In New England, governors team up to tackle region’s infrastructure deficit

Source: Rod Kuckro, E&E reporter • Posted: Monday, January 6, 2014

New England’s governors have set an ambitious course to fast-track the construction of hundreds of miles of new transmission lines and pipelines to help bring down the cost of electricity and natural gas in the region, where consumers are paying much higher prices than most other places in the United States.
While the¬†plan¬†unveiled in early December commits the governors’ combined political will to the task, it remains to be seen whether the best of intentions can overcome market barriers, inadequate incentives and old-fashioned not-in-my-backyard sentiments that have bedeviled past efforts to build energy infrastructure in the six-state region.Noting that the “region’s electric and natural gas systems have become increasingly interdependent,” the governors on Dec. 5 in a statement pledged to work with ISO New England Inc., the New England Power Pool (NEPOOL) and the New England States Committee on Electricity (NESCOE) to finds ways to diversify supplies of gas and electricity “while ensuring that the benefits and costs of transmission and pipeline investments are shared appropriately” among their states.Other aspects of the Regional Energy Infrastructure Initiative call for states to make coordinated investments in renewable generation, combined heat and power projects, and energy efficiency on the way to meeting state goals on clean energy and cutting greenhouse gas emissions.

The statement was signed by Connecticut Gov. Dannel Malloy (D), Maine’s Paul LePage (R), Massachusetts’ Deval Patrick (D), New Hampshire’s Margaret Wood Hassan (D), Rhode Island’s Lincoln Chafee (D) and Vermont’s Peter Shumlin (D).

Despite their efforts, ISO-NE, NEPOOL and NESCOE have been unable to craft a comprehensive, long-term solution to ensure adequate supplies of natural gas for power generation and enough new transmission to import electricity to areas of high demand. And the problem has grown worse as abundant natural gas has become the favorite fuel of New England power generators because most do not have long-term contracts with suppliers and turn to the more expensive spot market when demand for power increases.

A long time coming

“There has been a 20-year record of not getting anything done; we have had precious little infrastructure investment designed to fundamentally shift the energy future of the New England region,” said Dan Esty, commissioner of the Connecticut Department of Energy and Environmental Protection.

“New England is paying a terribly high price in every state for the lack of adequate energy supply infrastructure,” Esty said. In September, New England states ranked among the top 10 in the continental U.S. for the average price paid for retail electricity, according to the Energy Information Administration. Typically, retail electricity prices track natural gas prices, which in New England are roughly double what they are in New York and the mid-Atlantic region.

“I think what we are seeing is political leadership from the governors designed to signal to ISO-New England and the [Federal Energy Regulatory Commission] that we’re ready together to step up and really ensure that infrastructure gets built, including both new transmission for power and new gas pipeline capacity,” he said.

Esty pointed to Patrick Woodcock, director of the governor’s Energy Office in Maine, as “one of the real leaders in helping to articulate why a six-state, all-New-England strategy works.” He said Woodcock “made the case in a compelling way” to his boss, the conservative LePage, who won his election in 2010 with tea party support and who heretofore had been critical of energy mandates such as the state’s renewable portfolio standard, asserting to voters that support for wind power in particular “drives up the cost of your electricity.”

Nevertheless, LePage “gets the value of this kind of investment, and he understands that Maine will benefit by greater access to natural gas and by the potential of having one or more transmission lines built in that state,” Esty said.

“The governors are recognizing that we really do share some significant challenges in the region,” Woodcock said. “Our region has fallen further and further behind when it comes to competitiveness. We are positioned in a really enviable location if you look at ability to access natural gas in the Marcellus region, yet we’re paying some of the highest natural gas prices. It’s just so frustrating to see the rebirth of American manufacturing in some areas and we remain reliant on [liquefied natural gas] imports.

“In terms of what this agreement will do — and those other organizations have not been able to accomplish — I think it is a signal that the region is going to move aggressively,” he added. “The specifics are being worked out now; if you look at the actual agreement, it’s hard to actually determine what will be accomplished. But it’s noticeable that the governors have really not come forward with a statement like that previously. And what it really means is that New England will be moving forward with public policy initiatives and not just” building transmission lines for electric reliability.

Both Esty and Woodcock point to the opportunity that new transmission lines would offer to bring low-cost, abundant hydroelectric power from Quebec and the Maritime provinces into the region and support the expansion of wind generation in northern Maine. “There are already four or five major projects that are in various stages of planning and execution,” Esty said.

