DoubleSqueeze

HowtheArc+cExpressandnaturalgasconstraints

areturningtheWestCoastgasandpowermarkets

upsidedown

FredHeu<eNWEnergyCoali+on

March6,2019Workinprogress–updatesandrefinementswillbeincorporated.

•  ThePacificInter+eisoneofthelongestelectricpowercorridorsintheworld.

•  ThetwoACInter+escarryupto4800MWofpower.TheDCInter+ecarriesupto3200MW(north-south)and1000MW(south-north).

•  Sincethe1990s,powerhasalmostalwaysflowedonlynorth-south.ThatchangedonFebruary4,2019.

Thisstorybeginswithamystery...

BonnevillePowerAdministra<on

•  OnFebruary4,2019,poweronthecombinedPacificInter+esbeganflowingsouth-to-northatlevelsnotseenindecades.

•  OnFebruary5,S>Nflowsexceeded3000MWandcon+nuedhighatintervalsthroughoutFebruaryandintoMarch.

•  Inmostyears,latewinterInter+eflowsarestronglyN>SasNorthwesthydrogenera+onrampsuptomeetwinterdemandandtolowerreservoirlevelsaheadofthespringsnowpackrunoff.

•  Forexample,inFebruary2018Inter+eflowsalmostneverwentbelow2000MW.

•  Whatcauseda5000MWswingin2019?BPAtoldNWECthatitisama<erofpowermarketcondi+ons–thatisindeedthecase.

•  Whatfollowsisanexplora+onofthosemarketforcesandwhattheymeanfortheNorthwest.

Feb2019

Feb2018

--BonnevillePowerAdministra<on

February2019wasunlikeFebruary2018oranyotherrecentFebruary

Act1:SouthernCaliforniagasandpowermarkets

•  InOctober2015,theAlisoCanyongasstoragefacilityinnorthwestLosAngelesCounty,thelargestonthewestcoast,hadamajorwellfailureandwasmostlyshutdown.

•  Subsequently,severaldesertpipelinessupplyinggastosouthernCaliforniahadfailuresandwerealsorestricted.

•  WhenLines4000and235wererestrictedinOctober2017,thecombinedconstraintongasflowsintothebasinandstorageatAlisocausedpricesatSoCalCityGatetooscillatewhendemandroseneartotalphysicalsupply.

Le?axis–gasflows(green),availablesupply(blue)Rightaxis–SoCalBorderandSoCalCitygatepricedifferen<al(red)

--IndicatedShippersandTheEnergyProducersandUsersCoali<on,1/25/2019,CaliforniaPUCDocket18-IEPR-03

•  SinceOctober2017,duringverycoldandhotweathercondi+ons,demand(greenline)hasexceededsupply(blueline)─leavingSouthernCaliforniadependentonthereducedAlisostorageandothersmallerfacili+es.ThisspikedSoCalCItygategasprices(orangeline).

--IndicatedShippersandTheEnergyProducersandUsersCoali<on,1/25/2019,CaliforniaPUCDocket18-IEPR-03

Reducedsupplydrovepriceincreases

•  Overthelastyear,whilegaspricesatSoCalBorderrosemoderately(lefscale=$15/mmBtu),SoCalCitygaterosemuchmore(lefscale=$40).

But,pricesriseatdifferentratesindifferentplaces

•  AlisoCanyonispartofthedeliverynetworkfor17largenaturalgaspowerplantswithover9000MWofcapacityintheLABasin.

•  WithdesertpipelineandAlisoCanyonconstraints,gaspowerplantshadli<lechoiceduringthelateJuly2018heatwaveandhadtopaysuper-highpricesforgas...andrecoverthosecostsinthepowermarkets.

--AlisoCanyonRiskAssessmentTechnicalReport,April2016

Systemconstraintscontributetopricedifferences

•  InthelastweekofJuly2018,aheatwavehitsouthernCaliforniaandgasandpowerpricesbothspiked.

•  Therehavealwaysbeensummerheatwaves.Whathappenedthis+me?

•  ManygaspowerplantsbuysupplyatSoCalCitygateandthensellintotheCaliforniaISODayAheadMarket(DAM).Theyhavetorecovertheirgascosts,thusthemarketclearingpriceisusuallysetbyalessefficientgasplant.Thenormalpricerangeforthedailypeakhourisabout$40to$80/MWh,reflec+nggaspricesinthe$3to$4/mmBturange.

•  ButwithreducedpipelineflowsandAlisoCanyonconstraintsinlateJuly,thegasmarkethitacri+calpointandasseeninapreviousslide,SoCalCitygatepriceswentfromunder$5toabove$20/mmBtu.

