The northern hemisphere winter is approaching, which means more opportunities for amusement or shock at New England’s masochistic energy policies. Massachusetts and neighboring states have denied themselves access to abundant US natural gas in the Marcellus shale in Pennsylvania by preventing the construction of new pipelines that would connect them. As with most initiatives embraced by climate extremists, this one rests on the questionable belief that making it harder to use natural gas for power generation will somehow shift demand to renewables.

The US Energy Information Administration (EIA) is forecasting a 7.5% increase in the retail price of electricity this year. However, the pain of higher energy prices will not be spread evenly. Eversource Energy, a New England based utility with about four million customers, recently more than doubled rates from 10.67 cents per Kilowatt Hour (KWh) to 22.57 cents per KWh.

The New England Independent System Operator (ISO) reports that last year natural gas represented 46% of the energy used to generate electricity, above the US average of 38%. Liberal politicians in Massachusetts and neighboring states may be hoping that preventing new natural gas pipelines will somehow reduce its consumption, but instead shipments of Liquefied Natural Gas (LNG) are covering the shortfall. On its website the ISO notes that following the shale revolution, “… natural gas generators became the go-to resource for New England.” Not sharing politicians’ zeal to impede access to reliable energy, the ISO warns, “… we are finding that during severe winter weather, many power plants in New England cannot obtain fuel to generate electricity.”

In August Boston took delivery of its tenth LNG shipment of the year, bringing their seaborne imports to 16 Billion Cubic Feet. They have to compete with strong demand from European buyers, where LNG prices have been as much a 10X the US Henry Hub benchmark, currently around $8 per Million BTUs (MMBTUs). If Boston paid a mere $30 per MMTBU premium, that’s almost $0.5BN more in expense than if they were able to access this supply domestically.

Customers in New England are used to paying more than the US average for electricity. Retail sales of electricity in Massachusetts are around 50 Million Megawatt Hours annually. The average US price is 10.19 cents per KWh. In Massachusetts it’s 18.19 cents.

CO2 emissions have fallen over the past decade across the US to around 5.2 Gigatons (2019), down by 4.4%. Coal to gas switching is the biggest driver. Massachusetts has done a little better, lowering emissions by 7 million tons or about 10%.

If we assume that residents of the Bay state are paying an extra 5 cents per KWh for their electricity to achieve this CO2 reduction, that works out to $2.5BN in added expense. Divided by the 7 million tons of reduced CO2 means Massachusetts is spending $357 per ton.

This is an astronomical amount. The recently passed Inflation Reduction Act provides tax credits of $80 per ton for CO2 that is captured and permanently sequestered underground. Exhaust from ethanol production generates high concentrations of CO2, which makes this a likely use for the tax credit. Direct Air Capture, which pulls CO2 out of the ambient air where it exists at around 412 parts per million, will earn a $180 tax credit for its permanent storage underground.

CO2 tax rates in Europe vary widely. France is €45 per ton ($45) and Sweden is the highest at €117.

Surveys tend to reveal that support for public policies aimed at reducing greenhouse gas emissions is broad but shallow. Gasoline prices have been rising for most of the Biden administration. Global investment in new oil production remains too low to maintain supply at current prices. E&P companies recognize the impediments to new production represented by environmental extremists and left-wing energy policies. Together they have succeeded in driving pipeline sector free cash flow yields to over 10% because new pipeline construction is much less common. As I often say, if you meet a climate extremist, give them a hug and drive them to their next protest.

The Administration has been emptying out the Strategic Petroleum Reserve in recognition that high prices at the pump have political downside. For the same reason, a US carbon tax has never commanded much support even though it would cause more efficient capital allocation.

But there are clearly some parts of the US with a greater tolerance for higher energy prices if perceived to be in support of emissions reduction. New England’s energy policies present an example of what to avoid for many of us, but utility bills aren’t becoming a political issue.

Annual CO2 emissions in California fell by 12 million tons (2009-19), a 3.3% reduction. Assuming Californians are also paying 5 cents per KWh for this achievement, that works out to a stunning $1,042 per ton, along with an inadequate grid that recently asked Tesla owners to refrain from charging their cars.

Climate extremists could point to both these states as evidence that consumers will accept higher energy prices in support of their policies. Or they may calculate that the very high price per ton of CO2 some consumers are paying will draw unwelcome attention to the results of liberal energy policies.

Both states have found that impeding natural gas consumption leads to unexpected difficulties – either LNG imports to Boston or the risk of power cuts in California. Natural gas is hard to beat. It’s displaced a lot of US coal production, including in Newburgh, IN where a strip mine formerly operated by Peabody Coal is now the bucolic Victoria National Golf Club. The energy transition is good.

We have three funds that seek to profit from this environment:

Energy Mutual Fund

Energy ETF

Real Assets Fund

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