Pipeline* - Local Natural Gas Distribution Companies - Natural Gas in New Hampshire Part 3

In my last post, I finished off by introducing the two local natural gas distribution companies (LDCs) here in New Hampshire that deliver natural gas to residential, commercial, and industrial customers through their distribution networks. As a reminder, I again present the map below  which shows the service areas of these two LDCs.

Source: NHPUC

The first and largest of the NH LDCs, with about 89,000 residential, commercial, and industrial customers as of 2012, is EnergyNorth which does business under the Liberty Utilities umbrella. Liberty Utilities has the franchise for the distribution of natural gas up the Merrimack corridor to the Lakes region—where they tap into a branch of the Tennessee Gas pipeline—and the tiny Berlin “island”, where they draw off the Portland Natural Gas Transmission System Pipeline that crosses the northern part of the state. EnergyNorth was, for many years, a standalone natural gas distribution company, but has recently been through several ownership changes. In 2000, it was acquired by Keyspan. In 2006, National Grid, a UK utility company, acquired Keyspan. National Grid then sold EnergyNorth to Liberty Utilities in 2012. Liberty Utilities is itself part of a much larger, multifaceted energy company, Alqonquin Power and Utilities Corporation. Alqonquin owns hydroelectric, wind, and solar generating facilities, and well as water, natural gas, and electricity distribution businesses in the US and Canada. Alqonquin Power and Utilities is headquartered in Oakville, Ontario, and is listed on the Toronto Stock Exchange. Liberty Utilities also has a smaller business distributing electricity to about 43,000 customers in the west and south regions of NH.

The other natural gas LDC is Northern Utilities, which operates under the Unitil name. This is a smaller natural gas and electricity distribution company with operations in Maine, NH, and Massachusetts. In NH, their gas distribution business is limited to the sea-coast area where they draw of the Granite State Gas Transmission pipeline which runs up the coast to Portland, Maine.   In 2012, they had about 30,000 natural gas customers. Northern Utilities Company has also been through many ownership changes. It was purchased by Bay State Gas in 1979, which  merged with NiSource in 1999. NiSource then merged with the Columbia Energy Group in 2000 and, in 2008, Northern Utilities was purchased by Unitil. Like Liberty Utilities, Unitil is also in the electricity distribution business in NH. Unitil is a publically traded corporation listed on the NYSE and is headquartered in Hampton, NH.

There are two aspects to the business of the LDCs. The first is creating and operating the natural gas distribution pipeline and the other is providing the gas that the customer uses. This is the reason that NH natural gas users are charged separately for natural gas distribution services and for the natural gas commodity itself (see Jumping Jack Gas for a typical breakout of a NH natural gas bill).  Establishing and operating a gas distribution network is a complicated, expensive,  and highly specialized business so these utilities have the sole right to distribute natural gas in a specified area - a monopoly - on condition that it is done cost-effectively, safely, and that the service is reliable. As a consequence of the monopoly awarded to these companies, they are tightly regulated by the New Hampshire Public Utilities Commission. (For a primer on public utilities, see What’s It All About, Alfie?)

In NH, the natural gas business is partially deregulated. Only the large industrial and commercial customers can choose their natural gas supplier from competitive suppliers. Residential users have no choice and are obligated to purchase their natural gas from their local distribution company. The LDCs therefore distribute natural gas supplied by others in the case of commercial industrial customers or supplied directly by themselves directly for residential customers.

Operating a natural gas distribution company is a challenging business. As we were reminded again by the gas explosion in New York last month that killed eight people and leveled two buildings, handling, transporting, and safely delivering a combustible fuel takes special technology and unique precautions. When the pipelines leak and the leaks go undetected or unreported, the consequences can be disastrous. The LDCs have a safety-first approach and are very concerned about running a safe distribution system. They react rapidly to reports of natural gas leaks. We, as citizens, also bear some responsibility for natural gas safety and we should promptly report leaks when we smell that distinctive natural gas smell. All excavation projects, including simple home projects like planting trees and shrubs, should be first cleared by a call to the Dig Safe hotline at 811 so that they can come out and mark where your utility lines run. Nothing quite spoils a gardening or home construction project like puncturing a natural gas line: you really don’t want to be that guy who caused the whole neighborhood to evacuate on a Sunday morning! 

