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Item No: A-3

May 15, 2014

Summer 2014

Energy Market and 

Reliability Assessment

Good morning Madam Chairman and Commissioners. We are pleased to present the Summer 

2014 Energy Market and Reliability Assessment, a joint effort of the Office of Enforcement 

and the Office of Electric Reliability. The Summer Assessment is the staff’s annual 

opportunity to share our assessment of the electric, natural gas, and other energy markets as 

we head into the summer months. 

This presentation does not necessarily reflect the views of the Commission or any 

Commissioner. 

Electric and natural gas market conditions this summer will reflect exceptional gas burn and 

storage withdrawals this winter, and the anticipation of a warmer-than-normal summer for 

much of the country. The possibility of a summer El Nino may moderate temperatures and 

associated market impacts. CAISO markets face a deep drought, while market expansions in 

SPP and MISO enter their first summer period of operation. 
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Key Takeaways

 Reserve margins remain adequate and 

recover in Texas

 Drought could affect California prices and 

operations

 First summer operations for MISO South 

and SPP Integrated Marketplace

 Natural gas and electric futures prices climb

The key takeaways from today’s presentation are as follows: 

Forecasted reserve margins are adequate across the country. New resources in Texas are 

projected to put the region slightly above their reserve margin target this summer. 

Drought could affect California’s electric and gas markets as gas-fired generation increases to 

offset lower hydro generation. 

The MISO South region and SPP Integrated Marketplace will operate under summer conditions 

for the first time, which should lead to lower production costs to serve system needs. 

Higher electricity forward prices reflect increases in natural gas forwards. While futures are 

not a forecast of prices, this signals market expectations for higher prices this summer. 
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Reserve Margins Adequate 

in All Regions

Source: NERC 

Actual 2013 demand not yet available.

Preliminary data from NERC’s Summer Assessment indicates that reserve margins will exceed 

planning targets for all assessment areas this summer. One area we have focused on in 

recent years is Texas. This year, ERCOT is forecasting a reserve margin of 15 percent, just 

above its reserve margin target of 13.75 percent. MISO is also forecasting a reserve margin of 

15 percent, compared to its reserve margin target of 14.8 percent.

Overall, NERC’s total U.S. load forecast, when weather adjusted, is essentially unchanged 

over the past few years.

There has been a net reduction in available capacity of 10 GW NERC-wide since last summer. 

For example, PJM had a net reduction of about 2.5 GW of capacity. However, NERC is 

currently not projecting problems in any region due to these retirements. Forecasts for 

retirements in 2015 and forward to 2023 will be available from the Long-Term Reliability 

Assessment in the fall. 
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Wind and Solar Capacity

Source: NERC 

0

10

20

30

40

50

60

70

80

2008 2009 2010 2011 2012 2013 2014

Nameplate Capacity (GW)

Wind

Solar

The NERC Summer Assessment forecasts that the summer installed nameplate wind capacity 

will increase by about 4 GW, or about 7 percent from 2013. This will bring the total 

nameplate capacity across the nation to approximately 61 GW. The forecasted average onpeak wind capacity for this summer is 17 percent of nameplate capacity. 

NERC also projects that approximately 6 GW of new utility-scale solar capacity will come 

online this summer, most of which is located in Southern California and Arizona. This 

represents a substantial increase in solar capacity in California over the past two years. 

Rapid changes in wind and solar generation, particularly in the morning and evening, are 

expected to increase the need for flexible capacity for balancing and regulation. 
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New Resources in Texas

Source: ERCOT and NERC

Sherman

Ferguson

Temple

Deer Park

As noted, ERCOT is projecting a reserve margin of 15 percent, assuming that normal weather 

conditions occur in Texas this summer. This projection includes over 2 GW of new gas-fired 

resources that are forecast to enter commercial service by August 1. Texas load typically 

peaks in August; however, an early season heat wave could stress the system before these 

new facilities are available. 
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Fuel Issues to Monitor

 Limited railroad capacity could affect coal 

deliveries and stockpiles

 Higher demand for natural gas to fuel 

peaking units and replenish underground 

storage

 Drought will affect hydro resources in 

California

NERC reports that a number of coal-fired generating stations experienced delayed coal 

deliveries last winter. In some cases, these delays were because of ice on barge and shipping 

routes, while in other cases the delays were because of congestion and equipment problems 

on the rail network. Information from the Surface Transportation Board indicates that rail 

network congestion in some areas will continue into this summer because of the increased use 

of rail transportation for petroleum products and other commodities coming out of the 

Dakotas and the Upper Midwest, as well as limitations on rail capacity and equipment in the 

area. However, projections by the EIA indicate that reduced demand during the shoulder 

months could allow coal stockpiles to be replenished before the summer peak.

