Tennessee Gas Pipeline Co. LLC (TGP), a Kinder Morgan (NYSE: KMI) company, on June 2 filed initial comments with the New Hampshire Public Utilities Commission about potential approaches to improve negative wholesale electricity market conditions that currently exist in New Hampshire by providing more natural gas capacity to serve the region.
TGP noted that New Hampshire and New England are consistently experiencing the highest electricity and natural gas prices in the continental United States, which can be significantly reduced through contracting for and building additional pipeline capacity in the region. According to ISO New England, New Englanders paid approximately an additional $7 billion in electricity costs in the winters of 2013/2014 and 2014/2015.
ISO New England has also noted that although total use of electricity in New England dropped 2% in 2014 compared to 2013, the average price for wholesale electricity rose 13% in 2014, with the increase largely due to the increase in the cost of power plant fuel, particularly natural gas.
TGP said it agrees with ISO New England’s assessment and stated: “The existing shortage of pipeline capacity to serve the demand from the electric generation sector, particularly during the winter, leads to higher natural gas prices, and in turn, higher electricity prices. There is no doubt that the increasing cost of natural gas and electricity caused by the lack of adequate gas pipeline capacity makes it more costly for New England’s businesses to compete with businesses operating in lower energy cost regions, and is particularly painful for New England’s working families, retirees and others living on fixed incomes.”
TGP said it fully supports New Hampshire electric distribution companies (EDCs) contracting for pipeline capacity that would be made available to gas-fired generators and recovering the costs associated with those capacity contracts from its retail electric customers to reduce natural gas and electric prices in New Hampshire.
TGP has provided safe and reliable interstate pipeline gas to the New England region for over 60 years and is an important source of gas supply for gas utilities and electric generating facilities in New Hampshire, including Liberty Utilities and Granite Ridge Energy.
Tennessee Gas says its NED pipeline project is a major part of the answer
Tennessee told the commission that it firmly believes that its proposed Northeast Energy Direct (NED) pipeline project is a needed solution for the region. The existing Tennessee pipeline is a high pressure transmission system, interconnecting in New England with the Algonquin Gas Transmission, Iroquois Gas Transmission, Maritimes & Northeast Pipeline and Portland Natural Gas Transmission systems. The NED project is that it will enhance this interconnection flexibility of the existing Tennessee system such that Tennessee will be able to deliver incremental natural gas supplies to all those pipeline systems and related markets.
The NED project will create a large bidirectional pipeline loop that will fundamentally improve natural gas flows, relieve existing bottlenecks, and enhance gas supply diversity and reliability for decades to come. The NED project will provide direct connection to the historically low-cost and abundant supplies in the Marcellus Shale in northeast Pennsylvania with approximately 135 miles of new pipeline from Tennessee’s existing 300 Line in Susquehanna County, Pennsylvania, to Wright, New York, at interconnections with Tennessee’s existing pipeline system and the Iroquois system. From Wright, New York, the project further extends approximately 188 miles to interconnections near Dracut, Massachusetts, with PNGTS, M&NP, and Tennessee’s existing substantial pipeline system.
Tennessee wrote: “Operationally, as a new path for natural gas into New Hampshire and New England, the NED project will create a large bi-directional pipeline loop that will fundamentally change and improve natural gas flows resulting in incremental additional gas supplies being available to LDCs, gas-fired generators and industrial end users throughout New England. The NED Project alone will also enhance the reliability of the entire New England pipeline grid by creating new high-capacity, high-pressure natural gas transmission infrastructure to provide gas supply in case of required outages on one or more of the legacy natural gas transmission systems serving New England. The planned in-service date for the Project is November 2018, in time for the winter heating season.”
