Kinder Morgan announced its intent to build its gas pipeline through New England, despite not having sufficient orders to make it profitable. Why? Is this in order to make it seem like a fait accompli in order to gin up more orders and discourage local opposition? Are they really that committed to an old-industrial white elephant for all of us to enjoy? It’s really hard to figure.
Three things to consider:
Do we actually need it? Considering how much gas we waste due to end-point inefficiencies and leaks from our old infrastructure, that’s a really open question, so to speak.
Is the pipeline gas for us? The Acadia Center did an analysis that found that if that gas is headed east to foreign markets, prices could actually go up. Depends on with whom you’re competing for gas, doesn’t it?
… Trancik and one of her graduate students developed a new metric for assessing GWP [Global Warming Potential] that accounts for how far out that target “stabilization year” is and thus reflects the increasing urgency of our situation. With their metric, the benefits of natural gas decreaseover time as we get closer and closer to the point of no return. “At current methane leakage rates, about half the advantage of natural gas over coal is lost within two decades,” Trancik says, meaning however good natural gas looks compared to coal now, it’ll look only half as good in 20 years.
Emissions assessment of different fuel sources using a 100-year GWP (left) and a 20-year GWP (right). Here, CNG is compressed natural gas, and LNG is liquified natural gas. Edwards and Trancik
So we don’t need it + they can’t sell enough to make it worthwhile = PROFIT?
Maybe someone who knows MA energy policy better than I do can help me out here. Until a few years ago I lived in Virginia, where Dominion was constantly trying to build new hard infrastructure (power plants, transmission lines, etc.) because they were guaranteed a rate of return of something like 12% – huge profit. Will Kinder Morgan cash in today on the pipeline through the added fees on our bill, and whether it’s useful or makes money is future stockholders’ & ratepayers’ problem?
SomervilleTomsays
While dwarfed by the “Great Recession” of 2008, there were earlier bumps in the real estate market. In particular, the S&L crisis and its aftermath caused a significant decline in Massachusetts real-estate prices that began in 1987 (the 1986 tax changes for passive real-estate investment was a significant factor). Boston-area housing prices remained below their 1987 value during the 1990s.
During the worst of this earlier recession (in 1991), I noticed that new strip malls were being built all over the northern MA suburbs and in southern NH — literally adjacent to empty, boarded up, and crumbling existing similar properties. I asked a mentor who was active in the commercial real estate market to explain this, because I didn’t see how building a new strip mall could possibly make economic sense when the new building was surrounded by failing properties.
His explanation was, I think, very similar to what we are discussing in this thread. He explained that if you are a commercial real estate developer with a portfolio of undeveloped property, that property is worthless until it is “improved”. A depressed real estate market simultaneously cuts off your income, so you have severe cash-flow pressure — you can’t afford to wait for values to recover.
The only way to generate revenue is to build, even in a depressed market, and sell at a price just high enough to cover the development costs with, hopefully, a tiny profit margin (used to subsidize the losses in the rest of the portfolio). The result is a wave of cheap and shoddy commercial development that expands the already-enormous inventory of vacant commercial space.
I suspect that Kinder Morgan already has assets tied up in this white elephant, and has concluded (like the struggling commercial developers of the early 1990s) that building SOMETHING is their best exit.
Dominion in Virginia is a vertically integrated utility. They have to appear before the Virginia State Corporation Comission (their version of a PUC) and make the case that the infrastructure they build is both used and useful and part of providing safe, reliable power at just and reasonable rates. There is a consumer advocate, and third parties such as industrialists and environmentalists can intervene. The rate of return is typically more like 10%, but details vary.
Kinder Morgan is not a regulated public utility. The process they undergo is entirely different. Kinder Morgan is, generally, not guaranteed a rate of return from ratepayers. However, KM will sign contracts with regulated utilities, and so long as those contracts are deemed appropriate at the time of signature, ratepayers will pay their utilities who will pay KM.
