by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Presto Change-O! Like the Sorcerer’s Apprentice, President Obama waved his wand two weeks ago to initiate the regulatory process of transforming coal-powered electrical plants into gas-fired ones. Much like the student magician, he’s engendered some unintended consequences with this ambitious switcheroo—like the real possibility of blackouts in New England and the Midwest, where coal makes up a sizable portion of the generating industry’s energy portfolio.
You see, although the U.S. has natural gas aplenty, it doesn’t have enough pipeline to reliably deliver the clean fuel to every customer during periods of peak demand, like arctic cold spells. The situation already is acute in New England, where the pipes are running on full, according to Philip Moeller, a member of the Federal Energy Regulatory Commission. Moeller has been alerting government and industry to the problem for the past three years, following a February 2011 gas-supply fiasco in Texas, of all places. The problem could spread to the Midwest now that President Obama has instructed the EPA to draft rules that essentially will make coal-generating plants too costly to operate. A recent study that didn’t anticipate Obama’s fiat predicts that 65% of that region’s pipelines will run short of capacity in the next five years, says Paul Cicio, president of Industrial Energy Consumers of America.
We’ve already seen what can unfold when the mercury nose-dives. During back-to-back cold snaps in New England last January and February, natural-gas prices rose from less than $5 per million BTUs to more than $30 per million BTUs in about two weeks. Concurrently, the price for electricity soared from about $40 per megawatt hour to more than $200 per megawatt hour.
Because electrical usage fluctuates widely throughout the year, publicly held power companies are unwilling to sign so-called firm contracts for gas delivery, preferring instead to buy on the spot market. But spot supply can become spotty when demand spikes, because customers with firm contracts have preference for delivery over those with non-firm contracts. Furthermore, pipeline operators won’t lay new pipe unless they have firm, long-term gas contracts to justify the expense.
Moeller hopes the EPA bakes some flexibility into its pending rules to give regional gas markets time to evolve. He suspects, however, that the agency doesn’t fully appreciate the complexity of the markets or the monumental and time-consuming challenge of replacing a coal generating plant with a state-of-the-art gas generating plant.
Government officials who don’t understand the complexity of markets? I’m shocked — shocked! — to hear that assertion.