper market signals

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