A wrinkle on all of this is that it used to be that pipeline builders built the pipeline on their own dimes, and tried to get contracts with utilities. The tricky part is timing — a pipeline is built to make money over 30, 40, 50+ years, but nobody would sign a contract that long. So the pipeline builders have to risk that the future payments they’ll get for transmission of gas will be sufficient to pay the amortized costs. Some think this results in an underbuilt system — that if the pipeline builders were guaranteed a minimum amount of revenue over decades, then they’d be willing to build. Of course, risk doesn’t disappear, it gets shifted — in this case, from the builders to the future ratepayers, who could get stuck paying for uneconomic pipeline capacity in the future. This scenario is an (over) simplified version of exactly what’s been proposed in New England — that ratepayers be forced to sign long term contracts for gas pipeline infrastrucutre through their respective electric and/or gas utilities.
Personally, I’d much rather New England work harder at targeted energy efficiency on peak gas use days (very cold winter weekdays and very hot summer weekday afternoons), fixing gas leaks, building more renewable electricity generation (both large and distributed), more transmission to/from Québec and New York, and plan for more gas and electric storage. I think we could at the very least delay building another expensive pipeline, if not avoid it altogether.
I’d add that the load curve shown is for NYC — and it’s a very nice fit for New England, as it turns out (based on actual experience, not on theory).
I’d also add that off shore wind, by itself, isn’t a particularly good match — load peak in New England is roughly symmetric around 3pm, whereas offshore wind seems to have its evening peak closer to 8pm, growing consistently from 1pm until 8. But (!) off shore wind plus solar PV, when aggregated, do a wonderful job of ramping up in the morning as load grows, and then just when PV starts to fade, the off shore wind picks up, carrying generation through peak, holding until the later hours of 6-8 pm.
Solar PV plus off shore wind do a really nice job working together, on the average day. I don’t know anything about the daily weather-related correlations (positive or negative) of off shore wind and PV, or what we expect from each resource during our summer peak.
Christophersays
Any chance it can be the practice to put any graphics below the fold? I think front page graphics are contributing to slower loading times.
Also, I count THREE things to consider above:)
johntmaysays
If you come to the BMG BBQ on the 26th, you can see an area where they want to put this new pipeline….my back yard!
Trickle upsays
The following is speculation, but these kinds of energy projects usually do not involve risk to anyone but the public.
So I’d guess that Kinder Morgan has, or expects to have, or will ultimately insist on having, take-or-pay contracts with gas and electric utilities sufficient to guarantee the profitability of the project. The contracts will divorce “profitability” from “need.”
Ratepayers will be the ones on the hook, and it will enable a glut of natural gas in the region.
That glut will be used as a hammer against energy efficiency and renewables, in the same wise as the industry used a glut of generating capacity to forestall efficiency and renewables in the 1980s.
Maybe someone who knows MA energy policy better than I do can help me out here. Until a few years ago I lived in Virginia, where Dominion was constantly trying to build new hard infrastructure (power plants, transmission lines, etc.) because they were guaranteed a rate of return of something like 12% – huge profit. Will Kinder Morgan cash in today on the pipeline through the added fees on our bill, and whether it’s useful or makes money is future stockholders’ & ratepayers’ problem?
While dwarfed by the “Great Recession” of 2008, there were earlier bumps in the real estate market. In particular, the S&L crisis and its aftermath caused a significant decline in Massachusetts real-estate prices that began in 1987 (the 1986 tax changes for passive real-estate investment was a significant factor). Boston-area housing prices remained below their 1987 value during the 1990s.
During the worst of this earlier recession (in 1991), I noticed that new strip malls were being built all over the northern MA suburbs and in southern NH — literally adjacent to empty, boarded up, and crumbling existing similar properties. I asked a mentor who was active in the commercial real estate market to explain this, because I didn’t see how building a new strip mall could possibly make economic sense when the new building was surrounded by failing properties.
His explanation was, I think, very similar to what we are discussing in this thread. He explained that if you are a commercial real estate developer with a portfolio of undeveloped property, that property is worthless until it is “improved”. A depressed real estate market simultaneously cuts off your income, so you have severe cash-flow pressure — you can’t afford to wait for values to recover.
