Assessing risk in the state’s energy debate

Are the sides too entrenched for compromise?

THE MOST CONTROVERSIAL ENERGY POLICY issue pending before the Commonwealth – rivaled perhaps only by the solar debates – has been the proposal to expand natural gas pipelines into New England to serve electric generators.  Resolving this policy question is not clear-cut.  It is a complex issue about comparative risk assessment and risk tolerance.  The recent cancellation of the Kinder Morgan project reduces the choices but makes it no less complicated.   There have been numerous “studies” or “white papers” on the subject, the most notable of which was the comprehensive study completed by Analysis Group, Inc., sponsored by the office of the Attorney General.  As for many of the others, it should come as no surprise that in many cases one can predict the conclusion by simply identifying the sponsor of the study.  Sides have been taken, and the advocacy battle is well underway.  But if we do not evaluate the risks associated with the choices at hand in a balanced manner, we may lose our vision in the haze of smoke from the cannon-fire.

There is much that needs to be sorted out to get a clear view of what is at stake.  First, the question of “need” suffers from some confusion.  This is a result of the blending of different need issues.  It starts with confusion between (1) the need for capacity to serve traditional thermal uses of natural gas capacity and (2) the need for capacity to serve electric generation.  Whether additional pipeline capacity is needed to serve traditional thermal uses of natural gas such as heating is important. But that is a different question than the one relating to contracting for additional capacity to assure that we will not suffer power outages during the coldest days of the year.  In fact, nearly half of the capacity that had been proposed for the abandoned Kinder Morgan project was supposed to address the thermal requirements of gas distribution companies.  It was the balance of the project that had largely remained uncommitted.

The Analysis Group study is often cited by some opponents of pipelines for the proposition that we do not need additional pipeline capacity for any purpose.  Yet the study did not address the “thermal” question at all and the office of the Attorney General has never suggested it did.  Rather, it was limited to the question whether we need additional capacity for electric generators to assure electric system reliability. In addressing the electric generation reliability need, the study concluded that, under expected conditions, the system would operate reliably without additional capacity. The study also reviewed scenarios of “stressed conditions” on the system and compared various solution options that could address those unusual circumstances. Two of the favored solutions assumed the ability of all the New England states to radically ramp up energy efficiency beyond today’s nation-leading levels.  Among them was a combination of bringing 1,100 megawatts of firm large-scale clean resources into the region with an expansive, sustained ramp-up of energy efficiency throughout New England.  But the study did not assess the probabilities of the states being able to implement the aggressive energy efficiency solution and sustain it over a long period.

There also is another question of  “need.”  This is whether additional pipeline capacity is needed to lower and stabilize high winter electricity costs.  The Analysis Group study forecasted that the addition of natural gas capacity would result in net savings in wholesale energy costs regionally, among other initiatives that could produce savings.  But that was not the issue the study was really addressing. In contrast, the proponents of adding larger amounts of pipeline capacity for electric generation base their case on forecasts of substantial savings that can be achieved every winter by adding additional pipeline capacity.

Finally, there is another key question that relates to the environment.  That is the question of how additional pipeline capacity for electric generation might impact greenhouse gas emissions over time.  Of course, there also is the environmental concern of some advocates regarding the impact of construction and operation of the proposed facilities on the surrounding land and communities. But preemptive federal law places the responsibility to address those issues in the hands of federal authorities.  The emissions question, however, is an important one that can be addressed locally, in the context of the requirements of the Global Warming Solutions Act.  For example, the Analysis Group study included a forecast of the regional emissions impact of its identified solutions.  According to the study, some proposed solutions that combined energy efficiency with other initiatives would reduce emissions if they could be implemented in New England.  The data also showed that adding capacity alone, without including other initiatives, would cause a relatively small increase in regional emissions when compared to an assumed base case.  All of these issues – relating to emissions, reliability, and cost risk – do need to be considered together, as the Analysis Group study endeavored to do last year.

One of the most important issues, of course, relates to the weight that should be given to the reliability risks. Many assume that ISO-New England, the operator of the regional power grid, will always find a way to assure that power outages are avoided through market responses.  But the ISO has been publishing warnings about the impact of pipeline constraints for several years now.  In any case, ISO-New England may be the entity responsible for maintaining reliable service in the region, but the ISO has no authority to address environmental objectives.  And if emergency action is needed to avoid power outages, cost will be no obstacle.

