Costs of proposed natural gas pipelines may outweigh benefits

In 2017, two big natural gas pipelines are scheduled to go into service, increasing the volume of natural gas entering Michigan by up to 35 percent.

That’s the scenario developing out of separate proposals, one by the developers of Nexus, a $2 billion pipeline backed by Detroit-based DTE Energy Co., and the other by developers of Rover, a $4.2 billion pipeline backed by Dallas-based Energy Transfer Partners LP

Both plans are under review by the Federal Energy Regulatory Commission, which approves interstate pipelines. Developers on both sides expect approval this year, with construction following soon after.

How these spigots will impact customer power costs is an open question, though industry officials envision a general downward trend in customer bills as natural gas takes on a greater role in power generation over the next 15 years.

The idea is to connect Appalachia, home to some of the most productive natural gas fracking operations in the country, to Ohio, Michigan and beyond. The gas is cheap and abundant, so much so that producers — some of them with bankruptcy rumors swirling about them — are desperate to get their gas out of Appalachia and off to new markets.

This coincides with a shift, driven by the need for cleaner energy, in power generation that hasn’t happened in decades — and arguably since the utility industry formed in Thomas Edison’s time. Coal has been the dominant fuel nationally since then. Now utilities favor natural gas as a cleaner “bridge fuel” between coal and renewable energy. Natural gas plants burn fuel more efficiently and cleanly than those fired by coal.

DTE’s Nexus pipeline, the biggest project of its most profitable business segment, Gas Storage & Pipelines, is on track to open in late 2017. It is splitting the cost and ownership 50-50 with Houston-based Spectra Energy Corp. Nexus will have a carrying capacity of 1.5 billion cubic feet of natural gas per day. This is a fair amount: DTE’s gas utility sends out about half that, 0.8 billion cubic feet, every day to customers. 

Rover’s planned opening date is in mid-2017. The pipeline will have a capacity of 3.25 billion cubic feet per day, more than twice that of Nexus. Analysts say Rover is the biggest proposed pipeline to emerge from the Appalachian gas boom.

Nexus will be a main supply line for DTE’s future natural gas plants. DTE would like to have Consumers Energy Co. as a Nexus customer, too, though Jackson-based Consumers will not say whether it plans to become a customer of Nexus or Rover.

Infrastructure costs

One might think such a flood of cheap natural gas, timed with the rise of gas-fired plants, would automatically translate to dramatic savings for Michigan utility customers.

Gas utility costs already are coming down, thanks to cheap prices. Consumers Energy last month announced its lowest fees for gas customers in 18 years. Low natural gas prices will influence electricity bills as energy increasingly is sourced from this fuel. So should Michigan utility customers expect to be basking in cheap energy sometime in the next 15 years?

Probably not. Industry insiders are loath to predict the long-term direction of utility bill costs, given the complex web of economic pressures, regulations and parties involved. But they say a sharp drop is unlikely.

“The cost and expense of the pipelines themselves might negate the effect abundant supply has,” said Eric Brooks, a gas industry analyst for market researcher Platts.

Besides the cost of building pipelines and shipping gas on them, there is the cost of building or buying new plants to burn the gas. There will be large-scale investments in converting coal plants to gas, building new plants or buying existing ones. DTE expects to spend $8 billion on this by 2030, for example, most of it beginning after 2020. (Few specifics on plant retirements or replacements have been announced so far.)

These costs arrive in customer bills in two places. One is the basic electricity rate utilities use to recoup the costs of building plants and related infrastructure. This is where new investments in plants appear. The other is a fee that pays for the buying and shipping of fuel to power plants. Through a convoluted process involving a mechanism known as the FERC tariff, the pipeline construction costs eventually make their way into these fuel fees. 

So while there won’t be a “rate hike” as defined in the regulations, there nevertheless will be a cost in customers’ total bills reflecting the pipeline costs. 

Whether that cost will be higher or lower than it would be otherwise is anyone’s guess. DTE predicts

$100 million in electricity fuel costs will be shaved off customers’ bills from 2017 through 2032. It further estimates general natural gas price savings of $2 billion in that period statewide (taking into account other uses such as regular gas utility service), thanks to Nexus.

“It’s the cheapest route to the cheapest gas,” said Don Stanczak, DTE vice president of regulatory affairs.

The Michigan Public Service Commission, which regulates utility rates, hasn’t analyzed the potential impact of low natural gas prices or new pipelines. But the mood in the industry is that they will translate into some savings for customers, albeit not as much as they might think.

“We don’t get into the prediction business, but it is widely believed that gas will be abundant for the foreseeable future and that customers will benefit from that,” said Judy Palnau, spokesperson for the commission.

‘Clean and green’

Along with cheapness, natural gas comes with other features that should help push down utility bills as the big switch to natural gas gathers steam. 

The dirtiness of burning coal comes from burning off rock filled with pollutants, which not only is less efficient than burning straight gas but also necessitates expensive cleaning equipment to scrub the air emitted from smokestacks. Gas plants require less labor. A gas plant needs about 25 people, where a coal plant needs hundreds, said Samuel Andrus, a natural gas industry analyst at IHS Inc., a market research company.

The distance between Appalachia and Michigan is shorter than from where Michigan currently gets most of its piped gas: western Canada, Texas, Oklahoma, the Gulf of Mexico and Louisiana. That lowers shipping costs. Once the gas arrives in Michigan, the state’s abundant natural gas storage capacity helps to keep price spikes in check.

All this should result in lower bills for customers. But in addition to the investments in plants and pipelines, upgrades to an aging grid are bringing up costs, and utilities are increasing investments in renewable energy. 

DTE plans to drop its reliance on coal from 55 percent of its energy-source mix to 25 percent by 2030. Consumers in the past 10 years has dropped its coal use from 41 percent to 24 percent. Both companies will rely on renewables to buttress their natural gas baseload fuel.

These investments, too, will end up in customer bills. But these bills would be much higher if it weren’t for a lucky turn of history that has led to cheap gas arriving at a time of investment in cleaner energy, Andrus said.

“We’re basically financing going clean and green with the cheap gas,” he said.

DTE Energy Co.’s plan to switch from coal to natural gas will pick up speed in 2020. So far, it has given little indication of which plants it expects to close. An exception is its River Rouge plant. One of the plant’s two units failed in November, and the company has chosen not to revive it.

Total coal plant generating capacity, April 2016:

6,846 MW
Total generating capacity from all sources, April 2016:

12,890 MW

2015: 125 MW

2016-2020: 550 MW

2021-2025: 1,825 MW

2026-2030: 1,000 MW

TOTAL REDUCED CAPACITY: 3,500 Megawatts (est.)

Source: DTE Energy Co. business update from April 5, 2016

Crain’s Detroit Business; April 17, 2016