NEWARK, NJ — Would the PJM model work for the natural gas industry? Charles River Associates’ Robert Stoddard thinks it’s worth a try.
Stoddard told the Energy Bar Association’s Northeast Chapter Wednesday that a Regional Pipeline Organization, or RPO, could help address the pipeline capacity shortage that has complicated the growing interdependence between the natural gas and electric industries.
He said the current $1.65/MMBtu basis spread between Henry Hub and the Algonquin citygates is evidence of the need for an additional interstate pipeline serving the Northeast. But pipeline operators cannot build without firm supply contracts – which few gas-fired generators have been willing to sign.
“Right now we have no one who is responsible for thinking about a plan” for pipeline expansion, he said. “We are piggybacking on pipelines that were built for [local distribution companies] … How do we expect that to work?”
While the other speakers on the panel agreed on the need for more pipeline capacity, none embraced Stoddard’s RPO proposal.
Richard Kruse, who heads regulatory affairs for interstate pipeline operator Spectra Energy Transmission, said his company has been serving the industry for 50 years. “And we did it,” he said, emphasizing the point, “without an RPO.”
RPO Not Suitable
Kruse said the RPO concept is not suited to the nature of the natural gas industry and would eliminate competition among pipelines for expansion opportunities.
“We’re not regional pipelines, we’re linear pipelines. You’re talking about breaking up companies and remolding them,” he said. Spectra owns three pipelines that are more than 1,000 miles long, including Texas Eastern Transmission, which spans 9,200 miles from the Gulf Coast to Northeast.
John P. Rudiak, senior director of energy supply for local distribution companies Connecticut Natural Gas Corp. and Southern Connecticut Gas Co., also was cool to the idea.
“An RPO might have been credible a year ago. That’s not the case now,” Rudiak said, explaining that the gas industry has been increasingly talking to ISO New England, which has more than 500 wholesale market participants and more than two dozen stakeholder committees and working groups. “[The gas industry is] not very impressed with the workings of the ISO. It is a process that’s very cumbersome to say the least.”
Market Disconnects
Stoddard said the varying tariff rates in the pipeline industry distorts least-cost dispatch in electricity. “Instead of dispatching the unit with the lowest carbon footprint we’re dispatching those that happen to have the cheapest gas,” he said.
Stoddard said gas-fired generators are reluctant to commit to firm contracts because it is very difficult for individual generators to forecast how often they will be dispatched, and thus how much gas they will burn. Because so many gas-fired generators have similar specifications and cost profiles, he said, “which one gets committed is sort of like drawing a lotto card.”
Communication Gaps Not the Issue
What the speakers did agree on was that the challenge is one of infrastructure and not one of a lack of communication between the gas and electric industries.
Kruse said the two industries have been increasing communication in the Northeast since the 2004 Boston “Cold Snap,” when the coldest January in 116 years pushed the electric and natural gas systems to record demand. “Never have so many talked about so much and accomplished so little,” he said, adapting a quote from Winston Churchill.
Kruse said data requests sent to ISOs by the Federal Energy Regulatory Commission last week “could have [been] written … a year ago, two years ago, in 2004.”
Matthew J. Picardi, vice president of regulatory affairs for Shell Energy N.A.’s East region, said there’s no need to move to a common gas-electric trading day, as some have urged, though he said there could be benefits to moving up the gas day — which starts at 9 a.m. Central time — by an hour. The real issue, he said, is “power markets must support costs for more gas infrastructure.”
Too Much Information?
Kruse expressed concern that the gas industry could be providing too much information to grid operators.
“The ISO is a market player that actually decides who uses gas,” he said. “How much communication with ISOs [is permissible] before it becomes an undue preference to the electric industry versus our other customers?”
To Build or Not?
While all of the speakers on the panel called for more pipeline construction, FERC Commissioner John R. Norris, in separate remarks to the EBA, called for a long-term view.
He cited a projection that cutting CO2 emissions 80% by 2050 — a target the U.S. agreed to at the 2009 G8 summit — will require eliminating gas as a baseload fuel. Gas-fired generation would be limited to load following in support of variable generation.
Such a shift would conflict with the economics of the pipeline industry, which expects to recover its investment in new pipeline capacity over 30 years or more. “Is [a new pipeline] smart long-term energy planning?” he asked.
