Finding the Sweet Spot for Natural Gas Investment


Natural gas is an important part of our low-carbon future, but finding the “sweet spot” for gas investment is not easy. Too much investment in gas pipeline infrastructure and gas generation is risky. Gas pipeline and generation investments are long lived—30 to 50 years, or even more—so when we invest in gas, we are making a long-term bet that our investment will generate benefits for decades to come. Too little gas investment could prolong our dependence on higher carbon resources and thus defer the day when we meet our carbon reduction goals.

The sweet spot for gas investment is one where renewable energy, distributed energy resource, and gas resource investments work together through smart market and operations reforms to achieve our carbon reduction goals and ensure reliability and resiliency without imposing unnecessary costs and risks on electricity ratepayers and U.S. taxpayers.

It appears to me that we are outside of the sweet spot in our public discourse and we are in danger of committing too much public money to gas investment. Some regions (e.g., New England, Florida, New Jersey, and Pennsylvania) are discussing billions of dollars in ratepayer and taxpayer funds to support gas infrastructure. Now is the time to remind ourselves of the dangers of committing to too much gas.

The Interstate Natural Gas Association of America asserts that more than $313 billion in mid-stream gas infrastructure (e.g., gas pipelines) will be needed by 2035. The Department of Energy’s Energy Information Administration (EIA) forecasts that 255 to 482 Gigawatts (GW) of gas generation will be added by 2040—an additional investment of $233 to $442 billion. The combined price tag for these infrastructure and generation investments starts at $546 billion and ranges up to $755 billion. Furthermore, these costs will not be incurred evenly across the country, and some of you are seeing high price tag proposals to pay for gas generation and infrastructure coming to you right now.

I would not be as concerned if these costs were absorbed by companies who put their own capital at risk and bet on their ability to compete in natural gas and electric power markets to recover their investment. In this case, customers like you and I are insulated from the risk of bad long-term investments. Unfortunately, some of these projects are seeking funds that would be guaranteed with electricity ratepayer and taxpayer funds, so we are being asked or directed to underwrite some of these investments. I presume you are also concerned that your money be invested wisely, so let’s talk for a moment about the risk you are being asked to bear.

Bloomberg New Energy Finance recently revised their levelized cost of energy estimates for all electric generating resources, and the cost of wind ($80/MWh on average) is competitive with gas generation ($82/MWh on average) today! Plus, solar PV ($107/MWh on average) is closing fast. Solar costs are dropping exponentially and wind costs have a long-term declining trajectory that reflects continued technology improvement. On the other hand, the fundamentals behind the future cost of gas generation are not as rosy. Increases in the cost of carbon presage increases in the levelized cost of gas generation, and any progress to globalize natural gas markets offer the prospect of U.S. gas commodity prices rising toward those of Europe and Asia. We should be asking ourselves if it is wise to irreversibly commit our money to infrastructure for gas generation with increasing costs at a time when competing clean energy technologies are experiencing decreasing costs.

Furthermore, the price of gas has a recurring history of price volatility, so gas prices being low today is a poor predictor of what they will be in the future. In fact, gas prices are likely to go up and down and spike to quite high prices at times. For example, many companies who invested in natural gas generation in the 1990s lost a lot of money and some went bankrupt when the price of natural gas rose dramatically—companies take risk like this, but ordinarily ratepayers would not.

Even with ample gas reserves, the annual cycle of storage and consumption in some parts of the U.S. expose ultimate consumers of natural gas and electricity to price spikes if storage strategies leave the winter market with a shortage. When ratepayers and taxpayers are forced to underwrite these investments, you and I are accepting the risk that these assets will have value for decades to come and we are agreeing to accept the risk associated with gas price volatility.

The large up front capital commitment to long-lived gas infrastructure is a significant risk in and of itself, but the risk becomes magnified when one considers that the obligation brings with it a commitment to pay for gas and absorb any carbon cost. Falling out of the sweet spot of gas investment brings real costs and risks to all of us, especially if we are being asked as ratepayers and taxpayers to underwrite the risk of these investments.

The good news is that we can find our way back to the sweet spot. Gas consumption, in moderation, can result in a reliable, affordable, and clean energy supply, and there are concrete steps we can take to ensure we are not over-investing in gas.

  1. Make electricity system needs more transparent to all players, and consider performance compensation to utilities for achieving public interest outcomes, including improved clarity and granularity;
  2. Ensure that clean resource owners on both the demand side and the supply side, who demonstrate their resources have capabilities to meet energy, capacity, A/S, flexibility, or other system needs, have a route to be qualified to provide those capabilities into markets or RFPs and be fairly compensated for the capabilities they provide (See for example, Teaching the Duck to Fly, Power Market Operations and System Reliability in the Transition to a Low-Carbon Power System, and Aligning Power Markets to Deliver Value);
  3. Establish market rules, tariffs, and RFPs that result in full and fair compensation for clean resources (See Designing Distributed Generation Tariffs Well and Smart Rate Design for a Smart Future);
  4. Prioritize and dispatch clean resources first, including distributed energy resources (efficiency, demand response, distributed generation, and storage) and grid-scale renewable energy, because we need to attend to building the clean infrastructure and meeting the carbon goals ASAP; and
  5. Prioritize “clean first” infrastructure that supports the development of clean resources in near-term and long-term planning and implementation.