Now is the Time for Gas Utilities to Start Talking Decarbonization

by Bob Shively, Enerdynamics President and Lead Facilitator

Recent years have been kind to natural gas utilities in the U.S. Since 2010, consumer demand has increased by 12%, low gas prices have encouraged more usage and kept consumers content, and utilities’ earnings-driving capital investment is up by 73%[1]. However, a recent paper by McKinsey and Company titled “Are U.S. gas utilities nearing the end of their golden age?” suggests that in the next decade, gas utilities will see increasing forces that threaten ongoing business success.

The forces are threefold:

	Decarbonization As of late 2018, 20 states[2] including some of the largest gas consumers like California, Illinois, and New York, have announced goals to dramatically reduce emissions of greenhouse gases. Strategies center around three sources – power generation, building energy use, and transportation. In certain states we are already seeing opposition to gas-fired generation based on greenhouse emissions, and many initiatives focus on reducing carbon emissions by altering how buildings use energy (via energy efficiency, changing fuels, etc.). Such measures threaten two of the three largest demands for gas (power generation and building heating).
	Electrification Partly due to state decarbonization policies and partly due to new or improved electric technologies, many electric utilities are beginning a push to encourage consumers to shift from gas to electricity for space heating and hot water. Increasingly efficient heat pumps promise to compete with gas furnaces in new construction and remodels in many markets. In a state like California close to a third of gas demand could be eliminated.
	Renewables In the last two years, both utility-scale wind and utility-scale PV solar units have attained lower levelized cost of generation than combined-cycle gas units. Utilities across the U.S. have released new integrated resource plans that are steadily adding more renewables. Typically, these resources initially replace existing coal units, but more and more they are also displacing capacity that otherwise would have been gas-fired. Similarly, numerous large corporate buyers have made a commitment to buying renewable electricity rather than utility supply. In 2018 corporate renewable energy procurement reached a new record of 3.57 GW in new projects[3].  The result is fewer run hours for gas units.

To address these concerns, McKinsey suggests that gas utilities develop deep knowledge of their customer needs, competitive threats, and the impacts of potential decarbonization policies. Key questions McKinsey suggests that utilities pose include[4]:

1. How much volume is at risk over the next 10 to 15 years?
2. What is the outlook for volume growth over the next five, 10, and 15 years?
3. How could policy and economic trends change those projections?
4. What are the reasonable downside scenarios for each state? How much demand is at risk and what assets could be stranded?
5. How expensive will it be to decarbonize the energy sector by accelerating the level of electrification? How does that compare with investing in renewable natural gas?

Once the landscape is fully understood, gas utilities must work diligently to become part of the solution to consumer and societal demands. They must also tread carefully to avoid the perception of being opposed to change. As always, cost control and efficient operations will be important, but utilities must go beyond to find ways to join the decarbonization movement. This includes operational activities such as limiting small leaks and operational gas releases as well as future consideration of building business models around renewable natural gas and/or power-to-gas options. Certainly such technologies are immature and not ready for prime time now, but they may be the only path to a sustainable future for gas utilities. 

More and more states are stepping into the role of decarbonization policy ceded by lack of action at the federal level. The sooner that gas utilities engage regulators and policy makers in discussions of how they can support a low-carbon future, the better for all.

Footnotes:

[1] Data on usage is from the Energy Information Administration (EIA), data on earnings is from McKinsey and Company

[2] See Center for Climate and Energy Solutions website https://www.c2es.org/document/greenhouse-gas-emissions-targets/

[3] See the Business Renewables Center website https://www.rmi.org/press-release/corporate-renewable-energy-procurement-sets-new-record-in-2018/

[4] McKinsey and Company, Are U.S. gas utilities nearing the end of their golden age?