One such project, the $1.4 billion Northern Pass line through New Hampshire that would deliver 1,200 megawatts to New England, won a key approval from ISO-NE on Tuesday. The line, slated to be completed in 2017, has its share of opponents, though, including environmental groups concerned that the cheap Canadian power will hinder development of regional clean energy projects and the lobby for New England’s merchant power generators, who fear the line will be the first of a group to import thousands of megawatts of low-carbon energy in a region trying to slash its greenhouse gas emissions. Approval in New Hampshire is pending.

New gas pipelines require counterparties

As difficult as it might be to expand the power grid in New England, it pales compared with the challenge of adding to the natural gas pipeline network. Observers point to ISO-NE market rules that fall short of providing economic incentives for generators to make the long-term, 10- to 15-year obligation to firm pipeline capacity that underwrites a project’s construction.

Don Santa, president and CEO of the Interstate Natural Gas Association of America, said his group is encouraged by the governors’ initiative, “but we really need to see when you peel away the next several layers of the onion is what is there in terms of the willingness to make any concrete commitments and to use both the bully pulpit that the governors have and the fact that the states still have some ability via their regulation of parts of the [electric] industry to put somebody on the other side of the contract to buy pipeline capacity.”

Among the options that could satisfy Santa’s members would be if the states became counterparties to a contract for gas capacity. Maine, for example, enacted legislation last year giving the state Public Utilities Commission the authority to contract for gas capacity. The commission has yet to do so and is awaiting a study later this month on “what the opportunities might be,” said PUC Chairman Tom Welch. No other New England state has a similar law.

The region’s regulators also could put “the electric distribution companies in the position to be the counterparty,” Santa said. “Either would work.”

A third option would be “running it through the ISO tariff,” Welch said. “That’s one of the things that is a possibility” and is worth exploring since “the majority of the benefits to having additional pipeline capacity rebound to the benefit of electricity customers.”

As one Washington gas industry veteran put it, “Just because the governors say ‘we really like this pipeline’ doesn’t mean it’s going to get built.”

Merchant generators look for creativity from pipelines

New England’s merchant power generators wish the gas pipeline industry would consider financing options other than long-term contracts.

“I don’t see [merchants] signing up for 10-, 12-, 15-, 20-year firm transportation contracts on a pipeline in part because of the term” and the fact that the furthest forward electric market is only a three-year commitment, said Dan Dolan, president of the New England Power Generators Association.

Changes being discussed in the ISO’s forward capacity market could “lead merchant generators to contract for more premium-type gas products,” Dolan said, but merchants won’t risk a long-term commitment “unless somebody on the gas transportation side wants to get very creative on how they structure a product to build a bigger customer base.”

Noting that elsewhere in the U.S., pipelines are being built with financial support from gas producers and marketers, Dolan said he is “mystified” that similar efforts have not been made in New England. One factor may be that the New England electricity market is “just not that big” and smaller than the market in the New York ISO.

“So part of it may be scale,” that the returns are not large enough “to warrant the type of upfront investment,” Dolan said.

Another factor may be that in discussing their initiative, some governors raised the possibility of subsidizing the transmission to bring Canadian hydropower to the region. “If I’m the natural gas industry and I see the states looking to potentially subsidize what would in essence be a competitor from an energy usage standpoint, I don’t know how excited I would be about laying down money in the seven figures.”

How long before efforts bear fruit?

“The next step is really outlining exactly how much infrastructure the region is willing to invest in, and that’s the amount of megawatts and the amount of gas capacity,” Woodcock said. “So it’s going to be a long process because the actual mechanics are novel for the ISO New England and for NESCOE,” which will have to adopt “a new way of thinking as entities that have historically only looked at reliability projects.”

Esty is a bit more optimistic about moving ahead with some urgency. “I think there is a goal of getting action over the next six months to a year in terms of putting out a process that will get one or more transmission lines going and will dramatically increase the commitment to natural gas capacity coming into the region.”

He expects there will be a competitive procurement process to attract private capital to identified projects “to get the lowest possible cost for ratepayers and then establish a tariff to pay for it.”

“And on the gas side it may be that we’re committing to a certain level of demand — in effect, we’re guaranteeing that that level of demand would be there so that there will be a commitment on the part of private pipeline companies to build these pipelines,” Esty said.