After a particularly cold winter, natural gas storage inventories are lower than normal. As a 

result, the natural gas pipeline network will likely be called on to both replenish storage 

inventories and to provide gas for generators during the summer peak. At this time, NERC is 

not projecting any fuel issues which would affect reliability this summer, but it is an issue 

that we will continue to monitor.

While the California assessment area in WECC continues to experience a severe drought, 

water conditions have improved since March, and new gas and solar resources should help to 

keep the anticipated reserve margin at acceptable levels for this summer.
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Tight Market Conditions 

in California 

 Drought: low hydro, 

generator limitations

 Gas fired demand 

expected to rise

 So. Orange County 

and San Diego 

remains constrained Source: U.S. Drought Portal

California’s electric and natural gas operations could experience elevated prices this summer 

from challenges that include drought, hot weather, and fire hazards. NOAA forecasts warmer 

than normal temperatures for much of California as a deep drought continues. Statewide 

snowpack was only 33% of normal on April 1, the traditional peak of the snow accumulation 

season. As of May 11, reservoir water storage was 66% of the historical average, resulting in 

part from low precipitation in previous years. The low snowpack and reservoir levels will 

reduce hydroelectric generation, possibly to half normal levels. These challenges may affect 

the entire state, however market impacts may be more pronounced in the north and central 

areas, given low hydro conditions. 

The water conditions in the state may have additional implications for summer power 

operations. Low stream flows may restrict the availability and use of water for natural gasfired power plants. State officials are assessing such restrictions. CAISO has added over 3 GW 

of generation since last summer, which will help offset drought-related supply limitations, 

and primarily consists of natural gas and solar. Further, Pacific Northwest snowpack is near 

or above normal, which raises the potential for lower cost imports for at least the early part 

of the summer. 

Transmission limitations continue to restrict the amount of power that can be imported into 

the southern part of Orange County and San Diego, resulting in limited imports and use of 

higher cost local generation. Overall supply and demand conditions remain similar to last 

summer. 

Turning to natural gas markets, low hydro conditions, gas storage replenishment, new gas 

fired generation, and forecasted warm weather are likely to lead to above normal summer gas 

demand. This could lead to pipeline congestion, particularly in Southern California, and high 

natural gas prices. This is already evident in summer forward prices. Increased solar 

generation may moderate the increase in gas demand. 
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Market Expansion in 

Central Region

 First summer for SPP 

Integrated Marketplace 

and MISO South

 Potential coal delivery 

delays and low stockpiles

 Significant transmission 

additions

MISO

SPP

Source: Produced in Ventyx Energy Velocity

The new SPP Integrated Marketplace and MISO South region will operate for the first time 

under summer conditions. Both market expansions should improve unit commitment and 

dispatch, especially in more congested areas, as units should be used more efficiently relative 

to their value in alleviating congestion. MISO may see prevailing flows from north to south 

because of comparatively less expensive generation in the northern region, however flows 

could reverse under peak conditions as MISO South has a greater capacity surplus. 

Increased coal generation this winter reduced coal stockpiles in parts of the Midwest and 

Plains. Some generators have had difficulty replenishing their inventories due to railroad 

congestion. If this persists into the summer, the market could exhibit upward pressure on 

electricity prices in some areas by reducing the availability of some lower-cost generators 

operating on Powder River Basin coal. 

New transmission in SPP and MISO may improve access to wind resources and provide 

congestion relief for areas such as the Texas panhandle and west Kansas in SPP. 
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Transmission Expansion 

and DR Reliance in East

Source: Derived 

from PJM data Base Residual Auction Year

Transmission improvements should also yield market benefits in the east. Two 500 kV 

projects in eastern and central PJM, the Mount Storm-Doubs rebuild and the HopatcongRoseland segment of the Susquehanna-Roseland project, are scheduled to enter service in 

June 2014 and should help reduce congestion. The Greater Springfield Reliability Project in 

ISO-NE will provide incremental congestion benefit to western Massachusetts and northern 

Connecticut. Full service of the Neptune line in NYISO will increase import capability and 

exert downward price pressure in Long Island, a typically constrained zone. Changes in 

congestion management on the Ramapo line will enable more market interchange benefits 

between NYISO and PJM. 

