Natural gas is fast becoming the fuel of choice for power generators in New England due to being cleaner than coal and heating oil. This is opening a valuable market for producers and operators, but it comes with new challenges—namely, the ability to access the region at the desired timeframe and capacity levels.

New England is startlingly short of midstream infrastructure as it is nearly impossible to build underground storage due to its geology. “They don’t call [New Hampshire] the Granite State for nothing. Storage would be tremendously valuable and useful in New England as it would solve its peaking problem caused by pipeline constraints, but it’s not commercially viable, which is why it relies so heavily on LNG storage,” Harvey Harmon, senior director, North American natural gas and global LNG at PIRA Energy Group, told Midstream Business.

Consequently, midstream operators will need to build more pipelines from Pennsylvania and New York into New England, despite the large costs that will entail. Thus far, the costs associated have made it difficult to get subscribers for the projects, which will continue to be a headwind for the region for the foreseeable future.

“New England power generators are not allowed to recover long-term firm transportation charges in their rates. In other words, if they sign a 10 or 20-year contract for a pipeline project, they aren’t guaranteed to recover those funds. Until that changes, it’s going to be hard to build large-scale new pipelines to New England,” Harmon said.

Despite its proximity to the Marcellus and Utica shales, New England still experienced gas prices higher than the rest of the country because of the lack of pipeline capacity. Unfortunately the region is served by only two pipelines with access to volumes from the Marcellus: the Algonquin and Tennessee pipelines. There is additional capacity for both Canadian gas and LNG imports, but neither of these options is economically competitive with gas from the Appalachian Basin, making both options unattractive for generators during capacity constraints.

According to a recent white paper, “An Expedient Solution to New England’s Natural Gas Constraints” from PowerOptions, a Boston-based energy buying consortium, this has led to two major problems: high price volatility and threatened electric grid reliability that create bottlenecks in having supply meet demand.

When these bottlenecks arise utilities are forced to utilize other fuels that are either more expensive and/or generate more carbon emissions while also increasing the likelihood of blackouts. The paper noted that fuel oil was needed 22 days in 2013 as a result of limited gas availability. This compared to zero such days in 2012.

“The solution to these problems must be time-sensitive, fair, transparent and market-based,” the paper said, while noting that all parties involved, including consumers, generators and operators, agree that the best course of action is to increase pipeline capacity.

Natural gas represented 46% of the electrical generation in the region in 2013 and is expected to increase to 55% by 2022, according to ISO-New England, a regional transmission organization.

Given the pressing need to alleviate this bottleneck, the paper suggests utilizing the historical approach for building new pipeline systems in New England, which has local gas distribution companies in each state enter into long-term contracts for their projected needs, while adding capacity necessary to meet the needs of regional generators.

“The current framework of pipeline expansion is a well-established approach and will result in the shortest time to increase capacity. Consumers would pay for an accurate representation of the benefits the pipeline provides to them,” according to PowerOptions.

In an effort to meet this demand by building new infrastructure, the governors of the six New England states met and agreed to a plan last December. This would seek to develop and build pipeline and transmission infrastructure with costs being divided among the states. These states would seek to recoup costs through a tariff on customers while also managing the projects through third-party contract and capacity managers.

“Tariff costs would be allocated to each state as a percentage of total energy consumed in New England plus a multiplier of some kind which would either add or reduce a state’s share of the costs otherwise allocated based on their percentage of total energy consumed in the region,” the paper said. This multiplier is currently under discussion among the states, but it seems it will have difficulty realizing the light of day as Massachusetts has pulled their support for this aspect of the plan.

PowerOptions originally supported these changes, but has since changed this position due to likely legal challenges as well as regulatory delays, since it will have to go through Federal Energy Regulatory Commission. This is likely to increase costs and add delays to infrastructure development. Instead, the paper advises that rather than implement a new system New England should utilize its current structure with moderate changes.

“We propose a slight alteration to the historical approach in that in order for there to be sufficient new capacity to meet the needs of electric generators, the LDCs [local distribution companies] would have to contract for more capacity than needed to solely meet their demand,” the white paper said. This would also allow for greater price transparency as well as not adding more costs.