Source: Flickr - Eugene Peretz

One of the prevailing safety issues is that the original gas distribution piping was made of unprotected cast iron or bare steel buried underground. After years of underground exposure, these pipelines slowly corrode and, in areas where soil moisture is high or the conditions are highly corrosive, corrosion can be severe and leaks can occur. The picture below shows a piece of highly corroded pipe removed from a natural gas distribution network in NH. The LDCs have active programs in place to replace steel pipe with newer and safer high tech plastic piping, but this is an expensive endeavor with costs of the order of $1.5 million per mile. Over the years, the utilities have replaced a great deal of their networks with plastic distribution pipelines. The latest pipeline report indicates that only 155 miles (8.2%) of the 1875 miles of piping in NH is still made of iron. Compare this to NYC, where 60% of distribution mains are still made of cast iron or bare steel and where some of the lines are over 100 years old.

Corroded Natural Gas Pipeline from Nashua, NH Area

Source: NHPUC Filing

These LDCs are an important component of the business infrastructure for NH and, like all other businesses, they are looking to grow and to earn a return on their investment. However, they face some unique challenges. From my research and discussions with some of the LDCs and other folks who have been in the natural gas business for a long time, I got an improved understanding and appreciation for their business and challenges. Here are some of the interesting things I have learned:

• LDCs make their money from the distribution of natural gas and not from the sale of gas. The natural gas is passed through to their customers on a dollar-for-dollar basis. They are not allowed to mark up the price of natural gas that they purchase and resell. In the case of commercial and industrial customers, they simply transport gas provided by a competitive supplier.
• Because the LDCs are regulated utilities with a monopoly in their service area, any rate changes to their services need to be approved by the regulators at the NH Public Utilities Commission. 
• In the rate-setting process, several factors are taken into account, the key one being the investment the LDCs have made in distribution equipment and facilities (pipelines, compressor stations, trucks, etc.) as well as the working capital used to operate their business. These investments are collectively known as the rate base. Expenses such as payroll, administration, and taxes are also taken into account. Because LDCs are for-profit business, they are allowed to earn a return on their distribution services, however, the rate of return is capped by the regulators, and is typically in the range of 9 to 10% on the equity invested.
• Rate-setting is a complicated business and rate cases presented by utilities are expensive and lengthy endeavors requiring a great deal of review and analysis by both the LDC and the regulators.
• Growing the natural gas distribution business is expensive and challenging. The reasons are complex, but an important aspect is that within the networks, the LDCs have already been very successful in signing up natural gas customers. In their service areas, which is considered to be within 100 ft of natural gas main, the LDCs have already signed up about 80% of potential customers. This significantly limits potential growth in their customer base from within their existing distribution network. Growth needs to come from expanding the network.
• At the same time as the natural gas utilities are trying to grow their businesses, there is a negative impact on natural gas usage due to energy-efficiency measures  in homes and the “natural” turnover and replacement of aging heating units, such as dryers and stoves, to more efficient units.

As public utilities, the LDCs are required to submit annual reports to the NH Public Utilities Commission. These reports make for compelling reading. Here are some interesting details that I gleaned from an examination of the 2012 annual reports (2013 reports are not yet available):

• These are capital-intensive business with profitabilities of the order of 5%.
• Revenues per customer are ~$900 per year and net income per customer is only about $50/year, which is not a great deal.
• The bulk of their costs are associated with the purchase of natural gas (about 60% of their overall expenses).
• Other costs include typical operations and maintenance costs, depreciation, administration and debt service expenses.
• The LDCs keep a small supply of liquefied natural gas at storage facilities on hand to assist with supply shortages. Some will even use propane when natural gas is in short supply and some LDCs have even purchased storage capacity at underground storage locations located in other parts of the US to ensure gas supply during periods of high demand.  