The only way to generate revenue is to build, even in a depressed market, and sell at a price just high enough to cover the development costs with, hopefully, a tiny profit margin (used to subsidize the losses in the rest of the portfolio). The result is a wave of cheap and shoddy commercial development that expands the already-enormous inventory of vacant commercial space.
I suspect that Kinder Morgan already has assets tied up in this white elephant, and has concluded (like the struggling commercial developers of the early 1990s) that building SOMETHING is their best exit.
Dominion in Virginia is a vertically integrated utility. They have to appear before the Virginia State Corporation Comission (their version of a PUC) and make the case that the infrastructure they build is both used and useful and part of providing safe, reliable power at just and reasonable rates. There is a consumer advocate, and third parties such as industrialists and environmentalists can intervene. The rate of return is typically more like 10%, but details vary.
Kinder Morgan is not a regulated public utility. The process they undergo is entirely different. Kinder Morgan is, generally, not guaranteed a rate of return from ratepayers. However, KM will sign contracts with regulated utilities, and so long as those contracts are deemed appropriate at the time of signature, ratepayers will pay their utilities who will pay KM.
A wrinkle on all of this is that it used to be that pipeline builders built the pipeline on their own dimes, and tried to get contracts with utilities. The tricky part is timing — a pipeline is built to make money over 30, 40, 50+ years, but nobody would sign a contract that long. So the pipeline builders have to risk that the future payments they’ll get for transmission of gas will be sufficient to pay the amortized costs. Some think this results in an underbuilt system — that if the pipeline builders were guaranteed a minimum amount of revenue over decades, then they’d be willing to build. Of course, risk doesn’t disappear, it gets shifted — in this case, from the builders to the future ratepayers, who could get stuck paying for uneconomic pipeline capacity in the future. This scenario is an (over) simplified version of exactly what’s been proposed in New England — that ratepayers be forced to sign long term contracts for gas pipeline infrastrucutre through their respective electric and/or gas utilities.
Personally, I’d much rather New England work harder at targeted energy efficiency on peak gas use days (very cold winter weekdays and very hot summer weekday afternoons), fixing gas leaks, building more renewable electricity generation (both large and distributed), more transmission to/from Québec and New York, and plan for more gas and electric storage. I think we could at the very least delay building another expensive pipeline, if not avoid it altogether.
Very helpful!
As for peak usage, offshore wind peaks mirror demand. We should try building some!
I’d add that the load curve shown is for NYC — and it’s a very nice fit for New England, as it turns out (based on actual experience, not on theory).
I’d also add that off shore wind, by itself, isn’t a particularly good match — load peak in New England is roughly symmetric around 3pm, whereas offshore wind seems to have its evening peak closer to 8pm, growing consistently from 1pm until 8. But (!) off shore wind plus solar PV, when aggregated, do a wonderful job of ramping up in the morning as load grows, and then just when PV starts to fade, the off shore wind picks up, carrying generation through peak, holding until the later hours of 6-8 pm.
Solar PV plus off shore wind do a really nice job working together, on the average day. I don’t know anything about the daily weather-related correlations (positive or negative) of off shore wind and PV, or what we expect from each resource during our summer peak.
Any chance it can be the practice to put any graphics below the fold? I think front page graphics are contributing to slower loading times.
Also, I count THREE things to consider above:)
If you come to the BMG BBQ on the 26th, you can see an area where they want to put this new pipeline….my back yard!
The following is speculation, but these kinds of energy projects usually do not involve risk to anyone but the public.
So I’d guess that Kinder Morgan has, or expects to have, or will ultimately insist on having, take-or-pay contracts with gas and electric utilities sufficient to guarantee the profitability of the project. The contracts will divorce “profitability” from “need.”
Ratepayers will be the ones on the hook, and it will enable a glut of natural gas in the region.
That glut will be used as a hammer against energy efficiency and renewables, in the same wise as the industry used a glut of generating capacity to forestall efficiency and renewables in the 1980s.