The other prominent risk relates to winter electricity costs.  This is a central issue in the pending DPU proceedings. But, unfortunately, nothing on this topic is simple. At the outset, Massachusetts needs other states picking up an equitable share of the costs of the capacity that produce a region-wide benefit.  In addition, the municipal electric companies in Massachusetts (who serve 40 communities) and one investor-owned utility (Unitil) are not proposing to share in those costs at all. Only National Grid and Eversource have executed capacity contracts.  As currently proposed in the regulatory proceedings, the costs would be borne only by the customers of those entities who sign contracts. There will be “free riders.”  For that reason, if Massachusetts commits to a disproportionate share of the capacity costs needed to create the regional savings, its share of those regional savings may not be large enough, thereby rendering it uneconomic to Massachusetts.  Another complication is that there are many who simply do not trust the utilities.  National Grid and Eversource have contracted with Access Northeast, in which their corporate affiliates have substantial equity interests.  As a result, a suspicion of self-interest casts an unfortunate shadow on the decision process employed by the utilities, even if the proposals have been made in good faith.

If the DPU navigates a path through these complexities and decides to approve the contracts, many stakeholders stand ready to litigate in the courts over the DPU’s authority to approve the contracts, among other issues that lawyering can muster.  So we may be reading CommonWealth articles about this topic for years to come!

Importantly, we now know that some form of Omnibus Energy legislation is likely to be enacted in Massachusetts.  Thus, there will be new combinations of options concretely before us that could be evaluated.  For example, it could be instructive to evaluate a combination of firm large-scale hydro with different-sized pipeline capacity additions.  Similarly, it could be helpful to evaluate solutions that include a less radical regional ramp-up of energy efficiency that has a good chance of being implemented among states with different political challenges.  Finally, it might be important to understand whether the loss of half of the capacity that was intended for thermal needs from the Kinder Morgan project will have other impacts on winter gas capacity constraints, as gas distribution companies look elsewhere for capacity. But unfortunately, the posture in which we find ourselves in regulatory and litigated proceedings may not be conducive to performing this type of updated evaluation in a comprehensive and satisfactory way.  Instead, a fight appears to be looming among some stakeholders who do not trust each other and hold strong opinions – an all-too common feature of energy policy deliberation these days.

At its core, the issue should be about comparing risks, prioritizing them, assessing probabilities, and determining our level of risk tolerance. There are several risks of different types in that equation.   First, there are those that are assessed through energy forecasts and debatable assumptions that can have a pivotal effect on the conclusions drawn:

  • The risk that power could be lost during stressed winter conditions, as the region grows more dependent upon base-load natural gas generation to integrate with intermittent renewable resources,
  • The risk that we could have very high and sustained winter electricity costs that have a significant economic impact, caused by growing gas constraints after numerous large base-load plants retire, and
  • The risk of uncertain long-term greenhouse gas emission effects.

Then there are those risks that relate less to forecasts and more to one’s perspective regarding regulatory, environmental, and market principles:

  • The risk to electric ratepayers of making long-term financial commitments for infrastructure that could become stranded or uneconomic,
  • The risk of uncertain market impacts when employing out-of-market initiatives that shift generation-related financial risks from the market to ratepayers, and
  • The risk that more capacity might encourage longer-term reliance on natural gas.
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Whether one concludes that capacity is “needed” is undoubtedly affected by how much weight is given to each of these, among others not listed. And one’s confidence level in the energy forecasts can shift the weighting considerably.  That may explain, in part, why there have been numerous opinions offered by well-respected commentators reaching different conclusions.  When any stakeholder declares that additional pipeline capacity is “needed” or “not needed,” there is an implicit acceptance of certain risks that apply to either point of view.  But whatever one’s perspective, we should be highlighting the trade-off of risks.

Which risks should we be willing to accept and why?  And while we’re at it – is there a less ambitious capacity addition that should be considered along with new carbon-reduction initiatives to hedge some of the risks?  Unfortunately, the issues may be too polarizing and the sides too entrenched for compromise.

Ron Gerwatowski is a freelance energy advisor with 29 years of experience in the energy industry.  He recently served as assistant secretary for energy during the first year of the Baker-Polito Administration.  After completing a year of public service, he returned to the private sector as an energy and regulatory policy consultant.  He was formerly senior vice president for regulation and pricing at National Grid before retiring from the company in early 2014.