Risks of Natural Gas Reliance Are Even More Complicated Than We Thought

By Cynthia A. Arcate 19 April, 2012

New England’s reliance on natural gas for electricity generation has been a subject of debate and concern for over a decade, at least since the burst of new generation facilities after restructuring, leading to our current over 40 percent dependency on gas for power. The concern has been on the supply and cost risks of relying so heavily on a single fuel source. But there is another dimension of that reliance that is more operational and less obvious to the typical consumer. If we’re not vigilant in watching how it is addressed, much of the value of the now stable low electricity prices will be eroded.

Most generators buy interruptible transportation service for their gas. They buy this service for two reasons. One, firm transportation is expensive and the margins in the market don’t allow for recovery of those costs. Second, because they sell into a daily and very variable energy market, generators do not know when they will be generating and need to match delivery with their generation – a logical strategy which has served customers well in keeping electric costs down.

Also worth noting is that this strategy works well in New England because our seasonal gas demand for winter heating is the opposite of our electric cooling demand in the summer. Rarely, do we have a situation where electric demand coincides with high gas demand. When that does happen—and we must trust that gas pipeline companies are accurately reporting capacity issues, gas generators do not run because the home heating demand takes priority on the pipeline. (The gas distribution companies buy firm transportation for obvious reasons.) Then the system operator, ISO-NE, has to scramble by dispatching other generation – usually at greater cost to everyone – and, depending on the location, they may have to initiate emergency operating procedures.

Federal regulators recently opened an inquiry into issues around gas and electric coordination, and ISO-NE has flagged it as a risk for several years to come.

The pipeline companies, predictably, have advocated for requiring power generators to fix this by buying firm transportation—a move that would dramatically increase generators’ cost of natural gas supply as it increases pipeline companies’ profits. Is this fix worth the cost? I don’t think so.

The question that needs to be asked is, ‘Who is policing the pipelines to know for sure that capacity is not available on the days they say it isn’t? Don’t the pipeline companies have a vested interest in causing this “problem” and, thus, an inherent conflict of interest?

Also, to date, the cost increases tied with these occasional instances have been modest compared to the absolute certainty of increased costs that would be tied to mandating firm transportation when it simply isn’t needed.

We should first determine if there is a need to make any changes as balanced against the cost. Even then, we ought to see if the problem cannot be fixed with simple operational steps such as better coordination between the gas pipelines and system operators or establishing performance criteria for generators with penalties and rewards, as suggested by The Brattle Group in their recent paper to the Federal Energy Regulatory Commission, before taking the extreme step of placing operating mandates on participants in the free market. The one thing we can be sure of if that happens is that customers will pay more in the end.

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