Don't bet the farm on natural gas but instead focus on flexibility because there are many factors that could affect natural gas economics in coming years, executives of the Midwest Independent Transmission System Operator and a consultant said Wednesday as they met with MISO stakeholders.
MISO President and CEO John Bear, board Chairman Mike Evans and Vice President of Transmission Clair Moeller all had cautionary words about dependence on natural gas, warning of price volatility, future regulations and the issue of coordination between gas and electric infrastructure and markets.
Speaking at MISO's annual stakeholders meeting in French Lick, Indiana, Bear said the need for flexibility in future resource planning is more critical than ever, and the chief issues facing system planners are gas supply, changing technologies and a volatile gas market, as MISO sees retirement of huge amounts of coal capacity due to environmental regulations and low natural gas prices.
"There is some pretty tremendous change going on in our industry in a pretty brief period," Bear said, adding that MISO is focusing on predicting the future direction of markets, system planning, membership, compliance with laws and regulations, and improving efficiency of performance.
Five to 10 years ago, planning assumptions were made around a nuclear renaissance and the likely implementation of carbon capture and sequestration -- things that never really came to pass, Bear said. MISO is predicting some dramatic changes in its generation portfolio, he said.
The question now is "haven't we been here before?" Bear said. "Are we really going to make this big of a long-term bet on gas?"
Evans raised the issue of gas industry coordination with the power sector, which is getting increasing attention as the industry moves toward a gas-heavy generation mix. Inadequate gas transmission infrastructure will hinder gas-fired electric generation, just as electric transmission infrastructure issues hinder generation development, Evans said. He maintains that gas and electric systems must better align their contracting and market concerns.
"There are no gas-planning organizations that mirror a MISO function," Evans said.
Moeller said he is worried about gas delivery, saying that "we believe there are both institutional problems around the market as well as physics problems with the gas supply." In terms of gas supply, "we need to begin that conversation promptly" so both industries can understand it better, he said.
Booz and Co. Senior Partner Thomas Flaherty told the gathering that "when you think about planning, it's not about accuracy," it is about developing a general direction and incorporating enough flexibility to respond to unexpected circumstances.
Mentioning the fizzled nuclear renaissance of past years, Flaherty said that "the industry has probably been more wrong about the direction of the future than it has been right." Gas prices, technology and policy uncertainties are the "macro issues" that surround planning, he said. The industry's ability to forecast has been poor, weighted toward the status quo and employing "groupthink," he added.
The economy, diversion of new gas resources to the transportation sector, pipeline infrastructure uncertainties, liquefied natural gas imports and policies toward coal are all factors that will have a significant effect on planning, he said. Planners need to develop a robust set of scenarios and recognize the volatility of gas, he said.
"It's about trying to find a no-regrets strategy," Flaherty said, adding that "people are making are making 60- and 70-year decisions based on today's gas price, which doesn't make any sense." He mentioned that gas prices historically have been extremely volatile, and this situation is not expected to change.
As planners prepare for the future, "there is no single answer that is likely to emerge," he said, adding that some estimates see gas prices in the $4/MMBtu to $6/MMBtu range by 2014 to 2015.
