Caution: Future Market Need for Natural Gas Pipelines is Smaller than You Think

alaska-67304_1920Like a racer facing a caution flag warning of hazards ahead, America’s natural gas pipeline developers are seeing signs that their business plans aren’t tracking with the future. Mistakes in this race carry price tags in the billions, and could leave ratepayers (in other words, the public) footing the bill for decades to come.

Two recent developments in particular – a report from the Massachusetts Attorney General’s Office and a rate case at the Federal Energy Regulatory Commission (FERC) – show that the economics for new natural gas pipeline capacity to supply power plants are not as compelling or sustainable as the conventional wisdom would have you believe.

Together, the AG report and the FERC case provide a strong counterpoint to those now rushing to create excessive new pipeline capacity.  They suggest that many pipelines will lose customers and money as lower cost alternatives outcompete them, and long before investor expectations are met and their financing is paid off. The question is whether policymakers and pipeline developers will slow down and consider the dangers, or continue to plow ahead.

Financial and Environmental Consequences

In New England, winter gas demand for both heating and power is straining the capacity of pipelines that transport gas from supplies to the south and west, resulting in higher spot prices and electric rates. Although the price spikes of several winters back are diminishing, several of the region’s governors want electric customers to pay for more pipelines to ensure there is fuel for electric power plants in winter. This untried approach would commit captive electric ratepayers to 20 year contracts to pay, through their electric bills, for pipelines.  Unlike other areas in the country, gas producers, gas utilities and power plant owners are unwilling to sign contracts for pipelines to New England.

In comments filed at the Massachusetts Department of Public Utilities, EDF said the governors’ costly plan for investing ratepayer money in pipelines would be problematic, over the long run, for both customers and the environment. Our comments described the high costs of new capacity and questioned whether additional pipelines for electric power generation comply with the Massachusetts Global Warming Solutions Act (GWSA). The Conservation Law Foundation raised similar concerns.

An Attorney General Speaks Out

In November, Massachusetts Attorney General Maura Healey issued a detailed report assessing the governors’ questionable plans and validating EDF’s concerns, concluding that new pipelines are not needed for electric reliability and that far more cost-effective and environmentally friendly alternatives to pipelines are available. These include investment in energy efficiency and demand response , which reward customers instead of sticking them with a bill, and increased use of liquefied natural gas (LNG), which, as a form of storage, can avoid the need for new pipelines and help renewables by enhancing the flexibility of gas deliveries.

The report also warned that excessive investment in pipelines is contrary to climate policy goals and will increase the overall costs to achieve them.

A Glimpse of a Challenging Future

A rate case currently before FERC illustrates that the lower-cost and cleaner alternatives Healey cites will reduce the need for pipelines and market size for natural gas faster than some might think, and offers a glimpse of what the situation throughout the country could look like if those alternatives are ignored in favor of excessive new pipeline capacity.

The Tallgrass Interstate Gas Transmission pipeline system, which extends from Wyoming in the west to Missouri in the east, is struggling to make ends meet. In October, it initiated a proceeding at FERC because its rates aren’t covering its costs, resulting in losses of more than $40 million per year.

Tallgrass’s customers are shipping far less gas through its pipelines because the energy system has dramatically changed in the 17 years since FERC last set its rates, and there are cheaper alternatives for obtaining gas supply.  In the future, according to Tallgrass, competition will come not just from other pipelines, but also from lower cost and lower emitting renewable energy and energy efficiency which, along with climate policies, will eat into the market share for gas. As Alexander Kirk, a witness for Tallgrass in the FERC rate case explained, “the average [power purchase agreement] price for wind in 2013 and 2014 are below natural gas fuel costs alone,” and solar power prices “have fallen significantly in the past 20 years.” As deployment of these cost-effective options for cleaner energy expands, he notes that the Department of Energy envisions decreasing natural gas use.

According to Kirk, the bottom line is that “such a large decrease in natural gas use would cause a significant amount of excess pipeline capacity … and would greatly impact the ability of pipelines to collect their fixed costs.”

A Warning to All

Because FERC sets rates to cover costs (plus profit) for pipelines assuming a 35 year or greater useful life, the Tallgrass case and its concerns about a diminishing future market foreshadow a pipeline “death spiral.”  As fewer customers are asked to cover a larger share of costs, rates increase for those remaining, causing additional customers to leave for lower cost alternatives, again raising rates for the remaining customers and triggering further abandonment until no customers endure.

EDF has argued, and the Massachusetts Attorney General agrees, that new pipelines aren’t always a cost-effective tool for electric reliability needs; there are cleaner and lower cost options available, especially considering the 35+ year term over which new pipelines are depreciated and amortized.  As these lower cost alternatives take market share, pipeline owners and utility shippers will no doubt try to impose spiraling rate increases on captive retail gas and electricity customers — the very same ratepayers that the Massachusetts Attorney General’s report seeks to protect.

Policymakers in New England — and across the country — should heed Healey’s warnings and carefully consider the long term economic prospects for new pipelines in comparison to alternatives.

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  • N. Jonathan Peress
    Jonathan works to ensure that natural gas is used as an implement for clean energy transformation rather than as an obstacle to sound climate policy and solutions. His areas of expertise include natural gas and electricity market design and air pollution law and policy.

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