Reconsidering the Economics of Gas Pipelines

A study released yesterday by the Rocky Mountain Institute finds that gas pipelines and power plants proposed today are at a high risk of becoming stranded by 2035, as cheaper, cleaner energy alternatives outcompete them. Such a result would leave millions of ordinary consumers holding the bill for unneeded projects. The study underscores why the Federal Energy Regulatory Commission, which authorizes major interstate gas pipelines, must revise how it determines whether gas pipeline projects are needed.

RMI’s key findings

Projected economics for gas plants

RMI

The report, Prospects for Gas Pipelines in the Era of Clean Energy, looks at five U.S. regions with significant proposed growth in both gas-fired electricity generation and new gas infrastructure projects (New England, the Mid-Atlantic, the Midwest, the Southeast and New York), and considers the long-term economic prospects of gas projects that have been proposed but are not yet under construction. Using conservative assumptions regarding the future costs of clean energy (for more, see my colleague Amanda Levin’s blog), RMI projects that:

  • Clean energy would be less expensive to build than 81 percent of the gas-fired power plants proposed in the five regions, saving customers an estimated $16 billion and preventing approximately 83 million tons of CO2 emissions each year.
  • If, notwithstanding the cost, these plants are built, by 2035, 71 percent of them likely will become stranded, meaning that these plants would be uneconomic to run and could be retired and replaced with cheaper and cleaner alternatives. If we were to implement a modest carbon price ($25/ton), RMI estimates that we’d hit this threshold even earlier. And approximately 80 percent of proposed gas plants would be more expensive to operate than clean energy by 2045.
  • Further, in 2035, RMI estimates that the demand for gas-fired electricity generation will have plummeted by 70 to 100 percent across the five focus regions.

The connection between gas plants and pipeline need

Projected gas use breakdown

RMI

Historically, gas-fired electricity generation comprised a small fraction of gas use. But today, the power sector is the fastest growing end-user; gas-fired generation eclipsed industrial use for the first time in 2018, and the gas buildout we’re seeing today is largely due to expected increases in power-sector use. As such, a rapid decline in the market for gas-fired generation would have a significant ripple effect on the pipeline industry. The research concludes that these shifts in power generation could lead to a 20 to 60 percent drop in the capacity of gas transported via pipeline, leading to significant stranded pipeline asset risks.

This would lead to two unappealing options. Either companies would abandon pipelines well before the end of their useful lives, all the while having permanently taken and altered thousands of people’s private property; or, to salvage their gas investments, they may delay investing in clean energy to keep running dirtier and costlier plants, pushing us farther away from meeting necessary climate targets.

We could avoid both of these unappealing options if unnecessary pipelines aren’t built in the first place. This is where FERC comes in.

What can FERC do

Under the Natural Gas Act, FERC is required to only authorize pipelines that are required by the “public convenience and necessity”—projects that are needed and required by the public interest. Historically, FERC has taken a very narrow view of what demonstrates pipeline need. FERC currently views the existence of precedent agreements—long-term contracts between a pipeline developer and a prospective customer to reserve pipeline capacity (frequently called a “shipper”)—as sufficient evidence to demonstrate need. Shippers aren’t necessarily the end-users of the gas; in fact, in many cases, shippers seek simply to use the pipeline to market the gas to other customers. These contracts are typically for shorter terms (often around 10-15 years), way shorter than the 40+ year estimated useful life for a pipeline, in part due to the desire to avoid a long-term financial burden should the pipeline turn out to be uneconomic. And yet FERC still treats their existence as universally sufficient evidence of need.

It is not in the public interest to approve a 40+ year asset to operate for ten years. Moreover, economically speculative pipelines, particularly those owned by utilities, pose a significant consumer risk, as utility-owned pipelines often can roll in the cost of construction and operation into their electricity rates, meaning that ordinary electricity customers will be paying to build and operate unneeded gas infrastructure.

But FERC is not without recourse. Pursuant to its existing authority under the law, FERC may incorporate demand projections, potential cost increases or savings, state policies, and existing pipeline capacity as relevant factors to consider as part of its overall public interest analysis. And for the past 18 months, FERC has had an open docket to review how it permits gas pipelines. In July 2019, NRDC, along with the Sustainable FERC Project (of which NRDC is a part) and 60 other organizations, called on FERC last summer to do just that.

We need to act now

We can no longer pull the wool over our eyes and pretend that we don’t know our current climate circumstances. Here, the science is telling us that it’s better for the climate and our pocketbooks to switch to clean energy. It’s a win-win for consumers and the climate.

About the Authors

Gillian Giannetti

Attorney, Sustainable FERC Project, Climate & Clean Energy Program

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