Are we building too many natural gas pipelines?

Abstract

Natural gas has been considered as a bridge fuel in the ongoing energy transition because it is cleaner and more efficient than coal. In the market context, along with increases in U.S. natural gas production and demand in electricity generation and industrial sectors in recent decades, new transmission pipelines have been constructed to link the expanded and new production sources to more consumers around the country. These shifts in demand and supply will require gas flows in the U.S. to change significantly, therefore, require infrastructure investments in new gas pipelines and storage. On the regulatory side, to get approval from Federal Energy Regulatory Commission (FERC) to build a new interstate pipeline or expand a pipeline’s capacity, a company demonstrates market needs for capacity expansion by showing long-term contracts between pipeline companies and gas shippers for gas transportation. This simplicity of the regulation has greatly encouraged pipeline investments and has contributed to the speed of natural gas infrastructure development after the fracking boom. However, this practice has been criticized where both pipeline companies and shippers are affiliated entities. The reason is the inherent risk-shifting in such transactions, whereby pipeline developers earn a return above risk while captive customers are imposed with substantial reservation costs regardless of whether their gas utility uses the pipeline capacity. In Feb 2021, FERC issued a note of inquiry seeking suggestions on what methodology and types of additional or alternative evidence FERC should examine to determine pipeline project need. This paper aims to contribute to the ongoing regulatory debate by examining the efficiency of the current natural gas pipelines in the contiguous U.S. In addition, the paper provides a model-based project evaluation method that will be useful to assess the need for a new interstate pipeline in the context of ongoing energy transition and decarbonization policies. Considering the predicted future demand and supply, the substitution and/or complementation between new pipelines and new storage or between multiple pipeline projects is crucial to examine whether a company should build more pipelines. This paper focuses on providing a model-based project evaluation method to determine the need for pipeline and storage projects in the context of decarbonization with long-term insight. We illustrate the model by examining the efficiency of pipelines that had been built during the 2002-2018 period given the projections of demand and supply up to 2050. For this purpose, we create an optimization model that minimizes total capital and operational cost to meet demand at each state in the contiguous U.S. For comparison purposes, we keep gas demand, supply, and cross-border imports and exports exogenous at the observed or predicted quantity when we compute the optimal storage and pipeline capacity. We then solve the model to define the necessary additional capacity of storage and pipeline. The model input is daily data at the state level with a representative year for every five years. We account for every day in the selected year to reflect between day variation of gas supply-demand and interstate movement. Solving the model gives us the optimal additional pipeline and storage capacity built each year. Finally, we contrast optimal outcomes versus observed pipeline and storage capacity to evaluate whether pipeline companies overinvest in historical pipeline projects in 2002-2018 given the decarbonization pathway to 2050. The preliminary results show that generally, we are building too many pipelines and less storage than necessary. However, this is not the case for all contiguous states. Pipelines had been overbuilt in some regions while under-invested in others. States in the East region would have built more storage. The total capital cost spent on historical pipeline and storage projects in 2002-2019 was way higher than it should be in the optimal model. The model solution suggests that building additional storage is more efficient than building more pipelines in some states. Besides efficiency, investing in gas storage rather than pipelines also supports energy resilience considering the increasing frequency of unprecedented extreme weather events that cause an increase in local demand.

Thuy Doan
Thuy Doan
Ph.D. Candidate in Economics, Graduate Research Assistant

Thuy Doan is an independent and detail-oriented economics researcher with demonstrated abilities in empirical analysis. Skilled in applied econometrics and programming. Focused on energy and climate issues, especially topics of energy conservation, extreme weather, and natural gas market.