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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