Can Gas Utilities Thrive and Grow in an Environment of Decarbonization?

by | Jul 27, 2021 | Energy Efficiency, Energy Solutions, Natural Gas Industry, Utility of the Future

Natural gas utilities are working towards decarbonization, building from a long history of growing their customer base by promoting the virtues of natural gas when compared to other energy options: natural gas is clean-burning, energy efficient and cost effective. The expanding concerns about climate change and the interest in reducing greenhouse gas emissions have led some to question whether the combustion of any fossil fuel, including natural gas, should be part of our nation’s energy future. While most energy industry leaders and policy officials agree that reducing greenhouse gas emissions is a good idea, there is broad disagreement on the most effective way to accomplish this goal. The most extreme emissions reduction strategies involve the elimination of all carbon-based fuels (coal, fuel oil, gasoline, propane and natural gas) by “decarbonizing” the energy supply mix largely through “beneficial electrification,” which will have a significant unfavorable impact on the traditional gas utility business model. However, creative strategies can be employed by gas utilities today that will allow them to thrive and grow in the future.

Decarbonization can be defined as the process of reducing and removing carbon dioxide output from a country’s economy. The natural gas industry is working towards decarbonizationDecarbonization can be achieved in part by significantly reducing (and potentially eliminating) the combustion of fossil fuels. Beneficial electrification of residential and commercial buildings is viewed by some as a key decarbonization strategy, since it replaces end use technologies that use fossil fuels (e.g. natural gas furnaces) with those that use electricity. In order to provide a net benefit to the environment, the electricity generated to fuel the new electric equipment must be from green sources (solar, wind, etc.) or from sources that emit less carbon than the existing end use fossil fuel equipment.

Several studies have been commissioned and completed in order to assess the merits of beneficial electrification. While the ultimate conclusions of these studies vary, many agree that electrification of building space heating and other energy uses will continue to increase over time, and that policymakers can facilitate electrification through a variety of strategies. In simple terms, the benefits of electrification are largely environmental through combustion emissions reductions, and the barriers to success are primarily economic. The goal for policymakers is to remove the economic hurdles in order to achieve the environmental benefits of electrification.

As a result of these studies, some U.S. federal government initiatives have embraced the concept of decarbonization through electrification.  On April 22, 2021, President Biden announced a new target to reduce greenhouse gas emissions by over 50% in 2030 when compared to 2005 levels. President Biden’s most recent plans continue to set targets for a carbon-free power sector by 2035 and a net zero emissions economy no later than 2050. Biden’s plans specifically focus on supporting energy efficiency upgrades and electrification of buildings, as well as funding the improved electric transmission and distribution infrastructure required to enable the increased use of electricity resulting from electrification. Natural gas pipeline infrastructure or other fossil fuel investments are not the focus of President Biden’s energy plans.

At the state level, the approach to addressing climate change is mixed, with many states setting aggressive emissions reduction targets that could facilitate electrification while others have largely avoided electrification as a greenhouse gas reduction tool. In Oregon for example, a bill was recently passed that would ban the expansion or new construction of power plants that burn natural gas or other fossil fuels and mandate zero emissions electric generation by 2040. In California, the draft version of the state’s next building code favors the use of electricity by stating that electric heat pumps will be the baseline technology for new construction, and that incentive programs will attempt to facilitate electric heat pumps as the preferred option.  Even in Texas, where a recent winter storm and reliance on wind and solar power helped cause significant electric outages, organizations such as Powering Texas support the continuation and expansion of policies that enable renewable energy generation including wind and solar.

State public utility commissions generally do not consider climate change within their purview, but that may be changing. The District of Columbia was an early supporter of proactive climate change policies, passing the Clean and Affordable Energy Act which directed the Public Service Commission to consider the preservation of environmental quality in its decision-making. Connecticut enacted a similar concept by linking their utility regulator’s decisions to the state’s comprehensive energy strategy, which includes climate change goals, greenhouse gas reduction targets and equipment efficiency goals.

Several U. S. Cities and municipalities have been the most aggressive in promoting anti-fossil fuel policies. With the support of the Sierra Club and other environmental groups, forty-six cities in California alone have ordinances or commitments in place to phase out natural gas and other fossil fuels in new buildings. Major cities outside of California have also joined the initiative to ban or significantly restrict new natural gas hook-ups, with Seattle and New York City notably joining the list. In order to limit municipal gas bans, states such as Arizona, Indiana and Texas have passed laws that bar city governments from discriminating against or favoring one energy source or another in their regulation of utility service. In response to statewide pressure, many municipalities have moved to more subtle means of restricting natural gas use by enacting long-term decarbonization plans with specific emissions reduction targets that do not explicitly prohibit the use of natural gas.

