UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION. SOUTHWEST POWER POOL, INC.'s REPORT REGARDING FUEL ASSURANCE ISSUES

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1 UNITED STATES OF AMERICA BEFORE THE FEDERAL ENERGY REGULATORY COMMISSION Centralized Capacity Markets in Regional Transmission Organizations and Independent System Operators Winter Operations and Market Performance in Regional Transmission Organizations and Independent System Operators ) ) ) ) ) ) ) ) Docket Nos. AD AD SOUTHWEST POWER POOL, INC.'s REPORT REGARDING FUEL ASSURANCE ISSUES Southwest Power Pool, Inc. ( SPP ) respectfully submits to the Federal Energy Regulatory Commission ( FERC or the Commission ) this report regarding categories of fuel assurance issues identified by the Commission and how SPP is addressing any such issues existing within SPP s footprint. I. INTRODUCTION In its November 20, 2014 Order on Technical Conferences in this proceeding (the November 2014 Order ), the Commission identified specific fuel-assurance questions and directed each Regional Transmission Organization ( RTO )/Independent System Operator ( ISO ) to file a report on the status of its efforts to address market and system performance associated with said fuel assurance issues. Before discussing the three specific fuel assurance issues that are the subject of this report, SPP offers the following overview of the context in which SPP examines and addresses fuel assurance issues.

2 The SPP footprint has diverse fuel sources and adequate capacity, including generation provided by new Market Participants 1 and the construction of new generation by existing Members, 2 to meet regional load requirements. In response to the Commission s directives in the November 2014 Order, however, SPP has reviewed potential fuel assurance concerns across its region and has identified issues that are being addressed on a region-wide basis. First, SPP has identified near-term fuel assurance concerns and has developed strategies to address these near-term concerns with operational processes and coordination strategies. These processes and coordination activities were developed in concert with the 2014 implementation of SPP s Integrated Marketplace and Consolidated Balancing Authority coupled with winter preparedness efforts. Second, SPP has identified long-term fuel assurance concerns in its region and is utilizing its stakeholder process to develop strategies for addressing those concerns. SPP benefits considerably from the expertise possessed by its stakeholders throughout the region. SPP has a unique culture for an RTO; it is member-driven and comprised of a large number of stakeholder-populated committees, working groups, and task forces that develop consensus policies that SPP implements. The meetings of these groups are open to the public and agendas and materials are provided through the SPP website. Members of SPP have membership rights and voting privileges that go beyond the mere advisory role of Members in other RTOs. SPP s Members have both the right and 1 2 All capitalized terms not otherwise defined in this filing shall have the definitions assigned by SPP s Open Access Transmission Tariff. See the SPP 2013 State of the Market Report at p. 17 (posted on SPP s website at: port.pdf). See Appendix A attached hereto for additional information. 2

3 obligation to provide policy positions to the SPP Board of Directors and its Members Committee for consideration and approval. SPP Members hold the majority of the voting strength on all SPP committees other than the Oversight Committee. The stakeholder groups that will be responsible for developing the policy for long-term fuel resource adequacy include the Markets and Operations Policy Committee ( MOPC ), the Gas Electric Coordination Task Force ( GECTF ), and the Capacity Margins Task Force ( CMTF ). In addition, the SPP Regional State Committee ( RSC ) and the Cost Allocation Working Group ( CAWG ), both of which include participation by state regulatory staff, will be kept informed of fuel adequacy issues. II. DISCUSSION In this report, SPP addresses three specific fuel assurance issues: A) the nature of fuel assurance concerns specific to the SPP region; B) the comprehensive strategy or strategies SPP has implemented or plans to implement to address market and system performance in light of each of its fuel assurance concerns; and C) the specific programs and mechanisms SPP will use to carry out its strategies. A. The nature of fuel assurance concerns specific to the region. As indicated above, SPP has identified near-term and long-term fuel assurance issues. For purposes of this response, near-term operational issues are those occurring within a month or less of the operating day at issue. Long-term operational issues are those occurring more than one month from a given operating day. A.1. Near-term fuel assurance concerns SPP s near-term fuel assurance issues involve natural gas, coal, and dual fuel power plants. The SPP region has diversity of fuel, but the two largest fuel sources for 3