Both wholesale natural gas and electric prices have skyrocketed over the past three winters in New England. TGP said. The root cause of the natural gas price increases, which in turn have largely caused the wholesale electric market price increases, is a function of the confluence of a number of factors, including:
- An increasing proportion of natural gas-fired generation in New England, resulting in an increasing amount of natural gas required by such generating resources to produce electricity;
- A lack of incentive for gas-fired generation in the restructured wholesale electric market to contract for longer-term natural gas supply or transportation capacity;
- Very high utilization of the existing pipeline capacity into New England from the south and west;
- Relatively higher commodity prices associated with alternatives to natural gas-fired generation (e.g., oil and liquefied natural gas); and
- A lack of native gas production or underground storage that could otherwise help to mitigate natural gas prices in the region.
Gas-fired generating capacity skyrockets; pipeline capacity not so much
Over the past 15 years, the proportion of gas-fired generation to meet capacity and energy requirements in the competitive electric generation market in New England has steadily increased. In 2000, natural gas-fired generation represented 18% of the total installed generating capacity in New England. In 2014, natural gas-fired generation represented 43%, and by 2023, ISO New England is forecasting that number to jump to 52%.
Of all the electric generation resources that serve New England, gas-fired generation is the only resource that ISO New England projects will experience a significant increase in generating capacity between 2014 and 2023. Therefore, as a greater proportion of the generating capability in New England is fueled by natural gas, it is imperative that sufficient pipeline infrastructure be available to allow that gas-fired generation to operate reliably and without resulting in substantially higher energy costs for consumers in the region, TGP said.
While the amount of gas-fired generating capacity in New England has been rapidly increasing, the region’s pipeline infrastructure has not experienced the same level of growth. The pipeline expansions that have occurred over the past 15 years in New England have largely been to accommodate the natural gas demand growth of customers of the local distribution companies (LDCs) in the region. The regulatory framework in New England (and elsewhere in the U.S.) is such that LDCs contract on a long-term basis for sufficient firm pipeline capacity to meet their customers’ respective needs throughout the year and then have the ability to recover the costs of that pipeline capacity from their customers. In contrast, however, the wholesale electric market has been restructured in New England such that generation is for the most part no longer owned and operated by the electric utilities to serve their utility electric demands, but rather the generation is owned by third-parties that participate in a highly competitive wholesale market to serve the regional electric demand, TGP said.
“The existing structure of the New England wholesale electric market does not incent gas-fired generation in the region to contract for and underpin the construction of additional pipeline capacity, because the generators are not assured that they will be able to recover the long-term costs associated with contracting for new pipeline capacity and, therefore, in most all cases cannot financially justify the required long-term contractual pipeline commitments,” the pipeline company said. “In other portions of the U.S. in which electric utilities continue to own generation, those utilities procure the necessary natural gas for their gas-fired generation such that it is available when needed throughout the year, including during peak demand periods, and they have a mechanism similar to LDCs to recover the costs of the necessary pipeline capacity.
“In addition, while New England’s gas-fired generators are generally not in a position to contract for pipeline capacity, pipelines are unable to build incremental pipeline capacity without sufficient long-term contracting to support the investment required of such a highly capital intensive and long-lived asset. Long-term firm pipeline contracts provide a pipeline with the recovery of fixed costs on a monthly basis over the term of the contract, are required by FERC to show market need for the project, and demonstrate that the project is in the public interest.
“Consequently, most gas-fired generation in New England relies on pipeline capacity that is available in the market only if it is not otherwise required by the parties that have contracted for the capacity. However, when the demand for natural gas by LDCs and other natural gas consumers is high, there is a shortage of natural gas pipeline capacity available to serve the gas-fired generation in New England.
“For example, during the winter months, gas-fired generation must contend with winter heating demands of LDCs, which depend primarily on pipelines for gas deliveries. Although electricity demand in New England is highest during the summer, pipelines are more highly constrained during the winter due to gas requirements for winter heating and gas-fired power generation.
“This results in extreme competition for natural gas supplies within New England during the winter period especially (though not exclusively), which drives up the price of natural gas in the region. In addition, during peak summer power demand periods, although pipeline capacity is generally not being utilized by other contracted parties at the highest levels, required maintenance activities can require a reduction of the pipeline’s capacity and/or operational flexibility during short-term periods. Tennessee, for example, sees demand for its services exceeding its New England capacity generally year-round, though higher during winter periods.”