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Mar 19, 2013

Breaking New England’s Natural Gas Addiction


NE PipelineThis year I’m putting 60% of my retirement fund into Apple stock. I reason its recent string of product successes should continue unabated for the next 20 years, creating large returns with little risk. What could possibly go wrong, right?

Anyone with a reasonable and appropriately risk-managed 401k knows this is a terrible investment decision. Yet, New England is similarly concentrating its energy investments into natural gas, both for electricity generation and space heating.

What about the merits of diversification? The concept of a diversified portfolio is not only sound financial advice, it also applies to our energy sources.

In 2001, coal and oil accounted for 30% of electric generation in New England, while natural gas provided 29%. Fast-forward to 2012, when retiring coal- and oil-fired generation has been replaced with natural gas so that the region now gets 53% of its electricity from natural gas and only 3% from coal and oil. Talk about a changing of the guard (and in only a decade, to boot).

While that outcome is a boon for our air and climate, since natural gas emits 30% less CO2 than oil and 45% less than coal, the dependence on a single fuel—natural gas—leaves the region’s economy increasingly at risk.

That dependence can be particularly acute in New England. Arctic winter temperatures simultaneously drive high heating and electricity demand, straining the natural gas supply infrastructure. This supply scarcity results in gas price spikes and even supply shortages. Natural gas is typically the marginal generator—the last generator dispatched to meet peak demand, which therefore sets the wholesale electricity price for all generators, according to market rules. So when gas prices jump, electricity prices skyrocket, too. That is exactly what happened this winter. A Thanksgiving cold snap drove power prices over $100/MWh, more than 10 times normal. On January 24th, wholesale power prices jumped above $200/MWh on spot gas prices over $30/MMBtu.

The fact that natural gas is the fuel dominating New England’s energy portfolio is particularly worrisome. Natural gas has a history of price volatility, which in the past has turned seemingly smart investments in new natural gas capacity upside down. While an oversupply of unconventional shale gas has kept prices low and stable for the past few years, a number of mechanisms can cause volatility to return: rapid demand growth surpassing supply, pipeline capacity not keeping pace with demand growth, LNG exports causing prices to link to global markets, and regulations limited the supply or raising the cost of gas produced through hydraulic fracturing, to name a few.

New England also faces the challenge of being at the end of the natural gas pipeline. Historically, most of the region’s gas has flowed 1,500 miles from the Gulf Coast through interstate pipelines. That increased prices 20–30% over the national average due to added transportation costs, and it also meant that 115 million people (and their own natural gas demand) were located between the supply and New England’s demand.

The onrush of gas out of the Marcellus shale in western Pennsylvania is thought to change that dynamic, providing New England a semi-local, low-cost energy supply. Yet that “local” supply is still 600 miles away, and the sizeable demand centers of New Jersey, New York, and Pennsylvania sit in between. So while natural gas supply has now moved a thousand miles closer, New England remains at the end of a shorter pipe.

Infrastructure expansion plans will only serve to increase dependence on natural gas. The region has planned over $5.5 billion to expand the natural gas distribution system to replace heating oil use. Furthermore, New York and Pennsylvania are also looking hard at a natural gas distribution system expansion for home heating, and their upstream position relative to New England could siphon off supplies.

Thankfully, these problems are increasingly recognized within the region. Yet many of the proposed solutions, such as speeding the construction of gas pipelines and better coordinating gas and electricity trading markets, are short-term fixes that still leave the region fundamentally dependent on imported natural gas. There are other alternatives that can diversify New England’s fuel mix and position the region for long-term economic and environmental success.

Renewable electricity generation, particularly wind and distributed solar, can re-diversify New England’s generation mix. The existing natural gas fleet can then be repurposed to provide firming capacity for renewables. In addition, heat pumps are a readily available alternative to natural gas for space heat. Rather than expanding the natural gas distribution system, states can focus on large-scale heat pump deployment for less cost and less risk. These systems can provide heat for a comparable operating cost to natural gas, be powered by a newly diversified (renewable) grid, and carry far less fuel price risk going forward.

The natural gas rush experienced in New England appears to be spreading across the rest of the country, particularly in response to expected coal plant retirements. The region would be wise to insulate itself against future gas price risk. Fixed price renewable generation that might look slightly more expensive today carries little risk into the future, and may eventually look like a phenomenal deal.

For more about the opportunity for heat pumps as an alternative to natural gas in the Northeast, read RMI’s white paper.

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Both images courtesy of EIA.


Showing 1-3 of 3 comments

March 21, 2013

It's obvious that energy independence is best for society, i.e., individuals that make up society. That is very difficult, perhaps even impossible with a monopoly. We suffer from centralized planning that comes with government meddling in business. We need a separation of business and state. I am not advocating so-called "deregulation". The public must abolish the authority of government in business, especially energy and infrastructure. The very nature of government creates dependence while private enterprise allows for the maximum freedom of choice. There lies strength. And it was once the American way. It can be again with the intellectual leadership of RMI.

March 21, 2013

Yes, I do agree that various renewables technologies as well as measures on the demand side provide a good long-term hedge and related diversification benefits. It is however important that this line of argument not be used to justify ongoing reliance on other fossil fuels. So the right answer is not "fuel diversity" per se, but changing the mix away from fuels, period. Once that is clear, the question of speed is also a good one. I doubt it is economical to push for super rapid deployment of technologies where costs are still showing substantial cost declines due to technological scale. Solar comes to mind as the prime example. A steady but measured scaling up allows building the necessary competition in the supply chain to bring costs down over time without locking us into overdeployment of more costly early generation technologies. As the remaining coal-fired generation say in New England comes under increasing pressure, it is therefore not clear that we should not increase our reliance on natural gas at least some more rather than attempting to replace it all with renewables/energy efficiency.

March 28, 2013

New England has very little wind/solar potential compared to other regions. The days are short in the winter. It is hilariously cold in rural areas and snow cover can be expected any time between October and May north of Worcester.

Combine that with a lack of local fossil fuels, there's not much that can be done in terms of self-reliance. Any successful scheme will have to be all about energy conservation, both there and in Quebec where electric heat predominates. If HydroQuebec can spare additional power, that can help diversity. It's still imported power.

We're lucky that the large thermal loads are coincident with the large electrical loads, because this is the right area for cogeneration. Downtown areas are compact, allowing good heating districts, and air conditioning is often absent or not expected by residents anyway.

It's the one region of the country I could see a 5x500MW nuclear plant scheme working, simply because it worked last time with the Yankee plants. They would certainly be an easier sell to New England electorates than coal or oil plants.

New Englanders are used to energy conservation and most are already planning on it. Pipeline expansions etc. have never been easy to obtain there and the energy consumption of the region is already lower and has grown slower than other areas.

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