Efforts by utilities to buy U.S. natural-gas pipelines to make up for lackluster power use could be upended if the shift toward renewables and batteries accelerates.
Duke Energy Corp., Dominion Resources Inc. and Eversource Energy are among companies spending billions to expand into pipeline networks that link distant gas-producing regions to areas where demand is increasing.
It’s a hot deal at a time when coal-fired power plants are getting shuttered, nuclear stations aren’t being built and gas-fired generators are picking up most of the slack. Their bets may prove riskier than they think if improvements in battery storage and ever cheaper wind and solar power edge out gas-fired generation in electricity markets, according to one former energy regulator.
“These utilities are taking a risk that these will be stranded assets that ultimately their shareholders will have to pay off," Jon B. Wellinghoff, a San Francisco attorney who served as chairman of the Federal Energy Regulatory Commission (FERC) from 2009 to 2013, said by phone. "We will see regulators being more critical of these asset decisions as prices of renewables continue to go down."
Gas pipelines are attractive as shale output booms, dragging the price of the power-plant and heating fuel below $2 per million British thermal units last month for the first time since 2012. At the same time, U.S. power demand overall has slowed, cutting into utility profits. Opportunities for utilities to expand into pipelines are especially ripe in the U.S. Northeast and Southeast, which aren’t traditionally well- served by gas lines.
Duke upped its stake to 50 percent in the Atlantic Coast Pipeline, which will link West Virginia shale gas fields to North Carolina, following its $4.9 billion acquisition of Piedmont Natural Gas Co. Dominion Resources is a partner in that project. Then there’s Eversource Energy and Spectra Energy, which have joined the Access Northeast pipeline in New England.
“There’s nothing risk free, but given the ongoing low price of gas and the regulatory environment moving away from coal, building gas infrastructure to serve our customers seems like a relatively safe bet,” Thomas Williams, a Duke spokesman, said by phone.
Since gas now generates half of New England’s electricity, even increased use of renewables will need to be complemented with the fuel, according to Jeff Kotkin, a spokesman for Eversource. Dominion’s pipeline strategy is secured with “firm commitments” from gas consumers, not producers who might struggle when prices are low, said C. Ryan Frazier, a spokesman.
Pipelines are also attractive because they offer regulated returns, resembling the traditional utility business model, except with better growth potential. They are also regulated by FERC, which is seen as more stable than state-level oversight that’s often affected by turbulent local politics, said Kit Konolige, senior utilities analyst for Bloomberg Intelligence.
The threat from batteries, however, is that they can remove the problem of “intermittency” from renewable sources – allowing for solar and wind power to keep the lights on even when it’s cloudy and calm out, Paul Patterson, a New York-based analyst for Glenrock Associates LLC, said in a telephone interview.
If battery costs fall far enough compared with gas, then wind and solar could become the preferred source of "peaking" power that’s needed when electricity demand is at its highest. “In general, there would be less demand for natural gas,” Patterson said.
There are signs it’s already occurring. Utility Southern California Edison said at an energy storage conference last month that supply from batteries is set to compete against gas-fired peaker plants.
In the area covered by PJM Interconnection, lithium-ion battery costs can be already competitive with gas peaker plants when needed for periods of less than an hour, according to a recent study by Bloomberg New Energy Finance (BNEF). PJM is the largest U.S. power grid.
“In five years time, we would expect batteries to be even more likely an attractive option for longer,” said Andrew Turner, a BNEF analyst who conducted the study. “And they’re just going to get cheaper.”
With assistance from Jim Polson in New York.
©2015 Bloomberg News
Lead image: Gas distribution pipeline. Credit: Shutterstock.