4 the power plants serving the SPP Consolidated Balancing Authority are coal and natural gas. 3 Within the SPP region, many Members with natural gas power plants maintain firm natural gas supply and/or transportation contracts. These firm contracts are to ensure gas availability and deliverability during summer and winter peak load events. Despite these contractual arrangements, natural gas flows on firm natural gas contracts could be negatively impacted by the misalignment of the gas and electric scheduling process which includes the nomination cycles for gas scheduling and the Integrated Marketplace timing requirements. 4 Additionally, there may be restrictions to ratable takes or specific receipt and delivery points during cold weather events when the natural gas pipeline delivery system begins to reach its limit. Further, gas pipelines may also interrupt firm natural gas flows during extreme cold weather events in order for the gas pipeline to support delivery to residential and industrial gas customers if required to do so under its tariff. 5 The notification of these restrictions and curtailments often leaves limited time for compliance and often with little notice during the actual operating day. In some cases this does not present a problem because SPP may have the ability to (a) call on additional generation from a nearby power plant that is on a different pipeline or (b) procure generation from a power plant using a fuel type other than natural gas. However, during See SPP 2013 State of the Market Report at p. 27. See Appendix B attached hereto for additional information. SPP also experiences near-term fuel assurance issues surrounding the increasing impact and performance of wind generation during extreme winter weather events. The Integrated Marketplace s timing requirements include the processing time needed to evaluate and make offers to the selected bids. This process currently takes five hours. See, generally, the Statewide Natural Gas Consumption by End-Use, provided by Omaha Public Power District (OPPD). See Appendix C attached hereto for additional information. 4

5 extreme cold weather events, additional generation may not be available. If neighboring regions are experiencing similar weather, capacity may be limited and excess energy may not be available. SPP also experiences near-term fuel assurance issues involving coal delivery shortages. In recent months, the railroad infrastructure has been challenged due to an increased demand in transporting oil combined with an increased demand for coal after last year s weather-related issues such as flooding and a winter that was colder than anticipated. 6 As a result, coal-fired plants in Arkansas, Louisiana, Nebraska, Kansas, Oklahoma, Missouri, Texas, and the upper Midwest experienced reductions in coal deliveries. It is SPP s understanding that the limited railroad capacity caused by increased coal demand, combined with increased demand on the railroad capacity by competing commodities unrelated to power generation, has at times contributed to the reduction of coal delivery across SPP and neighboring regions. During winter weather events, the lack of sufficient coal supply as well as the possibility of frozen coal can be particularly problematic, especially when output from natural gas-fired power plants may be restricted or even curtailed as a result of high natural gas demand on pipelines or forced outages for other reasons due to the cold weather. The generation owners in the SPP region have an effective winterization process to ensure that the units perform during winter weather. SPP s region spans from Western Texas to Nebraska 7 and the regional diversity in temperatures across the region can create 6 7 Coal Delivery Issues for Electric Generation, Staff Overview, Item No: A-3, December 18, See Appendix D attached hereto. The region will expand north through North Dakota in October 2015 with the addition of the Integrated System (see generally Docket Nos. ER and ER ). 5

