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Frequently Asked Questions
Concentric Energy Advisors PennEast Pipeline Study
THE ENERGY MARKET
What is a basis differential? A basis differential is the difference between the price of natural gas at two pricing points at a given point in time (e.g. the difference between production and market area prices). What is PJM? The PJM is a regional transmission organization that coordinates the movement of wholesale electricity in the mid-‐Atlantic region. For additional information, visit www.pjm.com. What is the difference between natural gas production area pricing and natural gas market area pricing? Production area pricing points represent the price of the natural gas commodity in a region in which there is significant natural gas production. Market area pricing points represent the price of the natural gas commodity in the area in which it will be consumed. It reflects not only the cost of the commodity itself, but also the cost of transportation and other value drivers based on circumstances in that particular market. What are extreme peak days? Extreme peak days are days when demand for pipeline capacity is very high and constraints in certain areas of the pipeline transportation network are observed limiting the supply availability to consumers. Are PA and NJ residents using more gas? Yes. Demand for natural gas in Pennsylvania and New Jersey has steadily increased from approximately 1,400 Bcf/year to 1,600 Bcf/year, which translates to an increase in the average daily demand from 3.835 Bcf/d to 4.385 BcF/d over the study period. Local natural gas distribution companies (LDCs) in Pennsylvania and New Jersey are projecting annual growth over the next three years, ranging from approximately .5 percent to 2.7 percent, further illustrating increasing demand. What were the reasons the 2013-‐2014 winter saw spikes in spot natural gas prices? There are a number of reasons for the spikes in spot natural gas prices that were experienced last winter in major demand centers along the east cost. These include: 1. Colder than normal weather that increased peak demands; 2. Constraints in natural gas pipeline transportation capacity attributable to weather conditions; 3. Lower than expected storage inventories; and 4. Increased reliance on natural gas for power generation in competitive wholesale electric markets. What does the study mean by “seasonality” of natural gas demand? The demand for natural gas in Pennsylvania and New Jersey rises significantly during winter months as residential and commercial customers use natural gas to heat their homes and businesses. Additionally, demand by electric generators in the winter months for heat and summer months for air conditioning increases winter and mid-‐summer demand, meaning the lowest natural gas use occurs in the shoulder months. Why is natural gas-‐fired electric generation expected to continue to grow? Many coal-‐fired power plants are being scheduled to retire, or being examined for natural gas conversions, due to the EPA’s Mercury and Air Toxics Standards set to go into effect. In fact, more than 80 percent of the capacity in the queue for development in eastern Pennsylvania and New Jersey is natural-‐gas fired, while less than 1 percent is fueled by coal. As a result of the historical and expected future reliance on natural gas-‐fired generation to meet electricity needs, demand for natural gas by electric generators is expected to continue to grow. Further, the U.S. Energy Information Administration reports that America has reduced greenhouse gas emissions to levels not seen since 1994, thanks in large part to the use of natural gas in the power sector. The switch to natural gas in power generation also reduces emissions of pollutants such as mercury, particulate matter, sulfur dioxide, and nitrogen oxides. Where have LDCs traditionally sourced their natural gas? LDCs in the northeast have traditionally relied upon gas supply purchased in the Gulf Coast, transporting it via long-‐haul pipelines to their service territories. Concentric has assumed that half the 1Bcf/d of capacity of PennEast could have been used to purchase Marcellus supplies rather than supplies from the Gulf Coast. METHODOLOGY
Why was the 2013-‐2014 winter chosen for the market savings analysis? Isn’t such a cold winter misleading? While the winter of 2013-‐2014 was in fact colder than other recent winters, it did not reach extreme levels, or “design” conditions for which natural gas distribution companies plan. Using the most recent timeframe for which data is fully available most accurately reflects current market dynamics, including recently constructed infrastructure projects, and provides a basis for reasonably estimating potential savings that could be achieved in similar circumstances, absent additional infrastructure, to mitigate the high natural gas prices experienced. As such, the pipeline infrastructure in the eastern PA and NJ region that now is operational is similar to the pipeline infrastructure that was operational for the 2013-‐2014 winter. That was not the case for periods prior to the winter of 2013-‐2014. Subsequently, it would be misrepresentative -‐ and misleading -‐ to use a prior period for the analysis. Explain the areas of potential savings that the PennEast Pipeline would provide? Concentric focused on four primary areas of potential savings associated with the additional pipeline infrastructure and lower market area natural gas prices: 1. Savings that could be achieved by electric consumers when natural gas-‐fired generation resources set the electric energy price based on lower market area natural gas prices. 2. Savings that could be achieved by electric consumers when natural gas-‐fired generation resources could displace less efficient and more costly oil-‐fired generating resources and set the electric energy price based on lower market area natural gas prices. 3. Savings that could be achieved by industrial natural gas consumers purchasing natural gas supplies at lower market area natural gas prices. 4. Savings that could be achieved by LDC customers when LDCs have the opportunity to purchase more natural gas supplies from lower-‐cost, local Marcellus Shale production as opposed to often higher-‐cost Gulf Coast production. Why does the study assume no savings would be achieved by lower electric energy prices on extreme peak days? Concentric took a conservative approach that no savings would be achieved by lower electric energy prices on extreme peak days. This approach was based on the assumption that lower natural gas prices may not be realized at certain points downstream of PennEast during extreme peak days due to other existing pipeline constraints. With limited generation unit data, it is not known whether the location of a generation unit setting the electric energy price was inside or outside of pipeline constrained areas that PennEast may serve; therefore, Concentric assumed no savings for reduced power generation costs during these extreme peak days. However, it is possible that additional consumer savings would have been realized due to the additional capacity offered by PennEast. ECONOMIC IMPACT
What could have been the savings if an additional 1 Bcf/d of natural gas would have been available during the 2013-‐2014 winter? It is estimated that if PennEast’s 1 Bcf/day pipeline was available in the 2013-‐2014 winter, then Pennsylvania and New Jersey residents could have saved approximately $893 million. What is the breakdown between electric market savings and natural gas market savings? Electric Market • Savings for gas-‐fired would have been $412.5 million • Savings for oil-‐fired generation displacement would have been $119.1 million Natural Gas Market • Savings for LDC gas supply procurement would have been $106.2 million • Savings for industrial transportation customers would have been $255.6 million