Leveraging Gas Infrastructure to Drive Decarbonization

Meeting the challenges of decarbonization requires an all-hands-on-deck philosophy. From a regulatory policy point of view, that philosophy now includes a laser focus on the role of natural gas in supporting the U.S. national economy, and how (and whether) regulatory and market changes in support of decarbonization can be designed and implemented in ways that don’t create massive economic dislocations. This focus was inevitable and timely given natural gas’ huge CO2e footprint within the power, heavy industrial, agriculture, transportation, and building heating sector markets. 

There is some early momentum in identifying approaches that may hold long-term promise. While it’s still early in what will be a multi-year process, it’s in everyone’s interest to build on this momentum and determine what decarbonization measures and mechanisms make sense and should be afforded the needed investment and policy support. 

To be clear, the regulatory focus within many local and state-level jurisdictions is now on designing regulatory mechanisms and related programs to drive decarbonization—not merely on aligning on a consensus view concerning broad justification-for-action. In fact, many of these recent frameworks lean heavily, if not exclusively, on electrification as a near certainty, a bias that may prove to be nearsighted. 

As owners of the gas distribution infrastructure, the local distribution companies (LDCs) play a unique role in supporting decarbonization—especially given their connection to the end-use customer looking for affordable and environmentally sound energy solutions. The LDC must continue to support their customers’ energy needs for a safe, reliable, and affordable product—but they also must find ways of aggressively promoting efficiency, electrification, and the use of alternative low-carbon fuels.    

These pathways work in concert with markets and end-use customer needs, which are heavily reliant on natural gas use. By encouraging the most cost-effective electrification measures, they also boost the resulting impacts of the cost-effectiveness of electric sector electrification investments and build greater confidence in whole market transformation potentials. 

These practical steps can move forward now—and don’t require new-fangled regulatory mechanisms to secure the needed cost recovery. However, just as with electrification measures, they do require higher levels of investment and program funding support broadly correlated to the avoided social cost of carbon emissions.   

The stakes are high on all sides. Regulators and utilities need to deliver on meaningful decarbonization programs that don’t risk harming economic growth or damaging underlying energy-intensive markets.   The electric sector needs the opportunity to focus on the most valuable forms of electrification to help foster innovation in the transportation and building sectors. Meanwhile, the gas sector needs to prove that it can deliver on efficiency, encourage innovation in end-use equipment markets, and kick-start growth in low carbon fuel markets. Doing so will ultimately secure the physical and economic viability of their vast physical networks for the delivery of some low carbon fuels in the long term, which is an enormously exciting prospect for our future decarbonized energy landscape.   

Chapter 1: Contributions from natural gas

Any consideration of the role of the gas LDC in supporting decarbonization begins by appreciating the natural gas sector’s contribution to CO2e emissions across its economic value change. Ironically, this contribution can easily get overlooked despite its scale. Its extent also is sobering for those who want to design out the contribution of natural gas from the economic value chain because it imposes huge challenges in designing and implementing value-growing (and not destructive) regulatory policy interventions.   

From gas production to gathering and processing, from off-system storage to interstate pipelines, from the city gate to power plants and end-use customers, the system is large, complex, and both asset- and technology-intensive. Equally so, the energy flows across the gas and electric systems are highly intertwined and not easily turned inside out without incurring huge risks for considerable unintended effects. 

The natural gas sector delivers 18.2 trillion cubic feet of natural gas to the national end user on an annual basis. This is approximately one and half times the amount of energy delivered from the electricity sector on a therms equivalent basis. This contribution speaks to the overall energy efficiency of natural gas’ use from both a cost and carbon perspective in support of the U.S. national economy. Electrification as a key pillar of decarbonization policy must be pursued in ways that encourage marginally efficient choices for any exchange of energy services from natural gas to electricity (and vice versa). We see these hard tradeoffs in practice in combined heat and power (CHP) installations–natural gas use goes up locally while total system efficiency improves and total CO2e emissions are lowered.  

The gas LDC plays a unique role in shaping the use of natural gas and electricity due to the role natural gas plays and the relationship that they have with their customers. The LDCs source gas for their customers, giving them tremendous leverage on the nature and quality of upstream gas that moves across their networks. They are also incentivized to ensure that the gas moved across their networks is done so efficiently. This is accomplished by innovating and upgrading physical networks with modern materials and control systems. The LDCs also deliver natural gas to large industrial customers located within their delivery network, anchoring local economies. Lastly, they provide commercial and residential end-use customers with the essential commodity services to support building process and heating requirements.   

It’s worth noting the size and extent of the gas LDC physical networks: Throughout the U.S., these networks are comprised of roughly 3 million miles of mains and services, serving over 77.7 million end-use customers. The current value of the physical plant associated with these networks is in the hundreds of billions of dollars. On a miles, therms, or value-add basis, these networks provide some of the safest possible means of delivering essential energy to end-use customers. The gas companies have also worked steadily to upgrade these networks through advanced, risk-aware, asset management practices—and in response to federal policy directives to constantly improve safety, reliability, and overall system integrity. Simply put, the value, diversity, capacity, physical extent, and integrity of these networks reflects their central role in supporting the U.S. economy on a 24/7 basis.    

