How far can a bridge fuel reach?

Rarely have things in the volatile world of energy aligned to make as much economic sense as, say, building new natural gas-fired power plants, expanding transmission pipelines and extending gas utility service to entire communities.

Natural gas has become the fuel du jour as a boom in drilling over the past decade has sent prices plummeting. Natural gas also has half the carbon emissions of coal and therefore an advantage as regulators strive for a cleaner energy sector across the board. Advocates often call it a “bridge fuel” to a future powered by renewable energy. 

Despite projections that natural gas prices will remain low for at least the next few years, some have wondered whether the power sector’s love affair with the commodity is risky business. Extending the bridge analogy, they ask: How wide is the river, anyway?  

“It’s pretty clear that natural gas has a pertinent role to play in lowering electricity costs and reducing carbon pollution,” said John Rogers, senior energy analyst at the Union of Concerned Scientists and co-author of a report in October that ranked states on risks of overreliance on natural gas generation. 

“The issue is how much is too much. ... Are we overbuilding, are we putting stuff in the ground that we’re not going to want?”

The Cambridge, Mass., nonprofit found two-thirds of states are at risk of “overreliance” on natural gas generation by measuring the states’ current share of overall capacity, the expected increase in share of capacity, emissions and two other categories. Pennsylvania is among six riskiest states, the group found. 

In the report, the group suggested clean energy and efficiency should play a greater role in discussions about the future of the power sector. If, and when, natural gas prices would rise, power plants could become more expensive to operate. And should there ever be a price on carbon, those costs would be passed on to consumers.

“Pennsylvania is really going to want to think hard about maximizing clean energy before going down the natural gas path with big new commitments,” Mr. Rogers said, noting the Commonwealth ranks 16th in the country for wind generation and 12th for solar. “Even though it’s one of the top producers, it’s still got to worry about price spikes, the added costs of carbon pollution.”

Long-term commitments

Still, most others — including gas producers, financial and credit analysts and government officials — don’t see a problem, particularly when it comes to transmission pipelines. If anything, the problem is the opposite: not enough infrastructure. 

“The current conditions clearly suggest there aren’t enough pipelines in the area,” said Lindsay Schneider, principal analyst for Wood MacKenzie.

Last fall, more than 3 billion cubic feet per day (Bcf/d) of pipeline capacity became available in Ohio and Pennsylvania, Ms. Schneider said. Projects proposed to come into service this fall amount to half that capacity — 1.3 Bcf/d — as pipeline builders have postponed projects in response to the poor market conditions.

“It’s not like these pipelines are going to be built without firm commitments,” from both producers and power plants, she said. 

Indeed, the method for bringing new pipelines into service requires long-term commitments, said Anusha de Silva, an associate director with IHS Energy. Interested natural gas customers — such as a power plant or a local utility — essentially underwrite the project by agreeing to pay for a portion of a pipeline’s capacity.

Unlike a utility customer’s monthly bill, pipeline customers pay a fixed amount for capacity, regardless how much gas actually flows through the pipe, Ms. de Silva explained.

Dictated by geography

Mr. Rogers of the Union of Concerned Scientists said natural gas is important to fill the gap, but he’s concerned that natural gas is crowding out renewables.

Ms. de Silva said the cost-effectiveness of solar and wind depends on the location. Pennsylvania, for example, has wind turbines on top of ridges in Somerset and Fayette counties, but lacks the flat windy plains of Kansas.

Therefore, the consumers have spoken, in part, by underwriting the growth in pipelines.

“You can wish to have all of our energy production to be sourced by renewable generation in a utopian world, but in reality, the geography dictates how much renewables you can have,” she said. “You can use this generation to fill the gap where you wouldn’t be able to serve if you just had renewables.”

Still, recent credit reports for power utilities highlight possible risk when it comes to natural gas prices. 

Despite the harsh rhetoric surrounding environmental regulations — including arguments that led to a surprising U.S. Supreme Court stay last week of federal cuts on carbon emissions — electric utilities remain protected by regulation, guaranteed revenue and access to cheap natural gas, according to a 2016 credit outlook from Standard & Poor’s Ratings Services last month.

But the report also found diminished fuel diversity poses a long-term threat as utilities switch to natural gas. 

“Although industry projections are that natural gas prices will be stable, we believe that the return of price volatility is ultimately unavoidable,” writes Jeffrey Panger, author of the report. Higher prices could happen if “demand for natural gas increases due to economic expansion or regulations prompt switching” to gas from coal, he wrote.

Specifically on clean air regulations, Mr. Panger wrote that ”as long as gas prices remain low, the impact [of the regulations] should by-and-large by manageable. But should historical volatility return, the financial burden and risk would be greatly magnified.”

In that report, the credit agency projected natural gas prices will average $3 per million British thermal units (mmBtu) in 2016, $3.25 per mmBtu in 2017 and $3.50 per mmBtu in 2018. The agency has since lowered price expectations by 50 cents to $2.50 in 2016, $2.75 in 2017 and $3 in 2018 and beyond. 

Daniel Moore:, 412-263-2743 and Twitter @PGdanielmoore.

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