With some exceptions, elected officials and regulators are supportive of limited measures to address climate change and in some cases, the focus is on the reduction or elimination of fossil fuel use through electrification. However, market-based factors are increasingly causing corporations to rethink their environmental strategies. BP is an interesting example of one energy company’s response to climate change and market forces. It has pledged to become a net zero carbon organization by 2050 and has set specific carbon reduction milestones. For example, by 2030 it plans to have 50GW of renewable generating capacity, which is twenty times more than its current renewable capacity. More important, it plans to reduce gas and oil production by 40% over the same period.

Large energy users have also committed to reduce their carbon footprint by lowering energy use. Siemens, a multi-national conglomerate and the largest industrial manufacturing company in Europe, has committed to become carbon neutral by 2030 and become a leader in decarbonization. Core elements of their decarbonization plan include a 100-million-euro investment in energy efficiency projects as well as specific investments in decentralized energy systems, which will include on-site wind power and photovoltaic plants combined with energy storage. The Siemens program and other similar programs appear to be driven less by regulatory mandates and more by market demand, particularly from large asset portfolio managers and shareholders interested in corporate ESG performance (Environmental, Social and Governance).

The unfavorable impact of decarbonization and electrification on gas utility revenues and growth can be significant if not managed properly. Gas utilities typically see low customer attrition due to the historic value proposition of natural gas (clean burning, efficient, low cost), but potential future decarbonization programs and incentives designed to promote gas conversions to electric end use technologies could significantly increase gas utility customer attrition. The short-term revenue loss can be recovered through base rate cases and rate increases, but the resulting higher rates could further increase existing gas customer attrition. Higher gas rates will also impact the gas utility’s ability to attract new customers via conversions from other fuels (e.g. fuel oil). New construction gas customer growth will also likely be unfavorably impacted by government programs and initiatives designed to favor electric technologies, along with potential reductions in market driven demand.

Despite the challenges to gas utilities associated with our new energy landscape, excellent outcomes are possible for gas utilities if appropriate action is taken now. Many utilities are working with regulators and legislators to establish ground rules that level the decarbonization playing field for natural gas technologies. These ground rules are designed to assess the full environmental, economic and energy reliability impacts of electrification and decarbonization programs so that a more wholistic policy approach is taken. These efforts have been partially successful in the short term by slowing some of the more aggressive electrification efforts. However, the strategic challenges presented by decarbonization and electrification cannot be met by regulatory and legislative solutions alone.

While there is disagreement about the timing and worldwide impact of decarbonization and electrification on the energy industry, there is some agreement that a long-term “business as usual” approach is not sustainable in the natural gas utility industry and that new strategies will have to be employed in order to thrive and grow. UGI Corporation, an international energy distribution and services company, has joined many other companies by employing new strategies in all its businesses including its gas utility. UGI’s most recent ESG report is titled “The Foundation of a Renewable Energy Future,” and establishes a goal of reducing scope I greenhouse gas emissions by 55% over the next five years. The report also outlines a new focus on renewable natural gas (RNG) and hydrogen supplies as new opportunities for the gas utility business, and it touts an agreement to interconnect its gas distribution system with what will be the largest RNG supply point to date in the United States.

The key to success for UGI and other gas utility companies in this new competitive environment is to redefine what it means to be a gas utility. By thinking creatively and stepping outside our typical utility comfort zone, creative strategies can be employed, and new programs created to position the gas utility brand as a solution to our climate change challenges rather than the problem. The gas utility must be positioned as an energy solutions provider rather than simply the company that safely delivers natural gas (and a monthly bill). In order to achieve this new brand identity, non-traditional and new service offerings must be presented to gas utility customers in order to validate the expansion of the brand as an energy solutions provider. A portfolio of additional strategic services can be effectively executed either in-house or through third party partnership arrangements. When the utility does not possess the core competencies necessary to execute the desired strategic services, a third-party partnership and cobranding arrangement is most effective. In order to optimize results, the customer experience for the core utility must often be enhanced to levels achieved by top performing service companies. An excellent customer experience builds the foundation for the execution of enhanced strategies and new offerings.

Gas utilities face unprecedented challenges due to decarbonization and electrification trends. With unclear regulatory and market outcomes, an improved customer experience along with enhanced customer relationships will provide the foundation for success. With creative leadership and brand enhancements including new strategic services, there IS a path forward that will allow gas utilities to thrive and grow well into the future.




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