Gas Infrastructure Has Big Impact on New England Energy Marketplace
by Bob Shively, Enerdynamics' President and Lead Facilitator
Building major new energy infrastructure projects can be difficult. Projects require significant capital investment, and groups opposed to construction are often able to delay or prevent new projects. These difficulties are especially prevalent in New England, where attitudes toward new infrastructure are often negative. Recently the Northern Pass electric transmission line, designed to bring hydro power from Quebec to Massachusetts, was rejected by regulators in New Hampshire. And in recent years, proposed gas pipeline projects such as Access Northeast and Northeast Energy Direct failed to receive approval. While it is up to the citizens of the Northeast and their political representatives to decide what infrastructure they want built, it is clear that such decisions do have impacts on energy prices and, perhaps in the future, energy reliability.
Gas infrastructure in New England
New England does not have natural gas production, so it must bring in gas from production basins located outside the region. Unlike much of the U.S., the gas pipeline network into New England is limited, with only five major pipelines available to bring in gas. New England has liquefied natural gas (LNG) terminals in the Boston area that can serve a small portion of the total gas load, and, if gas is available, can import LNG delivered to the Canaport terminal in northeastern Canada. New England also is hampered by a lack of natural gas storage. Geology prevents any underground storage, thus limiting storage to expensive above-ground LNG satellite tanks and to a large holding tank at the Everett, Mass., LNG import terminal.
Source: EIPC Target 1 Report Final Draft: Gas-Electric Interface Study, Existing Gas-Electric System Interfaces
Impacts on New England
New England’s gas infrastructure has seen only limited incremental upgrades in recent years. Under most operating conditions this isn’t an issue since gas demand has only grown by about two percent since 2013. But dependence on gas generation to serve electric load peaks has grown significantly and will continue to grow in the coming years. The gas infrastructure has been sized based on ensuring reliable supply on cold days only to traditional utility customers like residential and commercial. The result? While the gas infrastructure has plenty of capacity to serve utility loads and power plants on most days, the power plants can struggle to obtain gas on peak days. This is shown in the following graph from an ISO New England forecast for the Winter 2024/2025:
Source: ISO New England, Operational Fuel-Security Analysis, January 17, 2018
Note that LDCs typically have priority for gas because they commit to firm pipeline, storage, and/or supply contracts since they can pass these costs on to consumers under the regulated cost-of-service business model. Power plants participate in a deregulated market and have limited business reasons to commit to firm contracts. This means that gas-fired power plants must pay the market price to acquire supplies on peak days, must switch to other fuels such as oil if they have this capability, or must shut down.
Recent pricing impacts in New England
In the last two months, a spate of cold weather has hit the northeast U.S. This gives us the opportunity to see how gas infrastructure is impacting New England relative to other nearby states such as New York and Pennsylvania. If gas infrastructure was not a limiting factor, we would expect gas prices in New England to track prices in the nearby states fairly closely since marketers would simply move supplies to highest-priced markets. Here is a graph showing gas prices for the three regions in early 2018:
It is clear to see that while the shape of price movements is similar, price spikes are more extreme in New England on many days. The gas price spikes pass through to the electricity market since gas-fired generation is often on the margin in ISO New England. Here is the related price curve for electricity:
Where does New England’s future lie?
It appears that failure to built infrastructure that expands import capacity of either electricity or natural gas leaves New England vulnerable to extreme price spikes and even reliability issues on high peak demand days. But there may be solutions other than building import projects. The State of Massachusetts commissioned a 2015 study that concluded that a combination of energy efficiency, demand side management, distributed generation, and renewable electricity could address reliability needs. Recent developments in battery energy storage may soon offer an additional way for electric grids to address peak needs. New England will be an interesting case study to see whether new technologies and end-use customer market participation can substitute for large infrastructure projects.
Want to learn more about how gas and electric markets interact? Enerdynamics offers an in-depth one-day classroom seminar that is customized to cover markets and infrastructure in your region. Get details on our Gas Fundamentals for Power Markets seminar.
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