The R&D Tax Credit Aspects of Natural Gas System Engineering and Design

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        Conversions from oil to natural gas are at a tipping point.  Over the past decade, the combination of hydraulic fracturing and horizontal drilling technology has allowed access to enormous quantities of natural gas from shale formations.   As a result, in 2013, the U.S. became the world’s largest producer of hydrocarbons, producing more petroleum and natural gas than both Russia and Saudi Arabia, the second and third largest producers in the world.   

        This development has and will likely continue to have significant consequences for the natural gas industry.  The availability of abundant, low cost natural gas means many consumers will see an opportunity to take advantage of competitive prices, which could remain low for a very long time.

        As demonstrated in the chart, in the electric power sector, which is the largest consumer of natural gas,  utilities are using natural gas to generate electricity virtually matching that of coal.  In addition, the lower greenhouse gas emissions associated with natural gas may spur demand for the natural gas alternative in part because greenhouse gas regulations for power plants are becoming increasingly stringent.

        In addition to natural gas consuming market share from other energy sectors, the demand for energy products overall is expected to rise significantly in the upcoming years.  The Energy Information Administration, in its Annual Energy Outlook, projects total energy consumption to increase by 20% by 2035.

        Recognizing the growing demand for energy, more specifically, clean energy, some large energy producers are developing novel solutions to keep up with this demand. In New York, National Grid, in partnership with the New York City Department of Environmental Protection, recently announced the launch of a
wastewater treatment plant in Brooklyn, NY which will produce natural gas.

        Novel solutions are also being developed to address other issues in the natural gas industry.  As demand for the cheaper and cleaner alternatives grows, the capacity of infrastructure that is needed to support either conversions or new installations of natural gas systems must be increased proportionately.  

        Installation of new underground infrastructure, however, is both costly and challenging since many urban areas already have a complex network of above and below ground infrastructure that is difficult to work around.  In response to this conundrum, the current national strategy involves not only the installation of significant pipe infrastructure, but also a higher utilization of existing natural gas pipeline. This would involve novel techniques such as completing the successful expansion of pipes already underground without having to dig them up.

        Another novel solution being developed by National Grid involves connecting existing distribution systems in Queens and Brooklyn in order to increase the capacity of the existing network and the reliability of supply points.  Other innovations include new pipe repair and replacement technologies and novel methods for integrating large scale conversions.  

        These and similar technologies, innovations and novel methods are eligible for both federal and state R&D Tax Credits.

The Federal Research & Development Tax Credit

        Enacted in 1981, the Federal Research and Development (R&D) Tax Credit allows a credit of up to 13 percent of eligible spending for new and improved products and processes. Qualified research must meet the following four criteria:

  • New or improved products, processes, or software
  • Technological in nature
  • Elimination of uncertainty
  • Process of experimentation

        Eligible costs include employee wages, cost of supplies, cost of testing, contract research expenses, and costs associated with developing a patent.  On December 18, 2015 President Obama signed the bill making the R&D Tax Credit permanent.  Beginning in 2016, the R&D credit can be used to offset Alternative Minimum tax and startup businesses can utilize the credit against payroll taxes.

Newtown Creek Wastewater Treatment Plant

        As part of National Grid’s commitment to sustainable energy solutions, they recently began the design and construction phase for a new purification plant in Brooklyn, NY that will convert biogas byproducts from the Newtown Creek Wastewater Treatment Facility into natural gas.  Newtown Creek is the largest wastewater treatment facility in New York City.  The plant produces over 500 million cubic feet of biogas annually, a byproduct which is mostly methane (the main component of natural gas).  The amount of byproduct produced by the facility is expected to be enough to produce the amount of natural gas needed to power over 2,500 Brooklyn residences.  

        In addition, the project will reduce CO2 emissions by 16,000 tons annually, the equivalent of taking 3,000 cars off the road.

        The project is the first of its kind and involves a number of technological challenges and hurdles.  “Developing renewable biogas at Newtown Creek will serve as a blueprint for the type of transformative, sector-crossing projects needed to improve our air emissions and meet our greenhouse gas reduction targets,” said Sergej Mahnovski, Director of the Mayor’s Office of Long Term Planning and Sustainability.  “The projects will also act as a catalyst for developing new markets and technology for the resources recovered, both in New York City and elsewhere.”   Those resources can be quite substantial.  Energy generated at U.S. wastewater treatment plants (WWTPs) could potentially meet 12% of the national electricity demand, according to the National Association of Clean Water Agencies.