6 a concern in the early or late winter season. The extreme variations of temperatures from the south to the north in the SPP region can lead to varying scopes of plant winterization. This variation has presented issues in limited instances of extreme cold weather events occurring abnormally early in the season, particularly in the southern regions of SPP where winterization has not been optimal. In addition, wind production can be affected in the footprint due to equipment limitations during periods of cold weather. The SPP region currently has over 9,000 MW of wind capacity. 8 The winter peak for SPP so far this season is 36,995 MW. 9 When it is extremely cold, wind energy production can be significant, and this energy can help offset natural gas and coal plant production shortages if the wind turbines do not freeze. 10 Precipitation during extreme cold periods can reduce wind power production due to blade icing. SPP experienced wind output reduction of approximately 20% on two occasions during winter weather events in early 2014 due to ice formation. The unavailability of wind production due to turbine freezing can add considerable pressure to the need for natural gas and coal power production on short notice to ensure capacity needs are met across the SPP footprint. Difficulty in forecasting wind speed, freezing precipitation, and temperature impacts will be more severe with increased reliance on natural gas for use in generating electricity. Such events are of limited geographic scope and duration, so the consolidation of the former balancing authorities in the new SPP Integrated Marketplace See the SPP 2013 State of the Market Report at p. 93. See Appendix E attached hereto for additional information. The SPP Market footprint reached a winter peak of 36,995 MW at 07:23 on January 8, See the SPP 2013 State of the Market Report at p. 94. See Appendix F attached hereto for additional information. 6

7 has significantly lessened any potential impact. SPP is addressing the risk of unpredicted wind resource outages by collecting additional information about wind resource capability and by improving its weather forecasting. A.2. Long-term Fuel Assurance Issues As explained above, SPP has experienced challenges with natural gas pipeline and railroad limitations in the recent past, and said issues may continue into the foreseeable future. The SPP footprint is expected to be even more dependent on natural gas for power generation as a result of coal plant retirements and addition of renewable generation. The generation portfolio changes that are anticipated in the future for SPP could require construction of additional natural gas pipeline infrastructure to provide reliability and flexibility as natural gas becomes the primary fuel source for dispatchable generation in the SPP region. Railroad congestion for coal delivery could continue well into the future, and acts of nature (e.g. flooding resulting in the suspension or re-routing of coal) causing relatively long-term delivery disruptions can be expected to occur. B. The comprehensive strategy or strategies SPP has implemented or plans to implement to address market and system performance in light of each of its fuel assurance concerns. SPP has implemented both near-term and long-term strategies to address market and system performance risks related to fuel assurance concerns. B.1. Near-term strategy implemented or planned To manage near-term fuel assurance risks, SPP works diligently to be aware of the factors and circumstances that may limit the supply of fuel to power plants. 11 SPP 11 See BOD/MC Agenda & Background 4/29/14, b-looking Forward Report Boston Pacific, p posted at: See Appendix G attached hereto for more information. 7

8 performs a 10 to 20 day look-ahead analysis of the fuel supply and the balance of fuel types necessary to meet expected demand. The weather forecast and other factors such as fuel availability are included in this assessment for adequate near-term commitment strategy. As a result of the possibilities of natural gas supply curtailment and limitations in coal supply, SPP closely monitors capacity limitations and stays prepared to depend on other fuel sources such as oil or hydro. SPP has a multi-day commitment process that identifies opportunities for reliability commitments, and SPP is preparing to examine its processes for economic commitments. SPP performed a risk analysis in the fall of 2014 regarding the possibility of losing significant capacity at natural gas and coal plants during 2015 winter weather events. As more power plants are retired, particularly due to changing Environmental Protection Agency ( EPA ) rules, the amount of additional capacity available during extreme weather events will develop into a longer-term concern. 12 In addition, SPP publishes and maintains an Emergency Operating Plan ( EOP ) that details SPP and stakeholder actions required to ensure reliable operations. For example, if SPP s lookahead studies indicate extreme conditions, SPP will issue a conservative operations warning, communicating to Market Participants, generator operators, and transmission operators to operate conservatively and make as much capacity as possible available. The EOP also includes criteria for generator operators to communicate fuel supply shortages, specific to both coal and natural gas fueled power plants to aid in the planning of the SPP regional balancing authority. 12 See the SPP 2013 State of the Market Report at p. 17. See Appendix H attached hereto for additional information. 8

