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Supplier Says LNG More Cost-Effective for New England Generators

As New England braces for another winter season, the largest supplier of liquefied natural gas (LNG) in North America believes power generators in the region would be better served by importing more LNG for their peaking needs, rather than entertaining the idea of building natural gas pipelines.

Last January, ISO New England Inc. (ISO-NE), the nonprofit regional transmission organization that serves New England, submitted a proposal to implement a "pay for performance" (PFP) system to FERC for approval (see Daily GPIFeb. 14). PFP would compensate the region's generators when they exceed their obligations during periods of system stress.

The Federal Energy Regulatory Commission (FERC) approved ISO-NE's PFP proposal on May 30 [ER14-1050-000, ER14-1050-001 and EL14-52-000]. The plan takes effect in 2018.

"It's really an issue of what to do between now and 2018," Frank Katulak, CEO of GDF Suez Gas NA (GSGNA), told NGI on Tuesday. "Generators haven't had incentives to get a firm gas supply, so they just put their bids into the daily market. As a result gas prices -- and, therefore, power prices -- spiked last winter. There's been a lot of focus on what to do."

Katulak said some of the representatives to states in NEPOOL, a voluntary association whose membership includes hundreds of New England market participants, have been looking to subsidize the cost of construction of gas pipelines in the region.

"There are a couple problems with that," Katulak said. "First, there's no provision in the electric tariff to do that. Second, given the challenges of building infrastructure in New England, as a realistic matter you're not going to get a new pipeline built by 2018 anyway. In the long run, we feel that LNG as a peaking solution is much more relevant in terms of being cost-effective and reliable.

"When you look at the cost of running a pipeline for what's really a 30- or 40-day peaking requirement, their demand charge is roughly $1.30/MMBtu. If you use it all up in 30 days, you're effectively paying a $15/MMBtu demand charge, and you have to make a 20-year commitment. LNG is something you can buy year-to-year, season-to-season or even on a spot basis. In the long run it ends up being far more cost-effective and flexible, and allows you to utilize the existing infrastructure that's already there."

According to Katulak, generators who buy LNG this winter on a take-or-pay basis and don't use it all by the end of the season can get some reimbursement from ISO-NE's PFP. But there's a problem.

"The amount that has been offered to generators is based on volatility," Katulak said. "Of course, natural gas is more volatile, so it's not enough of an incentive for generators. It doesn't compensate them for the risks that they take. We've had some interest from generators, but basically their reimbursement has been too low."

Despite this, Katulak was encouraged to see interest in LNG from other participants in the gas market, including gas distribution companies and marketers that sell retail gas to commercial and industrial customers. "We have had interest overall, and that's good because that means there will be more gas supply in the region come this winter," he said.

GSGNA operates an LNG import terminal in Everett, MA, and supplies LNG via tanker truck by a third party to utilities and 47 above-ground storage tanks throughout New England. More than 90% of the LNG it imports comes from Trinidad & Tobago, with some cargoes also arriving from Yemen.

GSGNA spokeswoman Julie Vitek told NGI on Wednesday that the company is actively marketing LNG toward new customers in the region. She said the terminal can comfortably accommodate up to six ships per month, with each carrying about 3 Bcf of LNG.

“As with any sale, volume, price and tenure -- spot, seasonal or long-term -- play important roles,” Vitek said. “The Everett terminal is well-equipped to handle additional demand for LNG in New England this winter and beyond.

“At peak times, the cost [of LNG] is competitive, if not less expensive, than pipeline gas. On a number of days last winter, spot prices for pipeline gas far exceeded the so-called ‘world price’ of LNG.”

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