•  WIthSoCalCitygateabove$20,theCAISODAMspikedupabove$900,andtheimpactspreadacrossCaliforniaandthewest.

Naturalgaspowerplantstransmitlocalgaspricespikestothewesternregionatthespeedofpowermarkets.

--EnergyOnline.com

Act2:Bri+shColumbiaPipelinebreak

•  ThemainBCgaspipelinesystemisoperatedbyWestcoastEnergyInc.(WEI),aunitofSpectra,inturnownedbyEnbridge.

•  OnOctober9,2018,the36-inchgaspipelinefromnorthernBri+shColumbiatoHun+ngdon,BCandSumas,WAhadanexplosionnorthofPrinceGeorge.

•  Bothparallellinesinthatareaweretakenoutofservice,crea+nganimmediategassupplyemergencyfortheBCLowerMainland,VancouverIslandandwesternWashington.

•  The30-inchlinewasreturnedtoserviceinafewdays,andthe36-inchlinereceivedtemporaryrepairsandwasbroughtbackonlinewithgraduallyincreasingcapacityaheadofthewinterhea+ngseason.

•  Pricesonbothgasandpowermarkets,especiallytheMid-Columbia(Mid-C)tradinghub,zoomedupwardun+ltheinteriorBCgasflowresumed.

ThegassqueezeonPugetSound

•  WhileBri+shColumbiaisheavilydependentongasfordirectuse(hea+ng,cooling,waterhea+ng,industrial),thereareonlyahandfulofgaspowerplants.

•  ThePugetSoundregionontheUSsidehasseveralimportantgaspowerplantstheNorthwestdependsonthroughthewinterseason.

•  InOctober2018afertheBCpipelinebreak,gaswasreroutedtothePugetSoundareaviatheColumbiaGorge,PortlandandtheJacksonPrairiegasstoragefield.

•  Inmid-winter,withpeakhea+ngdemandacrosstheNorthwest,backupgassupplyfromPortlandnorthwardisverylimited.

--NorthwestGasAssocia<on

ThegassqueezeonPugetSound-2

•  ThesamekindofgashubpricingdisparityasseeninsouthernCaliforniasince2017hasnowemergedintheNorthwest.

•  InOctoberandNovember,followingtheBCpipelinerupture,AECO(Alberta)gaspricesdeclinedbecausegasfieldscouldmovelesssupplytotheNorthwestmarket.

•  Ontheothersideoftheconstraint,Sumaspriceszoomedupward,andMid-Cpowermarketpricesfollowed.

•  SinceNovember,theWEIpipelinereturnedtolessthanfullcapacityservice.

--RBNEnergy.com

•  InOctoberandNovember,withdiminishedBCgassupply,thepowermarketsintheNorthwest,especiallytheMid-Columbia(Mid-C)tradinghub,trendedsubstan+allyhigher.

•  WithmildtemperaturesinJanuary,pricescamedownclosertonormallevels,whilereflec+nglowerthannormalsnowpackandhydrogenera+on.

•  PricesweresharplyupwardthroughFebruarywiththeonsetoftheArc+cExpress.•  Onceagainlocalgaspricesarebeingtransferredtoregionalelectricprices“atthespeedof

powermarkets.”

ReducedBCgassupplyandhighdemandsqueezesNorthwestpowermarkets

--BPAPowerOpera<onsReport,March2019

Act3:Arc+cExpress

•  AmajorheatdomeoverAlaskaandthewesternArc+ciscausingweatherdisrup+onsaroundtheworld.

•  Theheadlinescallthisthe“polarvortex,”butthepolarvortexalwaysexists.NormallyitcontainsverycoldairwithintheArc+cregion,butnewandpersistentblockingpa<ernsassociatedwithextendedverywarmperiodsintheArc+caredisplacingcoldairsouthward.

•  ThecurrentArc+cExpressbeganinlateJanuarywithanenormouswaveofcoldairhiqngthemidwestandeast.

•  ThecoldairthenmovedwestwardandhasbeencenteredoverAlbertaandMontanaforthelastmonth.

•  TemperatureshavealsoperiodicallybeenverycoldinsouthernCalifornia.

•  Thishasresultedingasandpowermarketdisrup+onsevenlargerthanJuly2018.

GasMarketHubPricesduringthe2019Arc+cExpress

•  InFebruary,gaspricesinsouthernCaliforniaandtheNorthwestreflectedthelocalweatherfromdaytoday.Whenitwasverycoldineitherregion,pricesspikedupwards--over$20/mmBtuatSoCalCitygateinmid-February,andto$30atSumas.

