Originally published for customers December 2, 2022
What’s the issue?
New England received its first shipment of foreign LNG for this winter even though it sits just a few hundred miles from the largest natural gas field in the country.
Why does it matter?
A long-term lack of pipeline capacity into the region has led to there being legitimate concerns about the region’s ability to provide both heat and power to its residents if the region experiences a prolonged cold spell. This has led to calls for the federal government to exercise some of its emergency powers to ensure that there is enough gas to heat homes and produce electricity.
What’s our view?
The problem New England is facing is certainly self-inflicted and arises from bad decisions over many years by both regulators and private companies. However, if we learned anything during Winter Storm Uri in Texas, the lack of planning does not stop government officials from announcing emergency measures far beyond their authority when the lights go out across an entire region. Therefore, the pipeline industry, and particularly gas marketers and producers in New England, need to be prepared for ad hoc use of emergency powers if there is a supply disruption this winter.
New England received its first shipment of foreign LNG for this winter even though it sits just a few hundred miles from the largest natural gas field in the country. A long-term lack of pipeline capacity into the region has led to there being legitimate concerns about the region’s ability to provide both heat and power to its residents if the region experiences a prolonged cold spell. This has led to calls for the federal government to exercise some of its emergency powers to ensure that there is enough gas to heat homes and produce electricity.
The problem New England is facing is certainly self-inflicted and arises from bad decisions over many years by both regulators and private companies. However, if we learned anything during Winter Storm Uri in Texas, the lack of planning does not stop government officials from announcing emergency measures far beyond their authority when the lights go out across an entire region. Therefore, the pipeline industry, and particularly gas marketers and producers in New England, need to be prepared for ad hoc use of emergency powers if there is a supply disruption this winter.
New England’s Complete Lack of Planning
In September, we noted in New England Needs Gas, But Readies Itself for What Could be a Rough Winter that New England’s problems with a constrained gas supply is nothing new and that as early as 2013, the region’s higher gas prices in winter were a clear sign that more pipeline capacity was needed. The main issue for New England is that most of its power is generated by natural gas-fired power plants, but those plants do not have firm contracts on the pipelines into the region. When the local gas distribution companies, who hold most of the region’s capacity, see their demand peak each winter, the ability to get gas to the power plants becomes a concern.
As we noted then, a critical supply in such situations is the delivery of LNG into the region. Just about a week ago, the first delivery of LNG for this winter was made to the Everett LNG terminal located in Boston Harbor. But even before that shipment arrived, the CEO of Eversource, one of the region’s largest electric delivery companies, sent a letter to President Biden urging him to “swiftly address the growing concerns about winter electric reliability in New England” while lauding his own company and the New England states for their investments in “clean energy resources, including offshore wind and hydropower.” In so doing, he tacitly admitted that his company and the region had failed to adequately plan that transition because “many of these projects will not be bringing power to the grid for several years,” and the region “remains dependent on natural gas to meet our power needs this winter and for the foreseeable future.”
New England’s Generation Fleet
A look at the changes in New England’s mix of generation resources since 2008 shows the problem that the CEO notes in his letter.
As seen above, since 2008 New England has greatly reduced its dependence on coal as an electric fuel source but has primarily relied on growing its reliance on natural gas to meet its needs. The amount of new natural gas generation added since 2008 is over 70 times as much as the increase in “offshore wind and hydropower” promoted in the CEO’s letter.
A growing reliance on gas-fired power would have been reasonable had it been combined with market mechanisms that facilitated a commensurate growth in the access to the supply for the fuel, but that is where the markets and the regulators have failed miserably.
New England simply has not participated in the explosive growth of pipeline capacity that has been built since 2008 to facilitate the delivery of the growing supply of gas from just one state away in Pennsylvania. As seen above, the amount of new capacity to the region has been fairly minor, with just over two Bcf/day of capacity being added over that time period. More importantly, three quarters of that capacity was built based on contracts with local distribution companies and LNG importers, neither of which directly provide support for gas-fired power plants and certainly not to U.S.-based gas supplies.
The Fight Over the Narrative and Emergency Powers
In addition to the letter from the Eversource CEO, similar letters addressed to Energy Secretary Granholm were sent within the last month by the national representatives from the state of New Hampshire and U.S. senators representing the states of Maine, Vermont, Connecticut and Massachusetts. Not surprisingly, all of the letters ignore the long-term failures that have led to the current crisis and urge Secretary Granholm or, as in the CEO’s letter, the president, to “employ the emergency powers of the federal government to take all steps to ensure that adequate fuel resources will be available in the event of severe weather conditions in New England this winter.”
The trade association for the interstate natural gas pipelines, INGAA, responded to the CEO’s letter with its own letter in which it encouraged the president to look for a long-term solution to what is and will continue to be a long-term problem, New England’s reliance on imported LNG, by increasing the natural gas pipeline capacity to the region. While INGAA did not believe emergency powers were appropriate in the current situation, it did ask that, if Secretary Granholm convenes a meeting to discuss such a solution, that the interstate natural gas pipelines be a part of that conversation.
Emergency Powers Remain a Threat
In the CEO’s letter, he referenced the use of three emergency powers that could impact natural gas supply to the region. First, he specifically requested that the president issue a waiver of the Jones Act to allow direct import of U.S. LNG to New England using foreign-flagged ships. While claiming the LNG problems facing New England stem from a lack of supply, his real concern is the price that the region is paying because of the increased worldwide demand for LNG. Because LNG is a worldwide commodity, it is unlikely that this price problem would be fixed by a waiver of the Jones Act and so we don’t see the president taking this step.
The other two emergency powers which the CEO requested the president to consider invoking are similar, an emergency order under the Natural Gas Policy Act or under the Defense Production Act (DPA) to essentially prioritize gas supplies for specific purposes, evidently electric generation in New England. As we saw during Winter Storm Uri in Texas, when the lights go off across a region, executives, like Texas Governor Abbott responding to the emergency, will assert all sorts of power, whether there is a legal basis for them or not. But in this case, there appears to be more of a legal basis for presidential action than Governor Abbott had for some of his emergency measures.
In Can the President Use the Defense Production Act to Combat High Oil and Gas Prices?, we discussed the limited historical precedent for the president’s use of the DPA to avert a gas supply crisis in California in 2001. Under the reasoning used in that crisis, it appears likely that President Biden has the authority to determine the priority of gas supply among end-users and perhaps to allocate pipeline capacity. However, the issue for electric generators in New England in the winter is that they are generally competing for capacity with local distribution companies that are generally considered the highest priority uses of the interstate natural gas pipeline system. Thus, we would not expect that the president would direct allocation of pipeline capacity to power generators ahead of the local distribution companies. But other users of the pipeline system, namely industrial end-users and marketers/producers holding capacity, may be impacted by an order directing allocation of the pipeline capacity to electric generators.
As seen above, however, the current contracts on Algonquin pipeline, the primary pipeline serving New England, already has LDCs and power producers as its two largest categories of capacity holders. The amount held by industrial users is almost non-existent. The amount held by marketers/producers could be significant, but many marketers may hold the capacity to provide supply under a retail choice program, which would likely be treated as LDC capacity in any allocation scheme. Thus, whether an allocation scheme would make much of a difference is questionable. However, as we learned with Governor Abbott, desperate politicians will take desperate measures even if they are meaningless. Therefore, if New England were to experience a crisis this winter, we would not be surprised to see some effort to allocate pipeline capacity in the region away from “non-essential” shippers to those entities needing the capacity to fuel gas-fired power plants.