        Other public officials had similar comments to about the initiative. “Through this creative public/private partnership, the City of New York, National Grid, and Wastewater Management have demonstrated what a pathway to greater grid efficiency and reliability can look like” said Richard Kauffman, Chairman of Energy and Finance for New York State. “Innovative local solutions like this will be critical to ensuring that communities receive the clean power they need and deserve.”

Wastewater Treatment Process

        The technology most commonly used to turn wastewater into a renewable fuel source is called anaerobic digestion.  Essentially, microorganisms break down the organic material in wastewater in an oxygen-free environment.  The process yields “biogas” consisting mainly of methane and carbon dioxide. This methane can be combusted to produce electricity as well as compressed natural gas (CNG).     

        Although the technology has been around for some time, many innovators in the industry are trying to move it forward.  Cleveland-based Quasar Energy Group is currently involved in a collaborative effort with the Ohio Agricultural Research and Development Center at Ohio State University.  The partnership is developing technology that will hopefully be adopted by older municipal wastewater treatment plants in the U.S. that are in need of upgrades. The technology couples Quasar’s liquid anaerobic digestion technology with solid-state anaerobic digestion to increase energy outputs, expand the feedstock base, and broaden the market application for the system.

        Other innovations include the developments of MIT spinoff, Cambrian Innovation in Boston. Their EcoVolt product uses electrically active organisms to produce both electricity and heat while treating wastewater.  The treatment that takes place in the EcoVolt reactor is enhanced by a process called electromethanogenesis.

        With this novel approach, electrodes are coated with electrically active microbes that convert organic wastewater pollutants into electricity. The electricity is then sent to other electrodes coated with different microorganisms, which inevitably convert the electricity, ambient protons and carbon dioxide into methane.

National Grid Brooklyn/Queens Interconnect

        National Grid recently began construction on the Brooklyn/Queens Interconnect initiative.  When completed, it will connect the company’s existing distribution systems in Brooklyn and Queens.  This cross county capability is expected to provide reliability, safety, and flexibility to the existing infrastructure as it currently stands in both counties.

        The plan involves installing 1.6 miles of 26-inch and 12-inch coated steel pipeline underneath the Rockaway Inlet beginning at Beach 169th Street in the Rockaways, and ending at the intersection of Flatbush Avenue and Aviation Road in Brooklyn.

        The new 12-inch pipeline will connect National Grid’s existing distribution systems in Brooklyn and Queens and provide a back-feed for both areas to ensure adequate natural gas supplies for the Rockaways.  The 26-inch pipeline will connect to the Williams Transco proposed Rockaway Delivery Lateral Project, which will provide a needed additional natural gas delivery point for New York City from the existing Transco system.   

        Williams’ existing Transco pipeline is a major transporter of natural gas, delivering much of the natural gas consumed in the Northeast, extending from Texas to New York City.  This new access point to the Transco pipeline system will provide much needed service and reliability to the New York City area.

        The $83 million project will be the first major pipeline to be installed in the area in 50 years and is expected to lead to more conversions to natural gas.   “We are investing heavily in our gas infrastructure to ensure reliability, safety and to connect our customers" said Ken Daly, president of National Grid New York. "This project is critical to provide the additional clean economical natural gas supplies that our customers need”.

Pipeline Innovation

        Natural gas pipeline innovations mainly involve the integration of smart monitoring and control systems. Advances in pipeline control technology have made it possible to safely operate pipelines from a single location.  From its Gas Control center in Houston, Williams applies Supervisory Control and Data Acquisition (SCADA) computer systems for operation of its Transco pipeline.  Information is relayed back and forth between control centers and remote sites, 24/7.  The system transmits natural gas flow volumes, pressure and temperature, etc.
        The system allows Williams to operate compressor facilities, certain valves and other facilities remotely.   Some other innovations in the industry  include:

  • Trenchless Technology
  • No-Hole Technology
  • Camera & Crawler Systems
  • No-Blow Technology
  • Updated Processes
  • Advanced Robotics
  • Electrical & Mechanical Design

Pipe Repair and Replace Technologies

        The United States currently faces an aging pipeline infrastructure with an increasing need for ongoing maintenance.  Meanwhile, increasing urban development is making accessibility to pipelines difficult and more expensive.  The expanding population and increasing development drives up the costs of trenching.  As the population increases, pipelines are subject to more stringent operating restrictions and costly upgrades are often required, making pipe repair and replacement difficult.

        Pipe expansion technology which is being developed and actively used in the well drilling industry may provide a hopeful solution.  Solid, expandable, tubular technology uses proven well drilling methods to insert specially designed and manufactured steel pipes inside existing pipes. Basically, an expansion tool that exceeds the inner diameter of the tube is pushed/pulled through the pipe, forcing it to expand or in some cases mud pressure is applied hydraulically causing the same effect.

