TOPIC #4
Natural Gas Utility Decarbonization
Several States Examine Gas Distribution Utilities’ Long-Term Future
- As of late August 2023, 12 states and the District of Columbia have initiated proceedings to consider the long-term role of retail natural gas and related infrastructure (see Figure 4.1). These proceedings are largely related to decarbonization or GHG-reduction targets already in place in those states.
- Cases arise in different contexts, and one more docket may be coming. In Maryland, the Office of People’s Counsel has challenged gas local distribution company (LDC) proposals to continue replacing aging gas distribution pipeline at an accelerated pace under a 10-year-old rider framework, which does not include expanding service for new customers. The PSC is considering whether to start a formal proceeding.
- These proceedings have led LDCs and regulators to consider various approaches to decarbonizing gas systems and alternative technologies and fuels.
KEY TAKEAWAYS
“Future of gas” proceedings have been initiated in some states that have set energy system decarbonization goals.
Gas LDCs are looking at a variety of pathways to reduce carbon intensity in the gas system and in end-use consumption. The pace and scale of proposed changes to business-as-usual must balance competing objectives: safety, reliability, and stranded costs vs. rapid transition under state climate targets. Portfolio-based approaches may provide optionality, reduce cost, and increase feasibility of achieving emissions reduction objectives.
In tandem, regulators and utilities are considering new regulatory designs to effectively deploy recommended initiatives.
“Future of gas” proceedings have been initiated in some states that have set energy system decarbonization goals.
Gas LDCs are looking at a variety of pathways to reduce carbon intensity in the gas system and in end-use consumption. The pace and scale of proposed changes to business-as-usual must balance competing objectives: safety, reliability, and stranded costs vs. rapid transition under state climate targets. Portfolio-based approaches may provide optionality, reduce cost, and increase feasibility of achieving emissions reduction objectives.
In tandem, regulators and utilities are considering new regulatory designs to effectively deploy recommended initiatives.
Figure 4.1: "Future of Gas" Proceedings as of August 31, 2023
Sources: Building Decarbonization Coalition; Maryland PSC, ScottMadden research
Many and Varied Questions Characterize Gas Decarbonization Proceedings
Future of gas proceedings vary by jurisdiction, but most explore solutions to mitigate bill impacts and balance competing objectives: safety, reliability, and stranded costs vs. rapid transition under state climate targets.
In some cases, regulators are investigating decarbonization options through multiple proceedings. New York, for example, has two ongoing gas-related proceedings:
- First, the New York PSC updated its gas system planning process for LDCs (effective May 2022), accounting for GHG emissions (demand- and supply-side), alternative fuels (e.g., renewable natural gas, or RNG), and non-pipes alternatives, among other things. That proceeding (Case No. 20-G-0131) continues, addressing other gas planning issues.
- Second, also in May 2022, the PSC initiated another proceeding for gas utility compliance with the state’s climate reduction targets of 40%* by 2030 and 85%* by 2050.
- The proceeding requires development by utilities of a GHG emissions inventory report and directs LDCs to prepare a coordinated, long-term gas sector decarbonization pathway analysis through 2050 and a near-term plan for potential actions through 2030.
- The pathways study should analyze the scale, timing, costs, risks, uncertainties, and customer bill impacts of achieving significant and quantifiable reductions in GHG emissions from the use of LDC-delivered gas.
- In parallel with these proceedings, the New York legislature has been active, enacting a requirement—by 2027 zero-emissions sources of heat in all new buildings (with some exceptions). The legislature is also considering removing utilities’ obligation to serve gas customers.
The scope of PSC proceedings can be general, covering a few broad matters, or more specific questions to be addressed. Examples of each are shown in Figures 4.2A-B.
Figure 4.2A: New Jersey Gas Planning Docket Scoping Considerations (Docket No. GO23020099)
Note: Bold emphasis added, not in original.
Source: New Jersey Board of Public Utilities
Figure 4.2B: Rhode Island PUC Staff Future of Gas Draft Scope (Docket No. 22-01-NG)
Source: Rhode Island Public Utilities Commission
Decarbonization Pathways Involve Multiple Options and Trade-Offs
- Several decarbonization proceedings require LDCs to consider pathways—i.e., a series of assumption-based intermediate- to long-term regulatory mechanisms and programs—that comprise a coordinated strategy to achieve targeted GHG reductions. The pathways may contain a spectrum of options, ranging from options that include continued utilization of natural gas infrastructure to options that include full electrification solutions (Figure 4.3).
- Decarbonization measures are not mutually exclusive but may vary in matter of degree, depending upon cost, bill impact, customer preferences, technology maturity and effectiveness, regional suitability, and infrastructure readiness, among other factors. Figure 4.3 illustrates a continuum of pathways that vary by level of ongoing gas system utilization. Those pathways, in turn, rely upon technologies that have potential advantages and disadvantages (Figure 4.4).