A question often asked is why the natural gas utility cannot provide natural gas to your home. The main reason is that there may not be a natural gas main pipeline nearby. The service area for a natural gas company typically lies within 100 ft of a mainline: anything further becomes too expensive. Expansion of service area by the laying down of new distribution piping is expensive and consideration must be given to the costs of pipeline extensions, housing density, and the probability of signing up new customers. Moreover, regulators are very sensitive to the “socialization” of expansion plans so they do not want network expansion plans funded by rate increases for existing customers. New pipelines, which cost about $1 million per mile, have to be paid by new customers. As noted earlier, the income per natural gas customer per year is low so capital recovery and return on investment requires a very long period. It is for this reason that expansion in natural gas service areas is a slow, measured, and carefully evaluated process.

Laying new natural gas distribution pipelines. 

In my next post, I will take a closer look at retail natural gas pricing in New Hampshire, which turns out to be a fairly complicated matter.

In the meantime, remember to turn off the lights before you leave the room and call Dig Safe at 811 before starting to dig.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

Click on this link to receive email notifications for Energy in New Hampshire updates

[*Pipeline – A great 1960’s surf music instrumental by the Chantays. I have always have loved the way this tune kicks off with that distinctive riff. You just know there are good things to come. Here is Pipeline, covered by Stevie Ray Vaughn and surf guitar god, Dick Dale.] 

Post 11 – Keeping up with the Joneses – How are We Doing Compared to Our New England Neighbors?

Over the past months, I have lasered in on the energy profile of New Hampshire but have provided relatively little comparative data to give you a sense of how we are doing relative to our New England neighbors. So this week we are going to look over the fence and see if we are keeping up with the Joneses.  

Let's start off by looking at energy intensity. If you recall from my last post, there are two measures of energy intensity: there is the amount of energy that goes into producing one dollar of GDP and then there is energy use per person. These energy intensity measures are presented in the table below for the six New England states. Averages for New England and the US are provided for comparison.
 

 

The first thing to note is that Connecticut is the most energy efficient state as they use substantially less energy than the rest of the New England states to produce a dollar of GDP. In fact, they are at an impressive 48% of the US average consumption. New Hampshire sits squarely in the middle of the pack, with energy intensities close to the New England average. Maine has the poorest energy intensity figure for New England. Their energy requirement per dollar of GDP is even above that of the US average. Part of this is due to that fact that Maine has more energy intensity industries, particularly the paper and pulp mills. Maine uses 34% of its energy consumption for industrial usage, the highest of any of the New England states. Here in New Hampshire we only use 14% of our energy consumption for industrial purposes.

 

When we look at the energy use per capita, we note that the New England states use less energy per person than the US average. However we also note, a little unexpectedly, that little Rhode Island has the lowest use per person, which suggests a complicated relationship between economic output, personal and industrial energy usage for the New England states. (It also leaves me with a mental image of all those Rhode Islanders huddled into those big, fancy Newport, RI mansions in the winter months collectively reducing their per capita usage.)

 

Because of its energy intensive industries, Maine tops the list in per capita usage for the New England states and New Hampshire again finds itself in the middle of the pack. By both measures of energy intensity, the New England states are at about 72% of the US average.

Let's turn now to the overall energy supply portfolio and compare the New England states. Energy supply is equal to the overall gross energy inputs into the states and excludes the effect of any energy exports. This is the most straightforward basis of comparison and also allows contrast with national numbers. The two doughnut charts below show how the New England states compare to the US as a whole.

 

 

A few key differences are notable. The New England states are more heavily dependent on oil and natural gas than the rest of the US, but a substantially smaller portion of our energy supply comes from coal – only 5% of our energy consumption comes from coal vs. 21% for the US. This suggests we are more vulnerable to oil price and natural gas prices increases. On the other hand, we have more energy from non-fossil fuel sources, nuclear and renewables, 22% vs. 17% for the US.

 

The collection of charts below shows the same set of energy source allocations for the individual New England states.