        In order to reduce the loss of diameter that is caused by the new casing, a cold working process has been developed which allows the casing or liner to be expanded by up to 20% in diameter.

Pipe Failure Predictions

        As natural gas infrastructure ages, the growing concern with the network of over 4,000 miles of domestic pipeline is the reliable and timely detection of leaks and pipeline failure.  There are a variety of methods used to detect natural gas pipe line leaks, including manual inspection, trained dogs, advanced satellite imaging,  aboveground acoustic sensors that listen for faint sounds and vibrations, and in-pipe detectors which sometimes use video cameras.

        These systems are slow and can often miss small leaks altogether so the industry is beginning to develop novel solutions which can detect leaks quicker and more accurately than these existing methods.  

        One development includes self-propelled robotic devices which can move up to 3 mph through pipes. This is actually quite fast considering they are almost entirely automated which means they can roam through pipes 24/7 for automatic and nonstop monitoring of the system.

        Other developments include MIT’s robotic system that can detect leaks at a rapid pace and with high accuracy by sensing a large pressure change at leak locations. This new system “can detect leaks of just 1 to 2 millimeters in size, and at relatively low pressure,” says Dimitrios Chatzigeorgiou, a PhD student in mechanical engineering at MIT and lead author of the research papers.

        Chatzigeorgiou and his colleagues believe the system can detect leaks one-tenth to one-twentieth the size of those that can be detected by most of the existing methods.  

        Another similar, innovative leak detection technology, by ULC robotics in Hauppauge, NY is the CISBOT robot.  CISBOT  rolls through natural gas line pipes repairing leaking joints, preventing joints from leaking, and extending the life of cast iron natural gas mains with minimal excavation.  Both ULC Robotics and their clients have shared accolades for developing some of the most innovative products in the energy industry, including a Robotics Business Review Game Changer Award, a2014 Energy Innovation Award, and 2014 Top 50 Global Robotics Companies by Robotics Business Review.

Large Scale Natural Gas Conversions

        The Village of East Hills on Long Island is part of a first-in-kind initiative to provide a large portion of residents in the village access to natural gas lines.  The new project is expected to save residents hundreds and perhaps thousands of dollars per home that would otherwise be spent on running gas lines to their residence.  

        The project is part of a partnership between the village of East Hills and National Grid. Through the new program, approximately 1,000 homeowners in East Hills will be able to convert to gas without a charge for extending the gas lines.  Senator Martins, praised the efforts saying “This is an innovative clean energy program, whereby our installation of 60,000 feet of new, modern gas mains will provide over 1,000 customers access to clean natural gas ... Long Island communities will benefit from cleaner air as this program has the equivalent impact to the environment of taking 15,000 cars off the road for a year.”  Many people see this as a model of how the government and private sector should work together to provide access to natural gas lines on a national scale.  

Southern Co. Purchase of AGL Natural

        In August 2015, Southern Co. agreed to purchase natural gas utility company AGL Resources Inc. for about $8 billion.  The merger is expected to double the number of Southern’s customers to nine million, making it the second-largest utility company in the U.S. and giving the electricity provider a large chunk of the fast growing natural gas market.
All this is part of a wider strategy by Southern to gain market share in the natural gas industry as U.S. demand for electricity is stagnating along with earnings at coal and nuclear power plants.  “Natural gas will play a greater and greater role in primary energy needs” said Tom Fanning, Southern’s Chief Executive, “Driving this deal are growth opportunities.”  

        Burning gas creates significantly less air pollution than coal, a fact that could help the company meet increasingly stringent utility pollution limits.  Last year the company’s power-plant portfolio was 40% coal-powered, 40% gas, 16% nuclear, and 4% hydroelectric and other sources, according to Southern’s annual report. By 2020, company management hopes that as much as 55% of its electricity will be generated from gas, while coal would be reduced to 21%.  

Duke Energy Purchases Piedmont

        In October 2015, Duke Energy announced that it would buy natural gas distributor Piedmont Natural Gas for $4.9 billion.  Like the Southern Co. deal, the purpose of the merger is to expose Duke to the expanding natural gas market.  Lynn Good, President and CEO of Duke Energy, had this to say about the merger: "This combination provides us with a growing natural gas platform, benefiting our customers, communities and investors."  


        Given low natural gas prices and increasingly stringent air pollution requirements, natural gas conversions are becoming more prevalent.  As this happens, significant infrastructure upgrades will be required in order to keep up with the increasing demand for natural gas.  These upgrades along with system maintenance innovations often involve technical challenges and cutting-edge technologies. Federal and state Research and Development Tax Credits are available to help support and stimulate these efforts.

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