Expected Daily Volume of Responsibly-Sourced/Certified Natural Gas by Basin, End-2022e
Source: S&P Global

Key Points: The FERC’s recent rejection of Tennessee Gas Pipeline’s proposal to sell responsibly sourced/certified natural gas highlights the value in establishing (robust) measurement standards. Market-wise, TGP’s more recent proposal, which allows unbundling certification from the product, makes more sense than the company’s original physical (hub)-based plan.

The FERC rejects proposal to sell responsibly sourced gas. At the end of April, the Federal Energy Regulatory Commission (FERC) rejected Kinder Morgan subsidiary Tennessee Gas Pipeline (TGP)’s proposal to sell natural gas that is below a threshold for methane intensity. The FERC begged off taking responsibility for what constitutes so-called responsibly-sourced gas (RSG), noting that the market was nascent, that different standards were being set by different independent vendors and that methane emissions are unregulated (see more below).

Evolution of TGP’s proposal. TGP’s original proposal was based on a physically traded hub market, i.e. that the pipeline would source gas that had been certified as meeting methane intensity criteria. That proposal was met with protest from gas producers that had not pursued certified gas, that would be excluded from selling through the pipeline.

In response, TGP shifted its proposal to a “certification-based” market, which allows for the unbundling of the certification of methane intensity from the physical product. In other words, similar to Renewable Energy Credits in power markets, the natural gas sold through the pipeline could be sold separately from the methane intensity certificate for that gas, thereby allowing buyers other than those using the gas. TGP’s proposed gas “certifiers” included Project Canary (Trustwell Responsible Gas program), RMI/SYSTEMIQ (MiQ Standard) and Xpanisv (which in turn can use third party certification providers). Accentuating the FERC’s key objection, the third party certifiers have different methodologies/standards for certification, including frequency of monitoring. TGP’s revised proposal also met with objections, in this case that TGP would be too influential in determining what qualifies as certified gas.

Thus the pipeline company proposed to place criteria for RSG in its tariff, placing responsibility on the FERC. In rejecting this last proposal, the FERC indicated it was unclear how to evaluate TGP’s criteria given lack of Federal regulation on methane emissions and lack of standards in the industry.

The FERC further cited the risk that TGP’s tariff structure as proposed might stifle market-driven efforts to further reduce methane emissions. In other words, if the tariff only rewarded meeting a threshold, gas producers may lack the incentive to deliver even lower methane intensive gas. Other certificate schemes have incorporated such incentives — for example, the S&P Platt’s/Xpansiv’s recently introduced Methane Performance Certificate uses percentage-below-industry-average as a metric (issuing more certificates for natural gas with emissions further below industry average).

The FERC’s ruling was reported to have been positioned such that it is expected that TGP sorts out a way to proceed with its RSG plan. But the FERC’s point about varying standards reflects the challenge for buyers (and everyone else) in assessing the “true” methane intensity of the certificates and (therefore) of price discovery. This highlights the value in having a set of standards regarding ongoing measurement (frequency, number of points on site, nature of monitoring, etc.).

U.S. RSG market appears set to grow to 20 Bcfd. S&P Global reports that ~20 Billion cubic feet per day of U.S. natural gas production, or 21% of the U.S.’s total dry gas production, is set to have third party certification by the end of 2022 (see chart).