As a wave of local governments in California roll out policies that promote the electrification of buildings, the state’s energy regulators have been saddled with a complicated task: planning for the future of its natural gas system.
Around 30 cities in California have passed building codes that reduce their reliance on gas, according to the Sierra Club, the most recent being Santa Cruz, which in March passed an ordinance to “eliminate natural gas infrastructure and associated greenhouse gas emissions in new buildings where all-electric infrastructure can be most practicably integrated.” But while it’s "fantastic" that individual municipalities are showing leadership, this is a patchwork approach, Michael Colvin, director of regulatory and legislative affairs at the Environmental Defense Fund’s (EDF) California energy program, told Utility Dive.
“So you’re going to need the state to figure out, how do you accommodate the individual cities and their individual climate goals and their individual building code goals, etcetera — but ensuring that costs are equitable for the remaining customers,” he said.
Gas utilities service more than 11 million customers in California, the majority of which are in the Southern California Gas (SoCalGas) and Pacific Gas & Electric territories. And natural gas plays a key role in maintaining grid reliability, according to Christopher Guith, senior vice president at the U.S. Chamber of Commerce’s Global Energy Institute. As more intermittent resources come online, “essentially you’re making yourself overly reliant on gas — which is what California has done. They understand that and so, as a matter of policy… the CPUC, in coordination with the state energy agency, are looking at finding ways to alleviate that,” he said.
State utilities are procuring storage resources to address some of these needs. Last year, the CPUC issued a decision seeking retirement extensions for 4.8 GW of gas generation units, and identifying the potential for resource adequacy shortages beginning in 2021. In response, both Pacific Gas & Electric and Southern California Edison have proposed a series of battery storage projects to address these challenges.
There’s no question that the energy system is in the midst of a major transformation to reduce greenhouse gas emissions and achieve California’s climate goals, Jonathan Peress, senior director of regulatory affairs at SoCalGas, told Utility Dive — and gas infrastructure is a major facilitator in achieving those climate goals, both for electric and gas customers, he added.
“The vast majority of grid reliability and flexibility services that are necessary and are currently being used to decarbonize the energy system are provided by gas utility infrastructure. If the goal is to deploy more renewable and more low-carbon energy, then it is important to understand the contribution that that infrastructure, and utilities like SoCalGas, are making to ensure reliability and to provide that flexibility in the system, and that they will continue to make,” Peress said.
Visualizing that transformation and the role the gas system will play in it is now a challenge that regulators face.
How gas fits into California’s long-term goals
In January, operating under the assumption that local laws to reduce emissions will drive down gas demand for the next quarter-century, the California Public Utilities Commission (CPUC) opened a rulemaking that will eventually “manage the state’s transition away from natural gas-fueled technologies to meet California’s decarbonization goals.” The commission is currently in the first phase of the proceeding, which is focused on reliability standards and improving coordination between gas utilities and gas-fired electric generators, and intends to look at a long-term strategy in the second phase.
But there are still questions around what that transition will look like and how it will impact ratepayers. It’s likely that the state could continue using some natural gas for back-up power generation, and even residential usage, Anthony Kovscek, professor and senior fellow at Stanford University’s Precourt Institute for Energy, told Utility Dive, because the economics could work out that it’s cheaper to let people continue using gas and find other ways to mitigate those emissions.
“Specially, if you get into the questions of how you’re going to retrofit the big old cities, [like] parts of Los Angeles, parts of Oakland — retrofits are going to be very expensive if you want to make those people all-electric,” he said.
Dan Lapato, senior director of state affairs at the American Gas Association, told Utility Dive that it’s difficult to project natural gas declines just based on municipal policies, because of the possibility of a rebound effect and public pressure from consumers.
“With these bans and some of these stated policies, you’re actually going to start seeing some of the policy-makers who make these decisions will still be in office when they go into effect — and they’ll be able to see the true impact,” to residential customers who might want natural gas for cooking and heating water, and could experience price differences, he said.
On the national level, around half a residential million customers are added to the gas system every year, although the residential gas load across the nation has remained steady due to increasingly efficient appliances, Jake Rubin, AGA’s senior director of public relations, told Utility Dive.
On the other hand, a report released in April by Energy and Environmental Economics (E3) and the University of California, Irvine found that it is in the economic self-interest of some California gas consumers to electrify their appliances. The paper considered pathways to reduce California’s emissions 80% below 1990 levels by the middle of the century, and found that in the long term, electrifying buildings across the state, including space and water heating, reduces customer bills compared to using renewable natural gas like biomethane — a “high building electrification” scenario would cost between $5 billion and $20 billion less per year in 2050, compared to “no building electrification."
