OREANDA-NEWS. States will likely try to find ways to fund new pipeline capacity if power markets remain unable to create incentives for gas-fired generators to pay for firm fuel supplies, according to top US electric sector officials.

Northeast and midcontinent power markets have faced growing problems as power sector demand for gas is rising and they lean heavily on a pipeline system built to serve local gas utilities. Those pipelines on cold winter days use most of their capacity to supply firm customers, forcing gas generators to pay high prices for fuel or to experience forced outages if there is no more fuel left to buy.

New England states last year tried to roll the costs of building new pipeline capacity into the region's electric grid tariff, but stakeholder opposition to the plan and questions over its legality doomed the effort.

The idea of funding pipelines through the New England grid's tariff "died and it is not coming back anytime soon," Independent System Operator of New England chief executive Gordon van Welie said today at an event hosted by the consulting firm ICF International in Washington, DC.

New England states are now looking at whether they can fund pipeline capacity individually, by requiring local electric utilities to sign up for firm pipeline capacity and resell it to gas generators. But van Welie said talks are still in their early stages, adding that it would essentially create a subsidy to gas generators.

The New England grid operator has introduced a "pay-for-performance" mechanism, taking effect in 2018, that the pipeline industry hoped should spur power sector firm transportation contracts. But van Welie thinks the more likely result will be for gas-fired plants to install oil tanks for backup rather than pay the higher cost of firm pipeline capacity. And lawmakers in the region likely will not be happy about that outcome, in part because of concerns over the higher carbon emission from burning oil, he said.

"The long-term solution is to increase the pipeline capacity of the region," van Welie said.

States outside of New England have similar concerns over gas-electric issues, driven by the reliability problems exposed during the extremely cold conditions in January 2014, when 40,200MW of capacity went off line on a single day in the PJM Interconnection.

Public Utilities Commission of Ohio member Asim Haque expects states will "take matters into their own hands" if fixes to reliability concerns fail to materialize or are insufficient. PJM has proposed its own non-performance penalties called "capacity performance" that would begin in 2016, but it is similarly expected to mostly drive investments in backup fuel rather than pipelines.

State utility regulators might find ways to support electric utilities that want cost recovery on paying for pipeline capacity at affiliate power plants, Haque said, but he had few ideas on what state regulators might be able to do for purely merchant plants.

"That is a problem I do not know there are truly solutions for," Haque said.