 

On examination of these charts we learn the following:

• New Hampshire has the lowest dependence on oil and, except for Vermont, the lowest dependence on natural gas. Much of this is driven by the large amounts of nuclear power we generate.
• Massachusetts is highly dependent on fossil fuels, particularly oil and natural gas.
• Vermont has very little natural gas but a lot of nuclear power, no coal-burning plants, a decent amount of renewable energy and, of the New England states, the highest percentage of imported electricity. Seeing Vermont's high dependence on nuclear, all from the Vermont Yankee Nuclear Power Plant, makes one wonder what Vermont would do for power requirements if they closed down the plant.
• Maine burns almost no coal but a good amount of oil and natural gas. However the large component of renewable energy in the ME energy portfolio took me by surprise and left me scrambling to do more research. According to the Energy Information Agency, Maine generates a lot of electricity from hydroelectric operation and burns an enormous amount of wood for electricity generation and heating purposes. They also have a larger number of wind projects than the other New England states.
• Rhode Island is highly fossil-fuel dependent, with 96% of its energy requirement coming from oil and natural gas. There is no coal burning in RI and only a small amount of renewable energy.
• Connecticut is similar to New Hampshire, with a good amount of nuclear power but the state is still heavily fossil-fuel dependent and has relatively little renewable energy.

So what are our main takeaways from all this information?

1. Compared to the Joneses, i.e., our New England neighbors and the rest of the US, we, here in NH, have room for improvement. We are at 70% of the US average which is good, and we are neither the best nor worst of the New England states. Connecticut and Rhode Island set the standards for energy intensity.
2. Clearly New England, and especially our neighbors, is not coal country. There is no coal burning in Rhode Island and Vermont and very little in Maine. Coal usage is low in New Hampshire, Massachusetts, and Connecticut and, driven by cheap natural gas and more stringent environmental regulations, there will be further reductions over time.
3. Overall, in terms of renewable energy, New Hampshire does well, with 11% of the energy supply from renewable sources. Only Vermont and Maine do better. However, we are all still highly dependent on fossil fuels for our energy needs.

Each state has its own particular challenges. Vermont is struggling with decisions regarding an aging nuclear power plant, Rhode Island with its 96% dependence on oil and natural gas, and the rest of us with the fate of coal-fired power plants. Ultimately, I believe a portfolio approach to energy is best. We need more renewables, we need more nuclear, we need more natural gas and, in the meantime, coal has a place and needs to be part of our portfolio. Prudent energy planning requires that we reduce energy risk by not becoming too dependent on any one or two energy sources. We want to avoid the situation that the Rhode Island, with its over-dependence on oil and natural gas, finds itself in. Any substantial increases in the costs of these fossil fuels will have disastrous impacts on the already strained economy in Rhode Island.

 

I am fond of telling my students, in the MBA in Energy and Sustainability program at Franklin Pierce University, that when it comes to energy, there is no free lunch. Every time we turn on a light, drive to work or take a hot shower we create an impact on society, the environment and the future of our planet. Good energy decisions require data, analysis, planning, impact assessment and, ultimately, the implementation of difficult decisions that will impact someone. We owe it to future generations to make these difficult decisions now and to reduce our energy consumption. It really is time to stop kicking the empty oil can down the road or into our neighbor's yard. Most of us, I believe, understand that we need to do something concrete rather than fighting every energy project that comes our way. The challenge is figuring out what we need to do. What do you think we should be doing?

 

Until next time, remember to turn off those lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/17/13

Click on this link to receive email notifications for Energy in New Hampshire updates

The 25 by ’25 Renewable Energy Initiative for New Hampshire – Can We Do It? - Part 1

With a new governor in place, I have been giving some thought to the initiative enacted by Governor Lynch in 2007 that New Hampshire should aim to get 25% of its energy from renewable resources by 2025 – the so-called 25 x '25 initiative. With my recent posts on renewable sources and their contribution to the NH energy supply, I was wondering how we are doing and if we are making progress towards the 25 x '25 goal. Until a few years ago, the New Hampshire Office of Energy and Planning, OEP, had been calculating and recording our progress, but they have not updated their information in a while. The last available numbers were for 2008 so in the next few posts I will be presenting updates of the OEP numbers and will be taking a closer look at the feasibility of the 25 x '25 goal and what it will take to achieve it.  

The goal is 25% renewable energy by 2025 but we need to start off by asking the question: "25% of what?" According to the OEP, the "what" is net energy usage. Net energy use refers to the energy we use in-state and excludes that associated with any energy exports. In our case, we export 51% of our produced electricity, so we need to subtract the energy used to produce this exported electricity from the gross, or overall, energy usage by NH to generate the net energy number.