Demand response (DR) remains an important resource under high load conditions in the 

eastern region. DR will provide a larger proportion of reserves in PJM, which presents a 

greater opportunity for evaluating the performance of DR activations. Although the amount 

of cleared DR capacity decreased in NYISO, recent measures to improve performance may 

increase DR responsiveness. 
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NG Summer Futures 

Prices Rise

Source: Bloomberg

Note: 2013 reflects average June, July and August 2013 prices set in May 2013. While, 2014 reflect average June, July, August 2014 set in May 2014. Futures Price ($/MMBtu) NYC BOSTON CHICAGO ROCKIES MID-ATLANTIC SO. CALIFORNIA NO. CALIFORNIA HENRY HUB

This graph shows that average natural gas futures prices for June, July and August are 

generally higher than last summer. Henry Hub summer futures averaged $4.81/MMBtu as of 

May 6th, 84 cents higher than last summer. The largest increases are in the West, where 

Southern California and Northern California are up 97 cents and $1.23, respectively, making 

them two of the most expensive points in the country. The higher prices there reflect 

expectations for high summer natural gas demand in California. Futures prices in New York 

City are about the same as last summer but they remain 58 cents below the Henry Hub. The 

market expects few constraints into New York City this summer because of the NJ-NY 

Expansion Project put into service November 2013 and greater access to low cost Marcellus 

shale gas. 
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Source: Bloomberg Note: Coal prices are adjusted for relative power plant efficiency.

Gas-Fired Generation (Bcfd)Coal/Gas Price ($/MMBtu)

Jan-12 May-12 Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

Coal Generation Likely to 

Surpass Gas This Summer

This graph shows natural gas burned for generation compared to historical and summer 

futures prices for natural gas and coal. When natural gas prices remain near or below coal 

prices for an extended period of time during the summer, natural gas fired generation ramps 

up as the market shifts away from coal. Gas futures prices this summer are over $1/MMBtu 

higher than coal futures, compared to 41 cents higher last summer. In 2012, natural gas was 

57 cents cheaper than coal resulting in record natural gas-fired generation. Higher natural 

gas prices this summer should make natural gas-fired generation less competitive with coal, 

with gas burn projected to be 2.5% lower than last summer and 17% below the summer of 

2012. 

Higher natural gas prices also create greater incentives for increased production. Currently 

natural gas production is projected to grow 3% in 2014. Moderate natural gas burn and higher 

production would help natural gas storage recover from the current low levels. However, 

summer natural gas fired generation increasingly competes with storage injections for supply, 

and utilities may face some natural gas delivery constraints as LDCs and pipelines begin to 

refill storage. 
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Summer Electric Futures 

Increase after Winter

Source: Derived from ICE and Bloomberg data

Average electric futures for June through August increased markedly from November 2013 to 

May 2014. The increases were between 19 and 30 percent for the Mid-C, PJM-West, NYISO 

Hudson Valley, and ISO-NE Internal Hubs. The series of extreme cold weather events in the 

2013/2014 winter significantly increased electric futures prices, which mirrored increases in 

gas forwards. Futures prices increased in the West, which also reflects updated expectations 

for drought conditions. Regional variances in futures prices result in part from differing fuel 

mixes. For example, Mid-Columbia prices reflect a strong contribution from low-cost hydro, 

and Mass Hub prices reflect greater reliance on comparatively higher-cost gas generation. 

Spot electricity prices are particularly sensitive to weather conditions in the summer. 

Extreme heat elevates electricity prices through load spikes. Extended heat waves create 

additional price pressure by inducing generation and transmission derates and outages. 
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Forecasted Summer 

Weather

Source: NOAA Climate 

Prediction Service

The National Weather Service is forecasting above-normal temperatures along the Pacific 

coast, inland through the Southwest, and spreading northward through the Great Basin and 

Pacific Northwest. NWS also projects above-normal temperatures from central Texas, 

through the entire Southeast, and along the Eastern Seaboard as far north as Maine. These 

forecasts do not project severe weather events, which commonly have major impacts on 

market outcomes.

Offsetting this hot forecast, some forecasters are calling for a weak to moderate El Nino to 

develop by the summer. This tends to inhibit tropical storm development, and generally 

results in wet and cool summers in the central and eastern U.S. A strong El Nino may result in 

cooler and wetter weather across the country. 

Current hurricane forecasts call for 10-12 named storms, with 4-5 of those storms becoming 

hurricanes. Forecasters expect only 2 of those hurricanes to be category 3 or greater. The 

30-year average is 12 named storms, 6 hurricanes, and 3 intense hurricanes. Hurricanes are 

much less important to the U.S. gas market than just a few years ago, as offshore gas 

production has declined, from supplying more than 20% of the U.S. gas market to around 5%.
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Item No: A-3

May 15, 2014

Summer 2014

Energy Market and 

Reliability Assessment

This concludes our prepared remarks. We will answer any questions you may have.