New market mechanisms and gas infrastructure investments will be...

New market mechanisms and gas infrastructure investments will be needed to bridge the gap

The natural gas infrastructure in North America—pipelines and storage facilities—has grown over decades to transport gas based primarily on long-term, take-or-pay contracts between pipeline operators and customers (typically gas marketers or large buyers, like utilities or industrial companies) that pay a reservation charge (or tariff) for capacity.

In the coming decades, the capacity of the natural gas system will have to be increased to allow it to deliver on peak-demand days when renewables cannot generate at full capacity, even in areas currently not impacted by insufficient pipeline capacity. However, expanding this gas infrastructure capacity and maintaining the existing gas infrastructure will require new investments, though the capacity will be utilized at a much lower rate. The regulatory and market mechanisms that will support such investments are the key unlocks in this regard.

Addressing this challenge requires collaboration across the entire value chain—gas producers, pipeline operators, utilities or power producers (PPs), ISOs or regional transition organizations (RTOs), and policy makers—and a recognition that the solution needs to balance out the three imperatives of decarbonization, affordability, and reliability.

Pipeline and storage operators:These operators in particular will be affected by this. Together, lower average gas demand and the costs of increasing gas infrastructure capacity pose a unique challenge for pricing the delivery of midstream gas services to customers.

Current patterns of compensation for gas assets (such as storage facilities and transport pipelines built for predictable demand at moderate volumes) are not designed for this volatile demand. If these patterns persist, end users will likely be forced to pay for year-round access to a gas supply they may only need a few times a year. Additionally, pipeline operators have proposed peaking services to address some of these issues, which require investments (for example, flexible storage assets or new pipeline connections). However, in the current regulatory environment, investment costs often are not allowed to be passed onto customers.

Participants in the natural gas market will need to choose carefully how they approach the conundrum to justify gas infrastructure investments. One option is to continue to offer connection tariffs. The weakness here, however, is that customers will have to pay for infrequently used gas infrastructure capacity. For example, gas infrastructure capacity could be booked on a monthly basis with a fixed reservation charge. Peaking power plants would often not know whether they will dispatched and therefore may find it uneconomic to pay a monthly reservation charge. Another option is to offer customers hourly, pay-as-you-go payment plans, which may require regulatory support and customers’ willingness—such as power generation utilities—to pay high hourly rates for short periods during peak gas demand days (Exhibit 4).