All my blog posts and previous calculations, to this point, have referred to overall energy use by New Hampshire, so for net energy usage we need to reduce the 409 trillion BTU overall usage by the 113 trillion BTU used to produce exported electricity, leaving us with a new number: 296 trillion BTU. This is our net energy usage for New Hampshire for 2010 and will be the basis for the calculations and discussion for the next few blogs.

With the net in-state energy usage in hand and using the renewable energy numbers from previous blogs, we should be ready to calculate the percentage of renewable energy. Ah, if only it were so straightforward. Instead, we now face an intriguing dilemma: this revolves around how we look at that exported energy (electricity exports plus the energy waste associated with its production). The electricity produced in NH comes from renewable and non-renewable sources and even though the electrons involved in electricity flow from these sources are indistinguishable, we can view our produced electricity as a blend of green electrons (those from renewable energy) and brown electrons (those from fossil fuels and nuclear). So, when we export electricity are we exporting just brown electrons or a blend of green and brown electrons? As I have noted the electrons are indistinguishable, so we are, in essence, just playing an accounting game but this is an important game with important consequences. If we take the position that exported electricity is indeed a blend of green and brown electrons then we need a commensurate reduction in the amount of renewable energy we can claim for in-state use. Specifically: we export 51% of electricity production, so we need to reduce the renewable fraction that goes into electricity production by 51%. This significantly reduces the amount of renewable energy we can claim. On the other hand, if we take the position that we use all the green electrons in-state, then we can claim all that renewable energy that goes into electricity production.

Which is the correct answer? Well, the OEP sidesteps the issue of the correct answer by calculating the percent of renewable energy data for both scenarios. In my calculations, I adopted that same convention by performing calculations for both scenarios as well. The results of my calculations for 2010 are shown in the following table. I have used headings and formats similar to the OEP results to make for direct comparison. However, it should be noted that my methodology is a little different from that of the OEP as I have used the NH data and energy accounting approach from the Energy Information Agency, EIA, exclusively and I do not include imported electricity in accounting for renewables - even though it might be from hydroelectric operations in Canada.

At first glance, the results are not encouraging. Even if we lay claim to all the green electrons for in-state use, Option 1, we are at 14.7% renewable energy with 13 years to go. The situation is even worse if we calculate on the basis that we are exporting a blend of green and brown electrons, Option 2. In this case, we are only at 9.1% renewable energy. However, this still begs the question – which is the correct number? Well, it depends on who is playing the game and making the rules. Nevertheless, my vote is for the higher number, the one comes from grabbing all of the green electrons for ourselves. The basis of my choice that the calculation is simpler to perform, and this is an extraordinarily complex scientific reason - it is a larger number - which makes the 25% easier to achieve!

Feeling somewhat gloomy about where we presently stand, I wanted to see if we were, in fact, making progress since the 2007 start of the 25 x '25 initiative. If we were - and it was rapid progress – it would certainly be encouraging. I therefore went back a few years to calculate the percent renewable data for both options which I have presented in the chart below. I have included the earlier OEP numbers (shown as red X's) in the chart below and even though, as noted earlier, my methodology is somewhat different from that of the OEP, the agreement between the two data sets is good.

Since the start of the initiative in 2007, we have, using Option 1, gone from about 12% to almost 15% renewable energy which is commendable progress over the past 3 years. (With Option 2, we have only gone from 7.5 to 9.1% which is not as commendable and therefore, for the "complex" scientific reasons noted above, we will ignore it going forward.) At this rate – about a 1% increase per year – reaching 25% by 2025 looks achievable, which is rather encouraging. However, while we are basking in the warm glow of our collective achievement, let's take a closer look at the two sets of data that generated this chart. Specifically, let's examine net energy usage and renewable energy production in NH separately, which I have done in the bar chart below.

A closer review of this data reveals that most of the change in the renewable energy fraction has occurred as a result of the reduction in the in-state energy consumption over the past few years. We have gone from 325 trillion BTU in 2005 to 295  trillion BTU in 2010 – an impressive 9% decrease in 5 years (an annual compounded decrease of 1.9%) but, and this is rather crucial, an examination of the renewable data shows that there has been little change in the amount of renewable energy we produce in-state. As a result, we need to conclude that our progress toward the 25% renewable energy goal to date has been on the back of energy savings - and not from increased renewable energy.

