Low oil prices present early challenge to CT's $7B gas expansion

Written on: August 9, 2016 by ICM

August 8, 2016
Matt Pilon, Hartford Business Journal
When Connecticut launched its ambitious $7 billion, 10-year effort in 2014 to convert approximately 280,000 utility customers to natural gas, the plan’s success hinged on federal government projections that oil prices would climb for the next decade or more.
But that hasn’t happened so far. In fact, oil prices nosedived in 2014 and have remained at depressed levels, causing the state to fall behind its projected natural gas conversion pace early on.
Utilities say they’re confident they can make up for the slow start, but if oil prices remain low, getting 280,000 conversions may be difficult, because there would be less potential savings incentivizing customers to invest in required equipment to make the switch.
Hitting a smaller number of conversions could mean lower reductions in greenhouse gas emissions — though it’s not clear exactly how much — which may imperil the state’s chances of reaching its pledges to reduce greenhouse gas emissions over the next 34 years.
Fewer conversions could also hurt the economic impact of the program, which has created work for gas and construction crews.
In late 2011, two economists at the Department of Economic and Community Development calculated that the expansion would result in a net $4.1 billion increase in state GDP over the life of the program, assuming price differences at that time.

Bad timing

Improving the environment and creating economic benefits, including jobs and customer savings, were the two main reasons the legislature instructed the Department of Energy and Environmental Protection (DEEP) to develop a gas conversion plan in partnership with the utility companies.
But the market conditions under which the plan was hatched haven’t endured. The conversion plan’s original goals were based on 2012 forecasts from the U.S. Energy Information Administration (EIA), which predicted oil prices rising from $3.46 per gallon to $4.85 after 2025. A barrel of crude had been averaging $96 when state officials released the plan in 2013, but prices fell suddenly a year later. Today, crude is hovering below $50 — levels not seen since 2009.
A gallon of heating oil is in the low $2 range.
Utilities and state officials say natural gas remains a cheaper and cleaner heating source, despite oil’s fall, but the narrowed cost gap between the two fuels means a longer payback period for those who make the switch to gas.
That’s made it more difficult for the state’s two utility parent companies, Eversource and Avangrid, to convince oil-heat users to shell out or borrow thousands of dollars to convert to new equipment, such as boilers and furnaces, needed for natural gas heat.
“[Gas is] still cheaper, it’s just the payback is not quite as significant as it used to be,” said Michael West, a spokesman for Avangrid, the parent company of Southern Connecticut Gas (SCG) and Connecticut Natural Gas (CNG).
West said Avangrid still plans to meet its 200,000-conversion goal by 2023.
Both utilities and the Connecticut Green Bank offer low-cost financing options to incentivize conversions. The average residential ratepayer must spend $7,500 to convert, while commercial and industrial customers average $20,300 and $40,600, respectively, according to the state’s 2013 Comprehensive Energy Strategy (CES), which was overseen by DEEP.
Whereas the average homeowner who converted to gas in 2014 could expect upwards of $800 per year in savings, according to the CES, persistently low oil prices have lowered that amount.
“There was certainly a bigger difference between heating oil prices and natural gas prices [in 2013],” said Katie Scharf Dykes, DEEP’s deputy commissioner. “The gap has narrowed, so it makes sense that some folks would defer or choose not to switch.”
Connecticut Energy Marketers Association President Chris Herb, whose organization opposed and legally challenged the conversion plan, said he warned officials at the outset not to base policy on energy prices. “We told the state existing circumstances could change and we were almost immediately correct,” Herb said.
See related story: Oil dealers take fight to High Court

Some setbacks

All three gas utilities reported to the Public Utilities Regulatory Authority (PURA)that they met or exceeded their customer conversion goals in 2014.
However, PURA determined that 25 percent of Eversource-owned Yankee Gas’ conversions didn’t count because the new natural gas meters, though contracted, hadn’t started spinning before the end of the calendar year. As a result, PURA said Yankee actually fell short of its 5,207-customer goal by 1,362.
“Unfortunately, some customers delayed completing their conversions,” Eversource spokesman Mitch Gross said.
In 2015, it was Avangrid that ran into a challenge. Sluggish customer adoption forced SCG and CNG to reduce their combined original goal for the year from 16,900 conversions to 10,949. Avangrid cited the unanticipated persistence of low oil prices for the revision. The company was able to exceed its revised goal last year by 327 units, reaching 11,227 conversions for 2015, West said.
Through May of this year, Avangrid has converted nearly 3,000 customers towards its annual goal of 10,500, West said.
As for Eversource, its overall goal also remains the same — 82,000 conversions, Gross said. As of May, Yankee had completed 1,676 of its 7,067 conversion goal for 2016, said Gross, who noted that the pace of conversions tends to ramp up as winter approaches.
Gross said Eversource is seeking to entice customers by offering a free 40-gallon water heater for those who convert by the end of August, in addition to a $250 credit.
Eversource also offers a heating equipment rental program that allows customers to switch without an upfront investment, he said.
West said utility companies can’t control the macroeconomic factors that influence oil prices, but he said it’s easy to remain bullish on gas because of the large domestic supply.
“The underlying issue is demand for gas hasn’t changed,” he said. “It’s still very strong.”
And though utilities are building out gas mains as part of the expansion initiative, many residents in a number of Connecticut communities — particularly those in less populated rural areas — still can’t get gas, partly due to the prohibitively expensive cost of extending lines.
Dykes, DEEP’s deputy commissioner, said she remains confident about the program, adding it’s always been about expanding the number of ratepayers who have a choice to convert.
“I feel confident we have a regulatory framework that enables projects to go forward when customer demand is there,” she said.
Elements of that framework include gas utilities factoring in economy-of-scale savings for building out gas infrastructure for “clusters” of customers, such as neighborhoods or large manufacturers, rather than calculating for single customers.
Dykes said the plan will also benefit existing ratepayers in the long run, because more gas customers means utility costs will be spread across a broader base.
In the meantime, the plan has built-in mechanisms to protect existing gas customers from price volatility, including a rate premium for those who convert and requirements for utilities to secure a certain number of new customer commitments before they start a gas construction project.
The Comprehensive Energy Strategy is due for an update, and a draft is expected later this year. Will the state recommit to its gas conversion plan?
“We’ll definitely be assessing how well the plan has performed over the last couple of years in providing choice to customers,” Dykes said.
Courtesy: HartfordBusiness.com