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New England's Energy Future Lies in the Balance

As recent and ongoing activity regarding fuel security, renewable energy procurement and natural gas infrastructure make clear, the energy system in New England is at a critical juncture, the responses and solutions to which will shape the region’s economy for the next 30 years or more.

ISO-NE, the regional electricity grid operator, released its fuel security study raising legitimate reliability concerns based largely on the sufficiency of pipeline infrastructure and expanding deployment of renewable energy. Meanwhile, the Federal Energy Regulatory Commission (FERC) initiated a comprehensive review of electric system resiliency, including reliability and fuel security.

The Boston Globe editorial board recently waded into the fray with a series of editorials that blame most of New England’s energy challenges on public opposition to new pipelines. As simple as it might sound, however, that reading of facts is incorrect on many levels.

This blog presents three important facts related to natural gas markets and pipeline infrastructure in New England, and provides some suggestions regarding how those three facts can inform solutions for New England’s energy future.

Fact 1: Opponents have not prevented or meaningfully delayed new pipeline capacity into New England.

As a matter of law and economics, natural gas pipeline capacity is added based on a business case. Parties to that business case include a pipeline developer, and pipeline customers willing to commit large amounts of money over 20 years or more to pay for the service of transporting gas to supply their needs. Those transportation service contracts, assuming they are arms-length transactions between unrelated corporations, represent unsatisfied demand.

Through this contracting process, by which billions of dollars can be committed over the contract term, capital is channeled to finance new pipe on a market basis.

And in fact, this market-based system is largely functioning effectively. When pipeline customers commit to long term contracts, pipelines are almost always approved and built as they have been in New England and throughout the US for the past 30 years. This includes four recent (albeit modest expansion projects that have come on line in New England in the past two years: Algonquin Incremental Market (AIM); Tennessee Connecticut; Atlantic Bridge; and Continent to Coast (C2C).

The reason prospective New England pipeline developers aren’t seeking approval for any large new pipelines is that they have been unable to come to sufficient contract terms with gas-fired power electric generators, who are now the largest individual users of the region’s pipeline system. This lack of contracting is the clearest possible evidence that the business case, which underpins the construct by which new pipelines are permitted and built, has not materialized.

Fact 2: Electric generators — the largest pipeline users — are not currently pipeline customers.

At the heart of New England’s energy challenge is the fact that electric generators currently are opting not to sign the expensive long term contracts needed to deploy capital for new pipeline capacity. Why? Because pipeline operators aren’t offering, for a price, capacity in the shapes and sizes generators need or in the timeframes that they need it.

Modern power plants need the ability to vary gas deliveries over the course of the day as electricity use rises and falls, and they want to avoid costs for pipeline transportation services when demand is low and capacity isn’t necessary. Under the current market design, which primarily prices fixed pipeline capacity rather than flexible delivery services, the all-in cost of such contracts simply exceeds the revenues a competitive generator would earn from its sales of electricity to pay those costs.

Fact 3: Instead, generators are purchasing pipeline services in the opaque secondary market, from the utilities and third-party marketers that are pipeline customers.

The current natural gas (pipeline) market rules were designed when the largest users (i.e. customers) were local gas utilities and big industrial customers, both of which had relatively predictable and steady demands over the course of a season or day. This structure is being disrupted by the more variable and less predictable needs of the power generators who have since emerged as the largest users of pipeline gas.

Instead, the flexible services generators need are being procured in a largely invisible, mostly unregulated secondary market, where the sellers are a mix of those same local gas utilities and other marketing middlemen. While this work-around system of divvying up capacity to accommodate the more transient, variable power plant demand has so far done an adequate job from a reliability standpoint, it has the significant undesirable effect of obscuring the value of that supply.

Without a transparent and efficient market structure to establish the cost and price for supply tailored to meet the real world (i.e., shaped) needs of the system’s largest customer, the current market design unintentionally muddles price signals, diminishing the business case for competitive power generators or investors to risk capital necessary to expand pipeline capacity.

Challenge for Regulators

The problem for market regulators, both at the state and federal level, is the lack of a standardized and transparent mechanism to establish the value of pipeline capacity investment to serve power plants, and, within the secondary market, the opportunity costs borne by utility ratepayers when local gas utilities stockpile their contracted capacity rather than selling it to power plants and refunding the revenues to ratepayers.

Greater transparency into secondary market gas supply transactions is necessary to ensure that existing pipelines are being used efficiently to meet not only the seasonal needs of gas distribution utilities, but also the more variable and less predictable needs of power generators. At the federal level, FERC should consider updates to the wholesale gas market design so that pipeline pricing structures can more transparently meet the needs of all the pipeline’s customers, including electric power plants, at a time when both new gas-fired generation and variable renewable resource deployment is growing rapidly.

So long as we depend on market outcomes as the means to deploy capital for new energy infrastructure, it is practically impossible to ensure fuel security without a transparent and workable construct for transacting between pipelines and gas-fired power plants. Without updated market mechanisms, which could feature a combination of pricing incentives and disincentives, neither pipelines, power generators, utilities, or regulators can ever know how much additional pipeline investment is cost-effective to meet new demand, or whether alternative resources (such as liquefied natural gas, storage, batteries, or demand-side management) would be more cost effective.

In New England, these important considerations must be addressed for stakeholders to develop meaningful consensus around rightsizing investments to enhance fuel security, foster new infrastructure investment such as pipelines, and advance longstanding climate policy.

By N. Jonathan Peress

Image source: Thomas Hawk, Flickr

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