- Because of the current early stage of decarbonization actions and uncertainties with respect to its course, gas sector strategies are promoting portfolio-based approaches using a diverse set of strategies and technologies. For example, the Decarbonization Pathways report in Massachusetts’ investigation of the role of LDCs (D.P.U. 20-80) underscores the benefits of this diversified approach. It demonstrates that employing a portfolio-based strategy may mitigate the cost and feasibility risks of the transition, in contrast to scenarios relying solely on a single technology or strategy (see Figure 4.3).
- In considering decarbonization alternatives, LDCs are looking across activities in the supply, distribution, and end-use of natural gas. The initiatives include an array of actions (see Figure 4.5), including:
- Policy and reporting changes
- Commodity substitution
- Infrastructure upgrades
- New programs
- All initiatives require changes in regulatory design to establish funding and cost-recovery mechanisms, customer service standards and procedures, guidance for approval of pilot programs, and performance metrics. Some can be done within existing PUC jurisdictional authorities, while others may require more significant changes such as enabling legislation or modifications to existing utility statutes.
Figure 4.3: Selected Decarbonization Options (Massachusetts Example) (2020-2050)
Source: Energy+Environmental Economics/ScottMadden Independent Consultant Report on Decarbonization Pathways, MA D.P.U. Docket 20-80
Figure 4.4: Selected Decarbonization Technologies for Various Pathways
Source: ScottMadden, Energy+Environmental Economics analysis
Figure 4.5: Selected Decarbonization Initiatives by LDC Activity Area
Source: ScottMadden, Energy+Environmental Economics analysis
Several Decarbonization Strategies Attempt to Balance Sometimes Competing Policy Objectives
- There are several decarbonization strategies that may be implementable in the near term such as energy efficiency and renewable natural gas programs.
- Energy efficiency, through building shell retrofits and energy-efficient equipment, reduces overall energy demand.
- Renewable natural gas contributes to reduced GHG emissions by being blended into the distribution pipeline and offered to customers through voluntary tariff programs (See Figure 4.8).
- In addition, hybrid heating combines the use of gas infrastructure for peak winter heating demands and electric infrastructure for the remainder of heating needs.
- This strategy enables gas utilities to continue to use their existing infrastructure, minimize stranded costs, achieve emission reductions, and mitigate near- and longterm bill impact and intergenerational equity concerns.
- The solution is still being tested in a few jurisdictions and may require coordination between natural gas and electric utility (such as a financial transfer payment) to mitigate bill impacts on natural gas customers (See Figures 4.6 and 4.9).
- Other decarbonization initiatives, such as targeted electrification, involve block- or neighborhood-level electrification to reduce or minimize potential natural gas stranded assets. The solution is also still being tested and has not been attempted at scale. Some challenges include:
- Requiring 100% customer opt-in and elimination of the obligation to serve
- Engineering feasibility, especially for replacement projects affecting system reliability
- Differing planning horizons for gas (immediate safety/reliability needs) vs. electric
- Cost-effectiveness changes over time – perhaps lower
- Potential for avoided gas system costs to support electrification vs. lower gas rates today but greater in the future
- To address long-term affordability and cost recovery concerns, solutions such as accelerated depreciation may need to be considered.
- Accelerated depreciation, such as the units of production method, attempts to align asset cost recovery with asset utilization. For example, the method may include increased cost recovery in the near term when there is higher system utilization.
- If (and as) customers start departing the system, the cost recovery also decreases, helping to mitigate customer affordability and intergenerational equity concerns (see Figure 4.7).
- This alternative depreciation method has been proposed in Massachusetts and California but not yet approved by PUCs as of September 2023.
Figure 4.6: Hybrid Heating Program Illustration
Source: Hydro-Québec; Énergir
Figure 4.7: Annual Depreciation Expense $ per MMBtu Under Straight-Line vs. Units of Production Depreciation Methods (Illustrative)
Source: Energy+Environmental Economics/ScottMadden Independent Consultant Report on Regulatory Designs, MA D.P.U. Docket 20-80
Straight-Line Depreciation
- Asset depreciated on a uniform basis each year
- As asset utilization decreases, the $ per unit increases
- In the long term, customers remaining on natural gas system experience large rate increases
- As a result, utility faces stranded cost concerns
Units of Production Depreciation
- Asset depreciation aligned with asset utilization
- As asset utilization decreases, the $ per unit remains the same
- In the long term, customers remaining on natural gas system experience minimal rate increases (from depreciation)
- As a result, stranded cost concerns are mitigated
Figure 4.8: Upstream Initiative Spotlight: Blending Renewable Natural Gas
Source: ScottMadden research, S&P Global Market Intelligence
Figure 4.9: Downstream Initiative Spotlight: Hybrid Heating Programs
Source: ScottMadden research, S&P Global Market Intelligence
IMPLICATIONS
As the natural gas industry transitions toward a decarbonized future, utilities, regulators, and stakeholders will need to consider a portfolio approach with a range of options rather than a single technology or strategy. The portfolio of solutions would need to solve for key transition challenges such as customer affordability (near- and longterm), equity, utility cost recovery, and providing safe, reliable, and affordable energy options.
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