Winter in Vermont

Summer afternoon. I stare at the huge yellow blossoms of my daylily patch. I am always amazed by their generous beauty. Midsummer is wonderful in Vermont.

However, in Vermont, winter is always on your mind.

Looking back at winter oil

In the deeply cold weather of 2017/2018, oil saved the grid. Gas-fired power plants could not always get fuel. (I described this situation at the beginning of my book, Shorting the Grid: The Hidden Fragility of Our Electric Grid.)

Some gas-fired power plants were able to burn oil, and they did. The oil they burned saved the grid, and it was part of ISO-NE “Winter Reliability Program.” which assured an oil supply to power plants that could burn oil or natural gas (dual-fuel power plants). Our grid was operating on 30% oil for about a week.

The Winter Reliability Program was subsequently scrapped by FERC as being “out of market” and not “fuel neutral.” However, it kept the lights on in New England.

I have argued that we need such a program again, whatever FERC thinks of it. I have the sad history of the Winter Reliability Program in an earlier blog post.

Looking forward to winter oil

Time to look forward to the coming winter. In February of this year, I spoke at a forum of the energy committees of the Connecticut Legislature. (New England Was Barely Ready for Winter.) The next speaker at the forum was Gordon van Welie, the CEO of ISO- NE, our grid operator. Van Welie said that a Winter Reliability Project would not be effective this coming winter.

I could think of several reasons that such a project would not be effective. For one thing, several large base-load plants have shut down, and so oil would have to supply even more electricity in order to keep the lights on. The graphic at the head of this blog post is from a recent ISO-NE presentation. It shows that more than 5000 MW of reliable plants have closed in New England since 2013. Meanwhile, 3000 MW of dual-fuel plants have been added. But can the dual-fired plants get fuel without a Winter Reliability Program? Or is this just more dependency on Just-In-Time natural gas?

To put this in context, our New England grid runs as low as 10,000 MW at night and has rare peaks of about 23,000 MW. (In contrast, ERCOT of Texas is expecting today’s peak to be over 70,000 MW.) Shuttering 5000 MW of reliable power has affected a major part of our power supply.

Facts and figures for this winter

The figure at the head of this post  is slide 3 from an ISO-NE presentation in July that described the choices for the coming winter.  In this presentation, ISO-NE described their choices and attempted to justify their plan to NOT implement a Winter Reliability Program. I have reviewed the ISO-NE presentation carefully and attempted to understand the potential choices.

I cannot link directly to the presentation: it is a PowerPoint that simply downloads when you click on it.  However, if you follow this link to Markets Committee materials and scroll down to 2022-07-12-14 MC A09 Considerations for Winter 2022-2023 – ISO Presentation,  you can download the entire presentation.

I found the ISO-NE choices confusing, and the ISO-NE arguments contradictory at some level.

Oil will save us anyway?

In the presentation, Slide 22 claims that a Winter Reliability Program this year would be too expensive. ISO-NE projects the winter cost of oil at $61/bbl, which is about six times larger than the price during the 2017-2018 winter program. An oil-based reliability program this year would cost $179 million, while it only cost $25 million in 2017.

Then comes the good news (sort of). In the next slide, Slide 23, ISO-NE looks at forward prices for electricity. Their projections for electricity prices in winter show that oil is “in the money.” That is, electricity prices are expected to be high enough to give power plants an incentive to buy oil and sell very expensive electricity. To assure that power plants will have oil available, New England will not need a “Winter Reliability Program” stepping into the market.

To quote slide 23 “fuel oil is a less expensive fuel than natural gas in the forward markets.”

Okay. So far, I understand the situation. I don’t like it, but I understand it. The winter of 2022/23 will be a very expensive winter for consumers, due to natural gas prices. The only good news is that the high natural gas prices should increase reliability. Power plants will want to stock oil. The plants will want to be “in the money,” selling high-priced electricity.

LNG to the rescue?

But then…slide 24 describes some more reasons ISO-NE thinks we should NOT to have a Winter Reliability Program. ISO-NE notes that such a program would discourage LNG purchases.

Huh? Discouraging LNG purchases is bad?

Slide 24 has Pros and Cons for a Winter Reliability Program. The second Con is quoted below.

“Con 2: May Undermine LNG procurement – The fuel-oil subsidy may adversely impact LNG contracting by suppressing the energy market’s prices and reducing LNG-procurement profitability.”

This winter, I would personally like to see energy market prices suppressed. But that’s just me.

Why would ISO-NE be concerned with “reducing LNG-procurement profitability”? Their presentation explains their reasoning. LNG is more flexible than oil.

On the other hand, LNG is delivered from foreign countries on foreign-flagged ships. Also, LNG is almost always more expensive than pipeline natural gas. And ISO-NE expects pipeline natural gas to be more expensive than oil.

At this point, my head is spinning. Does ISO-NE want to encourage LNG procurement? I gather LNG is more flexible. But LNG is an international market. The Northeast would have to outbid the rest of the world for LNG. Why would a policy hurting LNG imports be a bad thing?

A real case of LNG rescue

ISO-NE has a cost-of-service agreement (a sort of Reliability Must Run agreement) with Mystic Station in Massachusetts. Slide 4 boasts of this agreement:

“(ISO-NE has retained) Mystic 8 & 9 under a Cost-of-Service agreement when retirement of that facility posed unacceptable energy adequacy risk to the region.”

I don’t want unacceptable energy adequacy risks! Still, Mystic is very dependent on LNG. Indeed, a few years ago there was concern that if Mystic closed, the LNG receiving facility would also close. Now, ISO-NE had a cost-of-service agreement with Mystic, and the station and the LNG port will keep functioning.

It seems to me that every two years there is a move to shut down Mystic Station, and then it is continued for two years for reliability reasons. This way, nobody has to admit that we need such natural gas stations in the future. (Especially when we shut down nuclear stations.) In a recent Grid Brief, Emmet Penney has a cynical comment on this common phenomenon:

It’s always two years later somewhere!

The measured move back to vertical integration

Getting back to the ISO-NE presentation. I found the discussions of forward prices for gas, electricity, LNG, and fuel oil were easy to follow. That is, they were easy to follow if I followed them one at a time. But it was very hard to take this information and put together a coherent story about the future of our grid.

I see this entire scenario, including Mystic Station, as a step away from markets, and toward vertical integration of utilities. And I think a step away from markets will also be a step toward reliability.

How is the Northeast stepping away from markets? First, ISO-NE has guaranteed cost recovery for a major plant. Next, ISO is not planning to take any action that would discourage LNG imports, because LNG is so flexible. These are choices on ISO-NE’s part.

Looking at these choices, I suspect other plants will be crying “foul” and insisting on similar deals to the Mystic deal. Cost recovery agreements will begin to happen plant by plant, to ensure reliability but in order not to disturb the “markets.” Guaranteed cost recovery is a hallmark of vertical integration. In my opinion, vertical integration is coming back to our grid.

It’s going to be an expensive winter up here. But perhaps there will be reliable electricity, as ISO-NE begins to encourage reliability, and the region moves away from just-in-time gas delivery. Not that LNG and oil are better, but they are more reliable.

In My Opinion

What we need is a few new nuclear plants!