In an effort to hedge against frigid winters and skyrocketing energy costs, the University of Connecticut hopes to save about $7.5 million in heating costs over the next five years, by entering an agreement that secures the delivery of natural gas to the Central Utility Plant at the Storrs campus.
The Board of Trustees took a step closer to that goal on Wednesday, by voting to authorize University administrators to develop a new contract with Connecticut Natural Gas to stabilize transportation costs of natural gas through 2022 at fixed rates. University officials anticipate that an agreement will be in place before the coming winter.
The goal of the new agreement is to provide budget certainty for the Central Utility Plant’s cogeneration operations (turning heat into electricity), and also to minimize the consumption of oil on campus, thereby furthering UConn’s goal of reducing its greenhouse emissions.
“We continually seek innovative contracts and partnerships with [energy] companies to promote conservation of our resources,” said Michael Jednak, associate vice president for facilities management. “Reduced consumption with the most resilient energy sources available results in a decreased carbon footprint, while still maintaining the levels of comfort and reliability that are expected to complete our mission as a leading research university.”
Over the past 15 years, demand for natural gas has increased dramatically in New England, spurred by a push to switch residential, commercial, and industrial energy generation from coal and oil to cleaner-burning and less costly natural gas. Power industry estimates show that by last year, 50 percent of the electricity produced in the Northeast came from gas-fired power plants. And because gas-fired power plants are more economical, demand for natural gas is sure to grow.
UConn’s Central Utility Plant, which provides electricity, steam, and chilled water to the Storrs campus, runs on natural gas or oil, but prefers gas as its fuel of choice. When the University buys natural gas, it must pay for both the fuel and transportation of the gas via the Algonquin pipeline, owned by Spectra Energy, one of a myriad companies that deliver natural gas to customers in the Northeast region.
Yet UConn’s reliance on imported natural gas makes it vulnerable to changes in natural gas prices and supply shortages. And because the University does not own any transportation rights on the Algonquin pipeline, it contracts with Connecticut Natural Gas for service, with pricing revised each year based on market conditions.
Hedging against another ‘Polar Vortex’
The ever-increasing demand for natural gas has pushed the current pipeline distribution system to its limits, increasing transportation costs and even forcing – especially during winter – the occasional shut-off of supply to utility customers in order to ensure residential supply, a process called curtailment. When gas delivery is stopped, oil is burned.
Thus for Fiscal Years 2010 through 2012, UConn paid Connecticut Natural Gas about $1 million per year for ”Basis,” or the cost of buying and moving the gas to New England from another part of the country. Anticipating pipeline capacity issues, the gas company increased UConn’s transportation charges to approximately $1.2 million in FY 2013; and $2.3 million in FY 2014. The $3.4 million UConn paid for transportation costs in FY 2015, were up nearly 300 percent from the FY10-FY13 periods.
Besides paying for the gas it uses, when delivery of gas is curtailed, UConn must then also pay for the oil it burns, and oil costs have fluctuated tremendously over the past few years.
For the winters of FY 2010 through FY 2012, curtailments were negligible. But in the winter of FY 2013, gas was curtailed for four days in January, requiring the Central Utility Plant to burn about 185,000 gallons of oil, valued at approximately $615,000.
Curtailments in FY 2014 jumped to 14 days, necessitating the burning of 660,000 gallons of oil, at a cost of about $2.5 million. And FY 2015 – the winter of the infamous Polar Vortex – brought an unprecedented 28.5 days of curtailment, costing UConn $3.1 million for about 1.3 million gallons of oil.
UConn has budgeted $4.5 million for natural gas transportation costs for FY 2016, but there is no guarantee of cost stability under the current contract, leaving the University vulnerable to volatility in oil and natural gas prices.
While upgrades to existing pipelines and investment in new distribution systems may eventually provide some cost relief, the move by UConn’s Board of Trustees seeks to take advantage of a project to increase the Algonquin pipeline transportation delivery system later this year.
Connecticut Natural Gas has a long-term contract with Spectra Energy for a sizeable share of this new capacity, and has offered UConn the opportunity to acquire transportation rights along the Algonquin pipeline for the relatively short period of five years, which will buy time to see how other pipeline projects progress and what impact they may have on gas transportation costs.
The new contract is expected to fix transportation costs at about $3 million annually, significantly reducing the potential impact of large annual rate fluctuations; it will also greatly reduce UConn’s consumption of oil through the Central Utility Plant. Although an unseasonably warm winter could create spot market transportation costs lower than the contract’s fixed costs, this being New England, next winter might just bring another Polar Vortex.