9 Another near-term strategy SPP has implemented to address fuel assurance concerns is to establish relationships with the gas pipeline companies in the SPP region. As stated earlier, the SPP MOPC has created the GECTF of SPP Members and gas industry experts to discuss and implement improvements to gas-electric coordination in the SPP region. With a focus on education and situational awareness improvement, the GECTF has overseen measures including onsite training classes, operator tool/display development, and system enhancements for gas industry public notifications. These measures have improved SPP real-time operations staff's knowledge regarding operational issues with the gas pipeline supply that might affect the operation of the bulk electric system in the SPP region. The GECTF created an effective setting in which to support and respond to gas and electric coordination issues that impact the SPP region and has provided a forum for stakeholders to openly discuss challenges across the seams between the gas and electric industries and to propose solutions. B.2. Long-term strategy plans SPP has a capacity margin requirement of 12% for all load-serving Members, and this value has provided a sufficient capacity margin in the SPP region. As discussed above, SPP recently created the CMTF under the direction of its MOPC to reevaluate the capacity margin requirements for the region in the future. C. The specific programs and mechanisms that SPP will use to carry out its strategies. SPP will continue to use its established stakeholder process to carry out fuel assurance strategies to the SPP region. 9

10 C.1. Near-term programs and mechanisms SPP will continue to leverage the GECTF as well as the Operating Reliability Working Group ( ORWG ), including the Balancing Authority Operating Committee ( BAOC ) to address fuel assurance concerns and strategies for maintaining reliable operations in the near-term. In addition, SPP Operations will continue to communicate actively on a daily and weekly basis with Market Participants, transmission operators, and generator operators to ensure SPP has a broad-area view of the system conditions. SPP holds a reliability call, as needed, with generator operators and transmission operators to address reliability concerns and pending equipment issues. SPP s Communication Protocols are described in the EOP, and they include the use of blast call, cell phones, and satellite phones as forms of emergency communication. 13 SPP has incorporated the potential use of Conservative Operations and Multi-Day Reliability Unit commitments as part of SPP s EOP. These mechanisms are available for use during extreme weather and limited fuel situations. SPP and its Members believe that using these mechanisms to provide longer lead times for natural gas generation facilities to acquire and schedule fuel supplies in the face of anticipated adverse winter weather should improve the reliability and availability of these facilities during such conditions. C.2. Long-term programs and mechanisms The CMTF is responsible for updating SPP Capacity Margin requirements. The CMTF is evaluating existing Capacity Margin requirements and is updating processes and guiding language related to these requirements. The CMTF began discussing reliable fuel supply and transportation issues in October This policy discussion is ongoing 13 Blast call is a SPP initiated conference call that can be initiated via internet to any type of phone. 10

11 and long-term fuel concerns are anticipated to be addressed through both the CMTF and the GECTF. III. CONCLUSION As discussed in this report, the SPP region enjoys a diversity of fuel sources that shields SPP Market Participants and Members from the frequency and severity at which other RTOs may experience fuel shortages and other assurance issues. Nonetheless, SPP has identified instances in which fuel-assurance issues (involving fuel of any type) impact the SPP footprint. SPP and its stakeholder groups have worked for a number of years to identify potential fuel-assurance concerns, and SPP has made strides toward improvement of communication and situational awareness in order to address these concerns. As discussed in the foregoing paragraphs, SPP is continuing its efforts to identify and address fuel-assurance issues so that SPP may continue to maintain its record of reliability and reasonable wholesale rates. February 18, 2015 Respectfully submitted, /s/ Don Shipley Don Shipley, Director of Operations /s/ Joseph W. Ghormley Joseph W. Ghormley, Senior Attorney Southwest Power Pool, Inc. 201 Worthen Drive Little Rock, Arkansas

12 Appendix A SPP 2013 State of the Market Report, Capacity Additions in