With about 60% of the coal-fired capacity in Michigan, representing 30% of the state’s total generation capacity, due to retire by 2030, it is important for DTE Energy (NYSE: DTE) to invest in new gas transmission capacity in Michigan.
That was the argument made by regulated utility DTE Electric in June 6 rebuttal testimony filed at the Michigan Public Service Commission. The utility rebutted arguments by various parties taking part in its yearly Power Supply Cost Recovery (PSCR) case, which was filed with the commission last September.
DTE Electric affiliate DTE Gas Storage & Pipelines (wholly owned by parent DTE Energy), and Spectra Energy are jointly developing the NEXUS pipeline. The pipeline will transport growing supplies of Appalachian Basin gas such as Utica and Marcellus shale gas production to customers in the U.S. Midwest including Ohio and Michigan and also to customers in Ontario, Canada, such as the Dawn Hub. The proposed path for the NEXUS pipeline will extend approximately 250 miles from the Kensington receipt point in eastern Ohio to interconnect with the existing pipeline grid in southeastern Michigan. As currently planned, the NEXUS pipeline will be capable of transporting 1.5 billion cubic feet per day (Bcf/day) of natural gas to serve LDCs, industrial energy consumers, and natural gas-fired power generators in the states of Ohio and Michigan, and the Province of Ontario . The service commencement date for the NEXUS pipeline is November 2017.
NEXUS is the only new greenfield interstate pipeline designed to interconnect directly with the Michigan Consolidated (MichCon) city gate, thus providing significant new incremental gas supplies to Michigan, DTE noted.
DTE Electric executed an agreement with NEXUS for interstate transportation capacity on the NEXUS pipeline because of the company’s long-term commitment to shift from a heavily weighted coal generation fleet to more natural gas-fired generation due to new environmental regulations. Said DTE: “This shift is inevitable because the EPA has now finalized the first ever national standards to reduce mercury and other toxic air pollution (Mercury and Air Toxics Standards – MATS) from coal and oil-fired power plants. Furthermore, the EPA finalized its Clean Power Plan (“CPP”) that includes establishing final emission guidelines for states to follow in developing plans to reduce greenhouse gas (“GHG”) emissions from existing fossil fuel-fired EGUs. Moreover, the EPA is establishing CO2 emission performance rates representing the best system of emission reduction (“BSER”) for existing fossil fuel-fired EGUs. Thus, it will be impossible under these rules to sustain existing older coal fired generation.
“Consequently, a significant amount of coal-to-gas switching is currently expected to occur throughout Michigan and the MISO region. Due to environmental regulations, the Company currently expects that 60 percent of the coal-fired capacity in Michigan, representing 30 percent of the state’s total generation capacity, will retire by 2030. MISO is estimating approximately 13 GW of coal-fired generation retirements due to MATS and as much as an additional 28 GW due to the CPP. These retirements are expected to cause a continued MISO capacity reserve margin decline, leading to capacity shortages in Zone 7 (Michigan’s lower peninsula) by 2016 and shortages across the region as early as 2020.
“Because gas-fired generation is widely considered to be the most economic alternative to replace coal-fired generation capacity, MISO estimates that nearly 20 GW of new gas-fired generation will be built by 2020. Driven by increased natural gas demand for power generation, total Michigan natural gas demand is currently expected to increase by more than 20 percent between 2015 and 2035. Thus, electric generation will become increasingly dependent upon natural gas as a source of fuel in the future. Much of this new forecasted gas-fired generation will be used as baseload generation which will require significant daily natural gas supplies. Thus, it will be critically important that this gas supply be provided using the most reliable means available which is firm interstate transportation capacity, not reliance on city gate supplies.
“With gas-fired generation becoming increasingly prevalent, it is imperative for DTE Electric to proactively enter into firm gas supply and gas transportation contracts to ensure continued electric reliability for its customers. In fact, a primary driving force behind DTE Electric’s contract for interstate transportation capacity on NEXUS is the Company’s expectation to retire more than half of the Company’s coal-fired generation capacity by 2030 due to the CPP Final Rule. Moreover, DTE Electric expects that natural gas CCGT generation will likely be the most economic source of replacement generation based upon preliminary analysis of the CPP. Consequently, DTE Electric’s natural gas requirements are estimated to increase by greater than 100 Bcf per year as the Company’s long-term plan includes three new CCGTs being built by 2030. Securing up to 75,000 Dth per day is clearly a significant important first step in the long-term forecast of gas-fired electric generation.
“The Company also recognizes the need to take proactive steps to ensure gas supply reliability even while DTE Electric’s electric generation becomes increasingly dependent upon natural gas as a source of fuel. The polar vortex of the winter 2013-2014 demonstrated just how volatile gas prices can be and how scarce gas supplies can become if a utility attempts to rely on spot purchases at city gate. Specifically, extreme cold experienced during the winter of 2013- 2014 (a/k/a the Polar Vortex) caused significantly increased natural gas demand. Because of this increased demand, transportation capacity was constrained and some generators without firm gas supply and gas transportation contracts were unable to operate. This severe congestion is supported by MichCon CityGate natural gas prices being $15.66/Mcf in February 2014 versus only $5.56/Mcf at Henry Hub. In the future, as MISO capacity reserve margins continue to decrease and reliance on gas-fired generation increases, it will be important for generators, which will rely more heavily on gas-fired generation for base load requirements such as DTE Electric to secure firm gas supply and transportation.”
But, competing gas transporter ANR Pipeline said in its own June 6 testimony in this case: “DTE Electric has failed to meet its heavy burden of demonstrating that its proposed agreement with NEXUS is reasonable and prudent. ANR respectfully submits the agreement is not in the best interests of DTE Electric’s ratepayers and should not be approved. DTE Electric should be required to engage in an open and fair competitive process for choosing the least-cost transportation service option that meets its capacity needs.
“ANR does not dispute that accessing Appalachian supplies is a desirable objective for DTE Electric. While ANR will demonstrate that the cost savings DTE Electric contends will result from its decision to support and contract with NEXUS are speculative and overstated, obtaining access to this fast growing production region would be beneficial to DTE Electric and its ratepayers. However, DTE Electric need not support NEXUS, nor more importantly incur the substantial cost of contracting for NEXUS capacity, to obtain these benefits. As ANR will demonstrate below, there are numerous alternatives available to DTE Electric that can provide it with access to Appalachian gas supply at a much lower cost than NEXUS and that will achieve the same or greater gas cost savings for its ratepayers.”
Bill Schuette, Attorney General of Michigan, by and through John A. Janiszewski, Assistant Attorney General, said in a June 6 brief: “[T]he Commission should issue an order denying DTE Electric’s proposed purchase of 30,000 to 75,000 Dth/day of transportation capacity from the NEXUS pipeline. The Commission should also issue a warning to the Company that it must demonstrate clear and sufficient evidence that it has fully explored all options so that the chosen option stands out as the best for its customers when submitting a future proposal on this matter. Such evidence should include proof of having entered into serious negotiations with alternative suppliers to determine the best available rates and terms.”