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April 16th, 2013

Expanding Natural Gas Pipeline Capacity into New England

by Andrew Price, President & COO

For those of you who have followed my blog, you will recall that I recently discussed the issue of natural gas pipeline constraints into New England and the impact these constraints have had on natural gas prices and spot electricity prices this winter in New England.  These impacts are not trivial.  We estimate that the price impact in the New England wholesale electricity market is approximately $0.017 per kWh on an annual basis, costing electric ratepayers throughout New England a little over $2 billion a year.  The impact on natural gas users is almost as significant at $1.5 billion a year, bringing the total cost of pipeline constraints to New England consumers and businesses to about $3.5 billion a year.

Typically, when there is this large differential in any market, competitors will step in to undertake the investments necessary to relieve the source of the differential – in this case, the pipeline constraints.  The problem here is that the constraints are best relieved by significant capital investments in new pipelines – perhaps as much as $3 billion to bring Marcellus Shale gas into New England.  This kind of investment requires long-term contracts with credit-worthy counterparties to support the debt financing.  As a general rule, pipeline counterparties have been local natural gas utilities that are able to pledge the credit of their ratepayers to support long-term contracts.  In this case, however, a major beneficiary of the new pipelines will be electricity consumers; however, local electric utilities are no longer in the electricity generation business as a result of restructuring.  Instead, the generators that use the natural gas to provide electricity compete in competitive wholesale markets and simply do not have the balance sheets or capital resources to finance pipeline development through long-term contracts.

Investments in fixed resources like pipelines also require that supply and demand relationships remain relatively stable over long periods of time.  While the Marcellus Shale gas fields provide that stability, new Shale Gas potential in New Brunswick that, if fully developed will seek to supply gas into the northeastern U.S., could undermine gas flows from Marcellus.  The effect of this could be a reduction in flows on any new pipelines built into New England, which could make them uneconomic.  Potential investors are aware of this risk, which makes them very cautious.

One potential solution to help alleviate the pipeline capacity constraint is to have state government commit to long-term contracts for capacity on new pipelines built to deliver gas to New England.  This could be accomplished by having an agency of state government, e.g., a public utility commission, permit the recovery of pipeline financing in the rates paid by customers of both electric and natural gas utilities.  Legislation to enable this option was recently presented in Maine for consideration this spring.  As the supporters of this legislation pointed out, New England has a problem that is costing its businesses and residents about $3.5 billion a year that can be eliminated by an investment of $3 billion.  This is a pay-back of less than one year.  Opponents argue that new pipeline construction is inherently risky, and that the legislation shifts any burdens of this risk from the private sector to Maine’s ratepayers.  They say that the private sector should bear this risk.

No matter how this debate shakes out, the locational disadvantages that New England and Atlantic Canada currently face versus the rest of North America due to natural gas pipeline limitations will not disappear unless new pipelines are developed or major natural gas resources are found in New England.  Since the latter does not appear in the cards, new pipelines that can bring Marcellus as well as potential New Brunswick Shale gas into New England are the only way to solve this problem over the near term, and for at least as long as both oil and liquefied natural gas (LNG) are both sold on world markets at prices that are four times the price of natural gas in the United States.

(Tags: Natural Gas, Shale Gas, Natural Gas Pipeline)

 

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