•  OnMarch1,withcoldtosuper-coldweatheracrosstheNorthwest,SumaspricesforgasdeliveryonSaturday,SundayandMondayreachedextraordinarylevelsover$150/mmBtu,whileWestcoastSta+on2innortheastBC,withnoabilitytosendaddi+onalgassouth,tradedaround$1.

•  TheMid-Cpowermarketexplodedtonearly$900/MWh.

ThePla^sstorynotes:•  Mid-Cpeak(highloadhour)pricesforMonday,March4tradedat$890/MWh(normal

this+meofyearisaround$30).•  Sumasgaspricestradedat$152/mmBtuforSaturday-Monday;thepreviousrecordof

$66wassetduringcoldweatherinNovemberwhentheWEIpipelinewass+llcomingbacktofullcapacity.

•  WEIcapacityatSumasissettodropformaintenancefromMarch4-6.•  Otherpressreportsindicateareduc<oninoutputattheJacksonPrairieundergroundgas

storagefacilitynearChehalis,WA.•  Becausegaspowerplantswon’toperatewithsuper-highgaspriceswhentheycan’tcover

thosecostsinthepowermarkets,powersupplyintheNorthwestbecomesconstrainedandMid-Cpriceshavego^endoublesqueezed.

•  Star+nginearlyFebruary,gashubpriceshavebeenhighperiodicallyinbothsouthernCaliforniaandtheNorthwest.

•  WhenpricesarehighatSoCalCitygate,theCAISODayAheadMarketgoesupdrama+callyandotherwesternpowermarketsincludingMid-Cfollowatalowerlevel.

•  WhenpricesarehighatSumas,Mid-Cpricesgoupdrama+cally.

•  WhenSumasiswellaboveSoCalCitygate,gasgeneratorsinthePugetSoundregionareconstrained,Mid-CtradesatabigpremiumtoCAISODay-Ahead─andpowerflowsnorthwardfromCaliforniaathistoricallyhighlevels.

Mysterysolved

TheDoubleSqueeze

•  Gasandelectricsuppliesarealways+ghtinthewinter.•  Inmostyearsgaspipelinesandstoragecansupportdirectuseandpowerplantseveninverycoldweather.•  TheDoubleSqueezeistheextendedcoldweatherfromtheArc:cExpressplusrestric:onsonregionalgas

pipelineflowsandstorage.•  Whentheweatherisverycoldandgasdemandreachesacri+callevel,naturalgaswholesalepriceswill

rapidlyzoomupwardun+ltheweatherwarmsup.•  Furthermore,gaspricebreakoutsinsouthernCaliforniaortheNorthwest–orboth–willhavean

immediateeffectonpowermarketsacrosstheregion.•  Becausegaspipelineandstorageconstraintswillcon+nueformanymonthsinbothregions,theriskof

similarpricerun-upsisveryrealthroughtherestof2019wheneverweatherisveryhotorcoldandenergydemandishigh.

•  TheDoubleSqueezehighlightstwonewrisks–over-dependenceongaswhenflowsandstoragearereduced,andtheimpactofclimatechangeonenergymarkets.Thecombinedeffectcreatesmajorsystemreliabilityandpricerisk.

•  Intheend,gasandelectriccustomerswillpaytheDoubleSqueezepremium.

Goingforward...1.Assessment•  ThecurrentDoubleSqueezeiss+llunderway,and

furtherassessmentwillbeneededonthecausesandconsequences.

•  Theeffectofmarketpricesurgesongasandelectriccustomersmustbeahighpriorityforu+li+esandregulators.

•  Rapidchangesingenera+onandtransmissionpa<ernsduringhighstressperiodsrequiresfurthersystemreliabilitystudies.

2.Reducepeakdemand•  Localgaspricespikesthatpushuptheregional

powermarketscanbediminishedbystrongdemandreduc+onprogramsonboththegasandelectricside.

3.Diversifysupply•  DevelopmentofresourcessuchasMontanawind

thatprovidehighcapacityvalueduringpeakdemandperiodsmustbeaccelerated.

4.Systemcoordina@on•  Systemopera+onsmustbebe<ercoordinated,

includingbe<eralignmentofgasnomina+onandelectricscheduling,pipeline/storagemaintenance,andcross-areaworkamongCalifornia,theNorthwestandotherregionsinthewest.

5.MarketReformandExpansion•  Strongeroversightisneededtoreducemarket

powerandgamingrisk.TheproposedEnergyImbalanceMarket(EIM)enhanceddayaheadmarketcouldhelpallregionsinthewestmanageunexpectedsupplycrunchesandpricespikes

6.Jointplanningandac@onagendas•  Thegas-electricinterfacestudiesbyWIEB(Western

InterstateEnergyBoard)andWECC(WesternElectricityCoordina+ngCouncil)provideastar+ngpointfordetailedwork.