Going forward, can we continue to rely on further energy savings to get us to 25% and how realistic is this? It also requires us to ask the question – where are these energy savings coming from – are they the result of a general economic slowdown in the state accelerated by the Great Recession, high energy prices, a shrinking population, the success of energy savings programs, or some other reason? This is certainly worth closer examination and I would be interested in your opinion. For the moment, and for an energy savings geek such as myself, regardless of the reason these energy reductions are positive and are certainly propelling us towards our goal. But we should stop here and ask ourselves - are they sustainable? In my next post, I will look at how net energy usage is allocated in the state and what we need to do in terms of more energy savings and/or renewable energy increases to achieve the 25 x '25 goal. It might be more difficult than we think.

 Until next time, remember to turn off those lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/10/2013

Click on this link to receive email notifications for Energy in New Hampshire updates

 

Renewable Energy in New Hampshire – Part 1

In this week's post, I am going back to some of the early analysis I did so that we can take a closer look at renewable energy in New Hampshire. As shown in the figure below, about one-tenth of our energy supply comes from renewable energy sources. Transportation - largely ethanol in gasoline -  accounts for 12% of the renewable energy supply, heating for residential and commercial buildings uses 9%, industrial operations, 4%, and three quarters goes directly to the generation of electricity. In fact, renewables make up 15% of the energy that goes into electricity generation in the state.

 
At this stage, you might be asking yourself "What is in the renewables box?" so let us take a closer look at this. If we pop open the renewable energy box, we find the pie chart below.

 
By taking a look at the various slices of the renewable pie, we see that energy from burning wood and waste makes up just over half of the renewable energy produced in the state.

I was a little surprised at the large slice of wood and waste, and my first thought was that a lot of this energy comes from the incineration of municipal solid waste (MSW). As it turns out, I could not have been more wrong: MSW incineration is only about 2% of the renewable energy category. The bulk of the wood and waste slice is from the burning of wood and other biomass to generate electricity. It turns out that there are seven wood-burning power plants in the State and two more under construction. These wood burning plants are responsible for three quarters of the wood and waste slice (or 4% of the overall energy consumption in NH). My estimation is that 8% of the total energy input into electricity production is from wood. This is a lot larger than I anticipated and clearly fodder for a future post.
 
The remaining quarter of the wood and waste slice is from the burning of wood and wood pellets in homes and businesses. I, for one, am impressed that the Energy Information Administration, EIA, that put together all this valuable information is able to collect reliable information on firewood and wood pellet sales. A lot of these sales are to individual homeowners, only some of which are sold at retail. A good portion must be from individuals buying and selling truckloads of firewood to one another and, in many cases, even from trees on one's own property. This figure must be extraordinarily difficult to measure or estimate.

Turning back to the pie chart above, we can see that hydropower makes up about one-third of the renewables pie which goes directly into the electricity supply for the state. Corn-based ethanol, which is now part of the gasoline in our automobiles, represents 12% of our renewable energy use. How renewable this food-based energy source actually is, is debatable, but I will take another opportunity in the future to grind that particular axe. Wind is a relatively small component, only about 2% of renewable energy and driven largely by the Iberdrola wind farm in Lempster. With new wind projects underway, this portion will increase in the future. Solar thermal and photovoltaic are a minute fraction and, at this time, geothermal does not even feature in the EIA numbers. However, there are a good number of geothermal applications in the State but these tend to be small-scale residential or commercial-based installations and are thus difficult to track. It could be interesting to review this sometime in the future.

The pie chart shows where we were in 2010 regarding our renewable energy portfolio in New Hampshire. For our state it is largely a lot of wood and hydropower. Next week, in Part 2, I will be taking a look at historical trends in renewable energy and will look at where we might be going and if we should be spending so much time, effort and tax dollars supporting renewables.

 
Until next time, remember to turn off those lights when you leave the room.

Mike Mooiman

Franklin Pierce University

mooimanm@franklinpierce.edu

2/3/2013

Click on this link to receive email notifications for Energy in New Hampshire updates