"In any future where California meets its long-term climate goals, natural gas demand is likely to decline, putting upward pressure on gas rates and bills," the report stated.
“The question becomes, what do you do with the remaining infrastructure in the ground?”
Director of Regulatory and Legislative Affairs, California Energy Program, Environmental Defense Fund
But even in a “high building electrification scenario," it noted that there will still be millions of customers on California’s gas system by 2050.
Colvin concurred that California will still need a gas system in 2045, in part because of industries with high thermal demands like food processing and cement production. But the E3 report “fully indicates that electrification is just going to happen from market forces alone — that it’s just going to be the cost to customers when you compare the cost of the gas system versus the cost of the electric system, that’s going to be the economically rational thing to do,” he said.
“The question becomes, what do you do with the remaining infrastructure in the ground?”
‘Pound wise and not penny foolish’: the dangers of an unplanned transition
EDF attempted to tackle this question in a report released last year, which noted that stranded gas assets could complicate California’s move away from gas, because of “potential reductions in overall utility investment, [and] rate increases for remaining gas customers.”
The issue, Colvin explained, is that if a hodge-podge of customers begin leaving the gas system on their own, without a managed plan, the state would have to maintain the cost of the entire gas system without being able to retire any assets, or the costs associated with them, until everyone has left — and customers who remain on the system will have to pick up those costs.
“And that becomes unaffordable, at a certain point,” he said.
“If there are fewer ratepayers, then those costs that are already sunk into the system are going to have to be transferred onto the reduced ratepayer base.”
Professor and Senior Fellow, Precourt Institute for Energy, Stanford University
After the natural gas pipeline explosion in San Bruno in 2010, California made a number of upgrades and repairs to the state's gas system under the assumption that those would be paid off by a certain number of ratepayers in a certain number of years, Kovscek said.
Who gets left on the gas system matters, Merrian Borgeson, senior scientist with the Natural Resources Defense Council’s climate and clean energy program, told Utility Dive. Around 40% of the state’s population are renters and may not have the control or upfront cash to, for instance, buy a heat pump, causing a huge equity and economic problem, she said. The other issue is transitioning gas workers.
“We want highly skilled gas workers taking care of the system — until we don’t need them anymore,” she noted, adding that taking care of that workforce is going to be a huge part of a successful plan.
There are a variety of ratemaking solutions that could be used to plan for this transition, according to Colvin, like accelerating depreciation of the system and reducing returns on equity — “all ideas should be on the table at this point.”
But it’s important, he added, that gas utility shareholders not be left holding the bag. Many of these investments were made in the 1950s, 60s and 70s, when utilities could not have known about current decarbonization trends, he said, and the downside of sticking shareholders with these costs is that it could decrease investor confidence in being able to recover the next set of assets — at a time when California is poised to make massive clean energy infrastructure investments in the next 25 years, like electric vehicle charging infrastructure.
“Increasing the risk to shareholders runs contrary to giving ratepayers the best deal possible … we have to be pound wise and not penny foolish when it comes to this,” he said.
Another part of the gas transition equation involves figuring out whether and how to leverage the state’s existing pipeline system — for instance, by using hydrogen, renewable natural gas and other power-to-gas technologies. These technologies represent an opportunity for the continued use of the gas system, Lapato said.
But moves to shut down part of the natural gas grid or prevent it from being fully utilized could impact these opportunities. “Today’s policies could have negative impacts down the road,” he added.
There’s a huge renewable natural gas market in California, Rubin said.
“I think it’s important to note that the industry is not waiting for government" for policies to support RNG, hydrogen and power-to-gas technologies, he added.
California has already established a leading role to develop infrastructure for hydrogen, for example as a transportation fuel and in some industrial applications
Senior Director of Regulatory Affairs, SoCalGas
California has already implemented at least three projects that are putting biogas into utility pipelines, Julia Levin, executive director of the Bioenergy Association of California, told Utility Dive, and there are many more that are being planned and developed. In-state potential for biogas is enough to replace about 20% of current gas demand, she said, although that figure could rise to 40% or 50% if gas demand falls due to electrification.
“Having said that, pipeline injection is still much more expensive in California than any other state and much more time consuming. ... We’ve got to find a way in California to accelerate the interconnection process and reduce the costs,” Levin added.
SoCalGas is committed to deploying renewable natural gas and coming up with structures to decarbonize its feedstock, Peress said.
“California has already established a leading role to develop infrastructure for hydrogen, for example as a transportation fuel and in some industrial applications — so I think you can expect to see the same continued trend line occurring within the feedstock that’s used by the electric generation and the electric grid in order to decarbonize,” he said.