A tipping point: Economics of gas no longer make sense
A decade ago, the economics of heating a home with natural gas were strong compared to alternatives like electric heat pumps. Natural gas was markedly cheaper than electricity. Consumers, eager to capitalize on cheap fuel prices and a promise of cleaner combustion, installed gas appliances. Puget Sound Energy (PSE) and NW Natural, two of the Pacific Northwest’s biggest gas utilities, helped incentivize this growth, adding more than 230,000 new customers combined, a 16 percent increase, over the past decade.
But gas is no longer cheap. In 2012, the commodity price of gas averaged $2.75 per Million British thermal units (MMBtu); 2022 averages are nearly 2.5 times higher at $6.60 per MMBtu. Between 2020 and 2022, gas prices rose particularly sharply because of slow production growth in the U.S. and a significant increase in liquefied natural gas (LNG) exports, coupled with the price increases driven by Russia’s invasion of Ukraine. In the Pacific Northwest, both PSE and NW Natural are wrapping up general rate cases for double-digit rate hikes, driven by gas commodity prices.
While natural gas bills are straining consumer pocketbooks, incentives for electrification are on the rise. The recently enacted Inflation Reduction Act is likely to hasten the transition away from natural gas. The law includes $369 billion in funding for a broad range of clean energy, energy efficiency, and emissions reductions programs, and includes an array of provisions that will supplement state and local electrification efforts in homes and commercial buildings already underway.
Among the most important electrification-related provisions in the new law are:
- A tax credit of up to 30 percent for installing heat pumps for either water heating or space heating and cooling.
- $4.5 billion in rebates for low and moderate income households that install efficient electric appliances. Estimates show this funding will enable one million households to electrify.
- A credit of up to $5,000 for developers that build homes meeting the Department of Energy’s Zero Energy Ready Homes standard.
- A 30 percent deduction of the cost of residential solar and battery storage systems.
- $1 billion for electrification retrofit projects in affordable housing.
This new wave of federal incentives is certain to transition millions of customers away from the gas system in favor of electrified homes and businesses.
States are promoting electrification, too. Recognizing the liabilities associated with adding and sustaining natural gas usage, two Washington utilities are poised to eliminate one of the most significant incentives for gas: the gas line extension allowance. These allowances let gas utilities subsidize customers who are hooking up new buildings to gas distribution pipelines to by amortizing the cost of that extension across their ratepayers, rather than charging the new customer the full-cost of that hook-up, effectively “hiding” the cost of new gas hook-ups and incentivizing new building owners to choose gas. Both PSE and Avista have reached tentative settlement agreements for their respective general rates cases, and if approved by the Washington Utilities and Transportation Commission, the settlements would eliminate gas line extension allowances by January 1, 2025.
Further, PSE has agreed to pilot a $15 million electrification program for its gas customers, targeting 10,000 homes and small commercial buildings. Both utilities agreed to develop a Targeted Electrification Strategy to be included in their next gas Integrated Resource Plan and Biennial Conservation Plan, which will consider a comprehensive set of electrification measures and corresponding incentives. PSE will also develop a proposal to limit or phase out incentives for new gas appliances, create a set of annual targets to continue reducing new gas customer additions in future years, and eliminate all promotional advertising aimed at attracting new gas consumers by the end of 2022. These settlements, if approved, could set a strong precedent for NW Natural and Cascade Natural Gas when these utilities file their next general rate cases.
Meanwhile, the Oregon Public Utility Commission (OPUC) issued its final orders in the NW Natural rate case. While environmental groups and NW Natural reached settlement agreements for several of the proposals in the rate case, no such agreement was reached for the contested line extension allowances. In its final ruling, the OPUC reduced the allowable line extension allowance by $500 (17 percent) and prescribed two additional reductions over the next two years. Unlike PSE and Avista, NW Natural stands to lose from electrification because it does not run the electric utility business that will benefit from the fuel conversion.
The message is clear: the economic future of gas utilities in the Pacific Northwest is growing ever more unfavorable. New federal investments will help boost electrification and efficiency initiatives that will decrease reliance on the gas system. At the same time, gas utilities can no longer promote the fuel as a low-cost and clean option. Finally, state regulators are also examining regulatory policies to remove or reduce gas subsidies that have historically fueled gas utilities’ growth. With high costs, decreasing subsidization, and a tarnished environmental reputation, coupled with the wave of new incentives for electrification, the economics of gas use has reached a tipping point.