Story Two: The Many Faces of New England’s Energy System

The Northeast Energy Direct Pipeline and Kinder Morgan

When you flip the light switch, do you know where the energy that is illuminating the room came from?

Tracing the Invisible Current

While some lucky people may be able to look outside and see solar panels glistening on their sturdy rooftops, for most of us the supply chain that brings energy and electricity to our lives is a mystery. We receive monthly bills and expect the lights to turn on when we flip the switch. However, as we continue to demand transparency and traceability in the systems that serve us, perhaps the time has come for us to know about where the gas that fuels our kitchen stoves, restaurants, and hospitals has come from. For this reason, the Kinder Morgan NED pipeline offers good reason to seek understanding of the process and system that provides us with the ubiquitous resource we rely upon everyday: electricity.

The process that delivers natural gas or the electricity mostly made by natural gas to homes and businesses in western Massachusetts goes something like this: first, energy companies such as Chevron or BP frack for natural gas. Once that gas is collected, it begins its journey through a network of interconnected pipelines. It will be transported to a processing plant and one or more compressor stations until it ultimately arrives at one of five places: 1) a power plant, where it is used to produce electricity that is distributed to customers by utility companies like National Grid; 2) a factory or manufacturing company that uses it as an energy source; 3) a processing plant, where it becomes liquefied natural gas (LNG) or propane (both which are transported by vehicle); 4) in underground storage tanks to be used during shortages; and/or 5) to private residences or businesses, also distributed by a utility company such as National Grid.

Ever Increasing Use

Over the last 25 years, New England’s use of natural gas has increased dramatically. NESCOE (New England States Committee on Electricity) reports that in 1990, five percent of New England’s electricity was generated from natural gas. In 2000 that number went up to 15 percent. In 2012, more than 50 percent of New England’s electricity was generated by natural gas. When viewed from this angle, the Kinder Morgan pipeline is illustrative of the major shift that has been taking place in the New England energy system and throughout the country. The United States is going through a natural gas boom. The Wall Street Journal reported on Oct. 22 that the amount of natural gas coming out of Marcellus Shale in Pennsylvania is expected to reach 16 billion cubic feet per day next month; the numbers are making history.

However, the recent increase in natural gas as an energy resource has not simplified the workings of our energy system. This is because natural gas and electricity are both public utilities and commodities. That means that they are produced and traded by for-profit companies and they are public goods, subject to varying degrees of federal and state oversight. In New England, Independent System Operator of New England (ISO-NE) plays a critical role in facilitating the function and reliability of our electricity services. Although ISO-NE wears many hats, it plays two key roles: 1) operating the electricity grid by making sure that the amount of electricity being produced is balanced with the demand; and 2) operating and administering the market which determines energy prices.

The ISO-NE Web site reads,

“the region’s interrelated suite of competitive markets work together to ensure the constant availability of competitively priced electricity for the region’s 14 million residents…The ISO’s financial independence from companies doing business in the marketplace is crucial to making sure the markets are fair and competitive.”

Essentially, ISO-NE is tasked with making sure that the people of New England have electricity and that the price they pay is as fair as possible.

Capacity Constraints

But flags were raised when National Grid and other utility companies reported that electricity prices would be increasing by 37 percent from Nov. 1 through Apr. 30. Utility companies plainly stated that the price increase was due to market volatility following the grid’s reliance on natural gas. Industry players were scared that there wasn’t sufficient infrastructure in place to support the electricity needs for cold winter days. Indeed, energy consultancy Black & Veatch reported in their study commissioned by NESCOE that, in the event of a cold spell, “New England will experience capacity constraints that will result in high natural gas and electric prices.”

The term “capacity constraints” is very important. “Capacity constraints” and “capacity release” are industry terms that describe the way an amount of time is reserved to transport natural gas on a pipeline. Similar to the way a person needs a ticket to board an airplane, natural gas requires a reservation on the pipeline. Pipeline companies like Kinder Morgan are natural gas transportation companies, and the contract negotiated to transport gas from one place to another is how they make money.

According to the American Gas Association,

“over one-third of pipeline capacity is owned or leased by local gas utilities under long-term contracts, costing local utilities approximately $4 billion annually in reservation charges to ensure that sufficient capacity is available to provide heat to customers on winterʼs coldest days.”

Accordingly, it is in the pipeline company’s best interest to limit capacity transparency so that contract negotiations result in higher transaction costs.

While the dominant narrative being used to advocate for the NED pipeline is that it will cause electricity process to drop, recently a new line of thinking has risen to the surface. On Sept. 18 FERC Commissioner Philip Moeller held a meeting at FERC’s headquarters in Washington DC. Attendees included representatives of natural gas pipelines, producers, electric and gas utilities, industrial end users, grid operators and more. The meeting, which was not recorded or televised, was intended to discuss the possibility of developing an electronic information and trading platform that would promote a higher degree of transparency in the natural gas and pipeline system for natural gas buyers and sellers. However, the conversation took a turn when a debate unfolded between electric generator and grid operators (mostly from the Northeast) and gas pipeline owners and producers.

Old Systems / New Rules

According to writer David Bradley, representatives of the electricity system called for natural gas markets and infrastructure to be altered to meet their peak demand needs. Natural gas representatives disagreed, claiming that change in the system’s operations and rules is not necessary. Bradley reported,

“near the close of the conference, a suggestion was made that the unwieldiness of the capacity release rules under which all interstate pipelines function today might be complicating this responsiveness, and that one way of addressing this would be to relax those rules in certain circumstances, e.g., during peak winter days or hours when electric demands are most volatile.”

The idea being that if there was more transparency in pipeline capacity, the rules that govern it could be changed in order to respond to environmental circumstances, thereby making the system more efficient.

Or, in other words, we don’t need new pipelines, we need new rules.

This reconfiguration of the problem unearths a gap in most conversations about the energy system. Specifically, there is more to the story of electricity costs than infrastructure. There are also rules that dictate how market players use that infrastructure, and it may be that the rules that govern the way the infrastructure is used are of greater consequence than the infrastructure itself.

Unfortunately, the mystery shrouding our understanding of the energy system puts us all at a disadvantage. The FERC meeting revealed that it is important to inquire as to the way the system works because there may be many avenues we can take to create the change we need.

*this series is based on research about the Northeast Energy Direct Project. While the research was executed in 2014, the project to build the NED pipeline is still underway in the state of Massachusetts, and beyond. More information about the research process, read this:

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