This is a cut-and-paste, with permission, from a LinkedIn post by Joseph LaRusso at the Acadia Center, responding to an ISO-NE statement about the way New England’s electricity has been generated by burning an awful lot of fuel oil during this long cold spell because the usual fuel, natural gas, is used for heating. It reflects how contracts, not just technology, drive the grid.
This sentence isn’t doing enough work: “The region’s natural gas system is contracted primarily to serve home and business heating needs first.” Read it and you might conclude that gas is contracted first to serve the region’s need for heating, and contracted secondarily by generators to make electricity. That is, you may conclude—erroneously—that contracts for gas heating crowd out or trump contracts for gas power generators (Note: This is exactly what I thought), and that the solution would be to bring more gas into the region via interstate pipelines to give power generators equal access to gas.
In fact, the capacity of the region’s interstate gas pipeline system is determined by those who purchase gas to serve customers—gas utilities and the owners of gas power plants. The gas utilities execute long-term contracts to get the supplies of gas they need to serve their customers. Gas power plants owners, on the hand, don’t execute long-term contracts for gas, but purchase what they need in the spot market. And this is why no new interstate gas pipelines are being built into New England. Pipeline developers need to demonstrate to lenders that they have a guaranteed revenue stream—long-term contracts payments—sufficient to pay the debt service on the loans they need to build pipelines. No long-term contracts, no guaranteed revenue stream, no development loans, no pipelines. Gas utilities don’t need to execute additional long-term contracts for gas—they already have the contracts they need to serve their customers—and gas power plants owners *won’t* execute long-term contracts because their preference is to buy gas in the spot market.
So…no opportunities for pipeline developers to execute long-term contracts, no guaranteed revenue stream, no financing from lenders … and no new pipelines. The only interstate pipeline capacity increases in New England come in the form of incremental expansions on *existing* pipelines.
Burning oil in winter to make electricity is not a bug of New England’s electric grid, it’s a feature: owners of dual-fuel (gas/oil) power plants would rather burn oil seasonally than execute long-term contracts for gas.
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I can’t quite figure this out. It says “gas utilities execute long term contracts”. Then it says gas power plants do not. Is there a difference between “utilities” and “power plants”? Or is the first sentence about a general idealized system and the second about reality? Gah! I may be alone in my confusion, but for me another go at clarity would help.
Yes, the distinction here is between gas utilities and power plant owners. Here in New England the vast majority of power plants are so-called “merchant generators.” That is, they are independent owners that are not affiliated with electric utiliities. So the gas utiilities that deliver gas to their customers already have long-term contracts in place, and the merchant generators prefer to buy gas as needed in the spot market, and so pipeline developers are unable to overcome the obstacle of finding a sufficienut number of counterparties to sign long-term contracts. This means they can’t get financing to build new piipelines.
Sandy, your confusion is understandable. In some parts of the country, utilities own and operate power plants. But in New England, electric utilities (like Eversource) are prohibited from owning and operating electric generation facilities (like gas power plants). Instead, the responsibilities of our electric utilities are limited to building and maintaining electric wires. Some utilities (like Eversource) are simultaneously both electric and gas utilities, which muddies the waters even more. The bottom line is that gas utilities, which serve heating needs, like long-term contracts, and electric power generators, who can purchase both oil and gas, do not.