On August 17th the Massachusetts Supreme Court vacated a ruling by the Massachusetts Department of Public Utilities that would have permitted electric utilities to charge electric ratepayers for pipeline capacity—and then sell the gas to generators. This could be the swan song for the last major natural gas pipeline expansion project on the table for New England.
One of the failures in our electricity markets is that there is currently no mechanism that incentivizes generators to subscribe to firm natural gas capacity. The Independent System Operator of New England (ISO-NE) will soon commence its “Pay-for-Performance” program which was designed to penalize generators who cannot operate (usually for lack of fuel supply) during tight supply/demand periods. The program will also reward generators who can operate at critical times. Even with this pending carrot and stick program, ZERO natural gas generators signed up for capacity on either of the major proposed pipelines—Spectra Access Northeast and Kinder Morgan’s Northeast Energy Direct.
While the merits of ratepayer financing of pipeline are debatable, the Massachusetts ruling ostensibly squashed the prospects of any natural gas pipeline expansion that could ease the volatility of natural gas prices and electricity prices in the region. This will be especially true for cold winter months when Local Distribution Companies (LDCs), who do subscribe to capacity, are using most gas for home heating. Any new natural gas plants will still provide power in the summer, but will do nothing to ease our wholesale electricity price volatility. And that is not good for New England’s families and businesses.
As much as high electricity prices are a problem, volatility is just as big a concern. Many businesses, especially seasonal ones, are finding it difficult to contract for reasonable long-term rates and have been forced to buy on the highly volatile spot market. This makes it especially difficult to make capital or hiring plans, and can put entire businesses at risk during an especially cold winter or hot summer. In addition, when electricity suppliers secure electricity for homeowners, volatility forces them to charge families more to cover the potential price extremes in the real time market.
The wake of the Massachusetts’ ruling will leave New England with only “one man standing” when it comes to future base load power options that can smooth out winter volatility—and that is imported hydroelectricity from Canada. We are not going to build new coal, oil or nuclear plants. We have very high market barriers to new entrants (not to mention this new legal decision) that will suppress any expansion of New England’s natural gas pipeline capacity. Fortunately there are a number of proposed projects that will bring imported hydroelectricity to the New England grid. Ultimately we will need all of them as the plants that have traditionally supplied us with baseload power and stable prices are closing under the strain of distorted markets and public policy initiatives that favor intermittent and unreliable renewables.
One transmission project, the New England Clean Power Link (NECPL), has received its permits from the state of Vermont and its Presidential Permit has been recommended by the Army Corps of Engineers. Yet one has to wonder if publicly released cost estimates are understated as the NECPL has yet to reach an agreement with any generator to lease capacity on its transmission line.
Of the proposed hydroelectricity projects in the region, only one, Northern Pass, has a generator agreement to supply power on its transmission line. However, Northern Pass still needs to get approval from the New Hampshire Site Evaluation Committee. After dramatically altering its route and agreeing to bury lines through the White Mountain National Forest, a final SEC decision on Northern Pass should made by next summer. While there has been opposition to overhead transmission lines, the cost of additional burial, if imposed by the SEC, could make the project financially infeasible and the repercussions will have a serious impact on the future of our grid.
Policymakers and bureaucrats went to great lengths to deregulate New England’s electricity markets by forcing vertically integrated utilities to divest of the generation assets. The prohibition of investor-owned utilities from owning generation was supposed to make our markets “competitive” and less costly. Unfortunately, lawmakers and regulators have followed that with policies like Renewable Portfolio Standards that subsidize renewables and the Winter Reliability Program that subsidize oil and gas generators. This has led us right back to a quasi-regulated marketplace, price volatility and (worst of all) a frighteningly limited base load supply situation.
In a perfect world, truly competitive electricity markets would result in participants competing to provide consumers with the lowest cost electricity. Unfortunately, we don’t live in a perfect world—and in the world we live in large-scale hydro and particularly Northern Pass is looking absolutely essential for the survival of New England’s electricity system.
Marc Brown is the Executive Director of the New England Ratepayers Association, a nonprofit dedicated to protecting ratepayers.
(A version of this column originally appeared in the The Portland Press Herald.)