The gas LDCs, along with their corporate owners, have a positive story to tell about encouraging efficiency and reducing natural gas losses across their network over the past two decades. It’s a good start, but there’s a long way to go on the decarbonization journey. This is particularly true when considering that the U.S. economy is expected to grow at an average long-term rate of 2-3% per year compounded, which will drive increased reliance on natural gas (and all other energy sources) without significant changes in regulation and incentives. To decarbonize, total CO2e process efficiency needs to improve by a factor greater than this average annual growth rate if the sector’s total CO2e intensity will decline. 

Chapter 2: The fallacy of therms for electrons

Many of the regulatory decarbonization efforts underway at the state and local levels are creating elegant, analytically rich, but arguably incomplete views of the challenges of swapping therms for electrons. Creating detailed, long-term market prognostications based on a handful of assumptions about building and heating equipment markets may be satisfying as a study matter, but these estimates most likely belie the complex nature of the markets they intend to parameterize. In fact, some of these models are often driven with scenarios that drive out natural gas use through aggressive electrification measures and whole building energy retrofits. Moreover, any local electrification measures are assumed virtuous by default, because (often) electrical system capacity is assumed always present in the amount and degree needed, and always with the greenest of credentials.   

Often these scenarios are light on the details about the end-use markets that are implicated.  Complex markets are boiled down to a handful of parameters concerning equipment sets (for building heat) and penetration assumptions (for building envelop energy retrofits). The regulatory interventions that are needed to force these outcomes are a backfill consideration once the forecast estimates over the long term are revealed—whether through fees, incentives, penalties, prohibitions, tax incentives, or other means, the interventions are assumed implemented without friction or undue side effects. 

Similarly, the needs of innovation to support these “bending of markets” views—whether in equipment sets, integrated software controls, regulatory program design, or workforce development requirements—are typically broadly stated (if at all) but certainly not intensively inspected.     

These scenarios also are typically end in a policy and economic catch-22—as natural gas use declines due to electrification, gas network utilization declines. This comes at a high price due to residual fixed network costs. This, in turn, sets in place a spiral of ever-higher network costs on the backs of fewer and fewer natural gas customers.   

It may be worth noting that the electric sector faced a similar “death spiral” peril just a few years back, with similar claims of a residual cost cliff. In that case, it was largely occasioned by premature enthusiasm for massive amounts of load shift to behind the meter distributed energy resources. Now we are just waking up to the real challenge of decarbonization—to meet it will require a massive build out of the electric sector’s green capacity to serve load. We are just now considering those implications in a reasonable way, revealing that the electrical system capacity will need to expand two to three times in order to meet the transformation challenge.  

These overly simple models and scenarios may have what we might call precision, but are they accurate? Can complex home heating markets, for example, be captured within the bookends of a few modeling assumptions concerning the types of home heating systems when there are thousands of different home heating system configurations? Do they capture the nature of these complex (and huge) markets (and their supply chains) in a way that we can bank on them for the purposes of designing and implementing the regulatory interventions required in order to promote their outcomes?

Chapter 3: Modeling a passive or proactive incumbent?

One striking observation about these scenarios is the largely passive role assumed within them for the natural gas companies themselves. They are largely a passive taker of the decline in natural gas use. As gas use declines due to comprehensive electrification in transportation, industrial, power, and building sectors (along with the resulting economic implication of declining network cost utilization), gas companies are positioned to play no positive nor accretive role. Nor are natural competitive pressures between natural gas and electricity harnessed to drive decarbonization outcomes. Rather, the natural gas companies are assumed to wilt and ultimately fail.

This construct misses the fact that the gas LDCs are important incumbents in today’s energy service landscape, and this confers competitive advantages to them in the service of decarbonizing. In the case of commonly owned gas and electric companies, these dynamics are somewhat softened and the participatory role for the natural gas company is sometimes emphasized. Excluding the long-term role of the natural gas company is thus a massive opportunity cost.   

First, the LDCs have a huge customer base and are well positioned to influence the consumption preferences, patterns, and the myriad equipment choices that these customers make. They can also influence, through competitive means, the home heating fuel and propane markets which further contribute to CO2e emissions. They can also play a significant role in driving demand-side measures, whether conservation or efficiency focused, just as the electric companies are called on to perform. If electric companies can deliver on energy efficiency so too can gas companies.  

Second, the LDCs annually purchase and move over 18 trillion cubic feet of gas through the gas delivery system. They can exert tremendous influence as a major purchaser of gas for their customers to ensure that the natural gas product is sourced responsibly with modern methods, technology, and delivery systems—thereby reducing CO2e across the delivery system. We see such market pressures play out all the time: Walmart or Target pressuring their suppliers to meet customers’ sustainability preferences is a commonplace expectation. 

Third, the LDC infrastructure is hugely valuable for moving gaseous fuels, including low carbon fuels over the long term. These vast and interconnected networks directly and indirectly promote the resiliency of the entire energy sector, which is vital for our economic well-being, particularly as it becomes more and more decentralized and distributed. Through their purchasing power, the LDCs have opportunities to promote, produce, transport, and distribute renewable natural gas, and green hydrogen—driving down today’s carbon intensity of delivered product. Greater use of decarbonizing gaseous fuels in an increasingly distributed energy world is a potent combination that supports electrification while preserving energy sector resiliency.