This article was published by The Energy Mix on July 25, 2024.
By Mitchell Beer
A pilot project in California aimed at converting whole neighbourhoods from gas to electricity may deliver some valuable lessons for Canada, despite differences in regulation and business models that make the comparison between the two countries a less than perfect fit.
Last month, Canary Media reported on SB 1221, a bill that is now before the California state legislature. “It would pave the way for the state’s gas utilities to set up 30 ‘zonal decarbonization’ projects—entire neighbourhoods where the cost of electrifying customers would be significantly lower than the cost of upgrading or replacing the old gas pipes,” the news story states.
With the cost of gas pipeline replacements running more than US$3 million per mile, “similar concepts are being explored in states including Colorado, Illinois, Massachusetts, New York, and Washington,” writes grid specialist Jeff St. John, the publication’s director of news and special projects.
“The common goal is twofold: to provide gas utilities with a way to invest in assets that don’t conflict with state mandates to dramatically reduce the use of fossil gas in buildings, and to avoid burdening gas customers who can’t afford to go electric with rising bills to cover the sunk costs of an increasingly underutilized pipeline network.”
Those are two of the central issues the Canadian Climate Institute (CCI) raised last month in a comprehensive analysis that called on provincial governments to rein in their expanding gas systems or risk failing to meet net zero targets, while incurring staggering costs from stranded assets.
“The critical thing is that we change our approach to expansion and that we think very seriously about how we’re going to deal with existing systems,” CCI Senior Research Director Jason Dion said at the time. “We need to be thinking very carefully about whether [new gas infrastructure] is going to be used and useful over its lifetime,” while dealing with the complexities of managing the existing gas network while demand declines.
A Game-Changer
San Diego-based sustainability strategist Jamie Skaar said he saw strengths and risks in the California approach. But in a LinkedIn post last month republished by veteran Canadian clean energy analyst Dan Woynillowicz, he called zonal electrification a game-changer. “Targeting entire neighbourhoods for gas-to-electric conversion could unlock massive economies of scale and accelerate the transition,” he wrote. “Savvy companies will start mapping opportunities and building community relationships now.”
In California, as in Canadian provinces, the risk of stranded gas assets is a “ticking time bomb,” Skaar said, with “potentially unrecoverable gas investments looming”. And utilities’ obligation to serve all customers can be a double-edged sword: “While it protects consumer choice, it also hampers the ability to decommission obsolete infrastructure.”
For a transition process that depends on trust-building and community buy-in, he also warned against “heavy-handed mandates” that could “trigger backlashes and entrench opposition. Equity must be central, or else vulnerable communities could be left behind.”
So Skaar proposed a thought experiment: “What if gas utilities were reimagined as energy service providers, agnostic to the fuel source? What if they could leverage their customer relationships and infrastructure to become electrification champions rather than obstacles? How might that alignment shift the entire landscape?”
Regulations Make the Difference
Kate Harland, the Climate Institute’s mitigation research lead and a member of The Energy Mix’s Heat & Power Sounding Board, said many of the differences between Canadian and U.S. utilities come down to regulation, and the structure of the industry itself.
In California, some gas utilities are recognizing that the risk of stranded assets could fall on their customers and looking at electrification as an alternative. “Particularly when you have opportunities like long lines of pipe that need replacing with few customers, that’s a sweet spot to support electrification of those customers,” Harland explained.
“It saves the whole rate base, because otherwise they’d be replacing that long line of pipe, all customers would be paying for it, and who knows if they’ll stay on the system for the 40, 50, 60 years it takes to pay for the infrastructure?” she added. But so far, that kind of forward thinking from utilities “is something we’ve seen more in the U.S.” than in Canada.
That’s partly because U.S. regulations require it. California rules include a “prudent management test” that “comes down to how they’re incentivized and where there’s clarity about the risk,” Harland said. In Canada, by contrast, “there’s a little bit of ambiguity about who might pay” in the event that assets are stranded.
The structure of the business in each jurisdiction also has an impact. In most provinces, gas and electricity suppliers are separate, a fairly unique situation that differentiates Canada from jurisdictions elsewhere with more dual fuel utilities.
The companies do advocate and work with each other, “but it makes it a lot easier to look at switching to electrification if it’s a business you’re already in,” she said. Even for a large, to some degree dual fuel utility like FortisBC, the main focus is still on gas. So “if gas is your large, central, regulated business and that’s where you’re getting a stable return, that’s what your parent company is looking for,” and investors are, too.
How to Make the Switch
Harland said the U.S. states cited in the Canary Media coverage aren’t the only jurisdictions embracing zonal electrification. She cited Zurich, Switzerland, and parts of Germany as places where area-wide gas networks have been replaced by heat pumps or district energy systems.
“This has been done elsewhere, and it’s been done on the basis that gas utilization in those areas has been falling and dropping because there’s a clear alternative,” she said. But it only works if communities are onboard and have lots of notice that change is happening—in Zurich’s case, 10 years’ lead time.
“You’ve got to have a clear plan with a clear lead time so you’re not telling customers it’s going to be turned off tomorrow.”
As for stranded asset risk, Harland stressed the essential role of regulators in deciding whether the cost burden will fall on customers or shareholders—or in most Canadian jurisdictions, utility customers or provincial taxpayers. “For utilities confronting those risks, “there’s less incentive to contain them and to control and manage them” if the financial responsibility is ambiguous, she said. “So that’s where some of our work has been going, looking at who bears the risk. Not who should, but who will from a legal perspective.”
The other issue with stranded assets is whether a utility exercised prudent management in the way it anticipated and addressed the possibility. But as the energy transition unfolds, that landscape is still “confusing to many”, Harland said, a situation that calls for clear and stable policies, with clear commitments and legislated, five-year targets to guide utilities’ decisions.
“If something is developing organically rather than by plan, if there isn’t a clear energy strategy at the provincial level, then you miss opportunities to build out the electricity you need, and you actually increase costs overall.”
Who Gets Stuck with the Bill?
The SB 1221 conversation in California points to two other important questions, Harland said: how to define or redefine the obligation to serve, and who gets stuck with the bill if utilities get that obligation wrong.
“One option which is being looked at in the United States is to have an obligation to serve consumers with heat, rather than making it specific to a particular fuel type,” an approach that doesn’t mandate any specific technology and might open up more affordable options for companies that are currently limited to transporting gas. That cost management opportunity ties in with the realities of a system where the costs are shared by all, but some ratepayers have more ability than others to get out.
“This is about being prepared and not leaving consumers on the hook for higher costs down the road” as gas dependency decreases, Harland said.
“As prices rise, those most able to leave the network financially and educationally are not necessarily those with the lowest income. So managing the network, managing the gas system, and reducing some of the costs will benefit those on the lowest income, because it reduces the cost of the system overall.”
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