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Be very careful what you wish for. Many investors are betting on natural gas to replace coal in generating electric power, while many also are anticipating the intermittent nature of wind power to offset permanent retirement of base load coal and nuclear power plants. However, the frigid cold snap of Jan 6 to 8 created a bit of an interesting situation with forced outages of generating capacity just when the system was experiencing record winter energy consumption.

Below is a two-page report from PJM outlining the situation on these days:

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Source: PJM.com

What does this mean? According to several articles published on Reuters.com and ydr.com here, here, and here, there are a few intriguing inferences. The first is that 39,000 MW of generating capacity was offline on Tuesday afternoon into Wednesday morning. With installed capacity of 189,000 MW, the outages reduced maximum available generating capacity to 149,700 MW at the same time as demand was peaking at 141,300 MW - and there existed a very slim capacity buffer.

Secondly, and probably more concerning should be the 9,000 MW of generating capacity that was shut down due a lack of available natural gas. In addition, 2,300 MW of newly constructed natural gas combined cycle capacity became unavailable.

Due to the lack of generating capacity and heavy demand, the network was close to instituting forced interruptions in service. Michael Kormos, PJM executive vice president for operations is quoted in the articles:

PJM said it expected 27,000 megawatts of generation would be offline Wednesday evening, an improvement from the 39,500 MW that were shut earlier in the day….We are very close and it may just be that last couple hundred megawatts (saved) that allow us not take any forced interruptions… We've had units trying to convert {from natural gas} to back-up fuels that were not successful starting up.

In the report outlined above, PJM states 19,114 MW of steam boiler plants, most coal-burning units, were offline early Wednesday when overall outages were above 39,500 MW. More than 16,000 MW of natural gas and diesel-fired plants were unable to operate.

Wednesday morning's maximum outage figure represents nearly 21% of PJM's total generating capacity (39,500 MW). In late December, and before the deep freeze descended on the Midwest and Northeast, PJM outages were running at about 12% of total generation (22,700 MW). About 66% of the increase in power generating outages was from the short-term curtailment of natural gas fuel to power plants. The average PJM forced outage rate for January through March 2013 was 8.3% (15,700 MW) an increase from the 7.5% average for the same period 2012.

For comparison, below is a graph of forced outages dating from 2007 to March 2013 as a percentage of total capacity, as offered by monitoringanalytics.com (pdf):

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How did this effect spot pricing for electricity? As with most supply and demand equations, when demand picks up and supply is curtailed, spot prices move higher. According to the Reuters articles, the 5-year average January next-day delivery electricity price in the PJM territory is in the mid-$50s per megawatt-hour. On Tues Jan 7, the next-day delivery price was $240 per MWh. Real-time power prices were running much higher at $1,000 to $1,500 per MWh.

Who is PJM? PJM is the managing oversight body for power generation and transmission in the Mid-Atlantic and parts of the Midwest. Based in Valley Forge, PJM Interconnection controls a series of power grids fueled by natural gas, oil, nuclear power and coal. From their website pjm.com:

PJM Interconnection is a regional transmission organization (RTO) that coordinates the movement of wholesale electricity in all or parts of Delaware, Illinois, Indiana, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia. ….Acting as a neutral, independent party, PJM operates a competitive wholesale electricity market and manages the high-voltage electricity grid to ensure reliability for more than 61 million people.

PJM also has structured an electricity-pricing model in its jurisdiction that follows a rolling 3-year auction for the bulk of the available capacity. Of the capacity available, the 2013/2014 auctions incorporated 146,200 MW and 2014/2015 auctions incorporated 151,700 MW of cleared capacity. As of March 2013, PJM managed installed generating capacity by the following fuel types: 41.8% coal; 28.6% natural gas; 18.2% nuclear; 6.2% oil; 4.3% hydroelectric; 0.4% solid waste; 0.4% wind, and 0.0% solar.

The following is a map of PJM's jurisdiction and the corresponding electric utilities as offered by monitoringanalytics.com:

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Companies that generate power in PJM's territory and are under its direction include units of American Electric Power Co (NYSE:AEP), NRG Energy (NYSE:NRG) FirstEnergy Corp (NYSE:FE), Exelon Corp (NYSE:EXC), and Public Service Electric & Gas Co (NYSE:PEG). PJM's region includes all or parts of Delaware, Indiana, Illinois, Kentucky, Maryland, Michigan, New Jersey, North Carolina, Ohio, Pennsylvania, Tennessee, Virginia, West Virginia and the District of Columbia.

It seems one of the basic fuel problems experienced throughout the curtailment of power generating capacity during the deep freeze was a lack of sufficient pipelines in the Northeast and Midwest to supply the required gas to fuel home heating, commercial uses, and power generation needs. Northeast and Midwest pipeline maps from eia.gov are below:

Source: eia.gov

E&E Publishing offers an interesting article titled, "Electricity: Who Benefits When Gas Prices Spike During a New England Freeze?". In it, the author offers this quote:

The spot price for gas sold in New England for delivery Friday was $28 per million British thermal units, according to the Energy Information Administration, a 51% increase from a day earlier and a soaring price compared with other parts of the country. As a result, the spot price of electricity in the region rose 26.5%, to $237.75 per megawatt-hour, on Friday.

According to oilprice.com, this is not a new problem and infrastructure constraints led to higher spot prices on occasion in the Northeast. For example:

The Algonquin Citygate price hub, which serves New England, saw two severe price spikes in 2013 - prices jumped above $30 per million Btu (MMBtu) in February and in December. The Transco Zone 6-NY, which serves metropolitan New York, also experienced a price spike in February, where it surpassed $35/MMBtu. By comparison, the average 2013 price at Henry Hub was only $3.73/MMBtu.

Gas utility companies that are expanding their pipeline infrastructure in the Mid-Atlantic are: National Fuel Gas (NYSE:NFG) with their extensive Marcellus acreage footprint; Dominion Resources (NYSE:D) soon-to-be spun off MLP; Spectra Energy (NYSE:SE) East Tennessee and Texas Eastern pipeline; and Kinder Morgan (NYSE:KMP) Tennessee pipeline. Most of the planned added pipeline capacity will carry additional production from the Marcellus and Utica shale natural gas fields.

While natural gas-fired capacity in PJM's territory will continue to grow, so will the problems of sufficient fuel. AEP and EXC offer coal and nuclear generating exposure in the Northeast/Midwest. NRG operates 17,500 MW of non-natural gas facilities in PJM's jurisdiction, or about 37% of total company capacity.

Investors may find intriguing opportunities in both eastern gas utilities with pipeline operations and non-natural gas power generating companies.

Author's Note: Please review important disclaimer in author's profile.

Source: Deep Freeze Causes Forced Power Generation Outages - Preview OF Future Problems?