April 2022 | Point of View

Your decarbonization strategy requires a blended approach to spur innovation

Decarbonization is ambitious. The challenges surrounding it are complex. Take a balanced effort to achieve your goals.

Your decarbonization strategy requires a blended approach to spur innovation

The Infrastructure Investment and Jobs Act (IIJA)—coupled with financial assistance from states—has created a once-in-a-generation market environment. Both industry and government have the opportunity to take strategic action toward decarbonization with billions in funding available. And yet, there are a host of often conflicting challenges and opportunities when it comes to reducing reliance on fossil fuels—including natural gas, the dominant fuel in the U.S.—and increasing the use of renewable energy resources. 

For instance, the growing number of bans on natural gas by U.S. cities and municipalities begs a series of complex follow-up questions: Will there be enough sufficient clean energy to serve as a replacement? If not, will near-term decarbonization efforts be hindered, seeing as natural gas is used as a substitute for higher-emitting fossil fuels? What’s more, will banning natural gas inhibit the development of cleaner fuels like hydrogen or renewable natural gas (RNG), which rely on the natural gas distribution system?  

There are no simple answers. Instead, when evaluating decarbonization strategies, utilities and regulators must adopt a balanced, blended approach that leverages new innovations and technological advances—and evolves over time. 

The current state of decarbonization  

Throughout the U.S., momentum continues to build for decarbonization—but there’s still a long way to go. Utilities with a strong understanding of the current economic and regulatory landscape will have a strong foundation for effective strategies the in coming years. Here’s a snapshot of where we currently stand. 

Policy initiatives  

There are myriad policy initiatives at the state and federal levels. For instance, 24 states and the District of Columbia have adopted greenhouse gas (GHG) reduction targets, and all but four of the 30 largest U.S. electric utilities have set net-zero GHG emission targets for 2050 in line with states’ and regulators’ directives. 

At the federal level, there are policies such as the Department of Energy’s (DOE) Energy Earthshot Initiative. Launched in June 2021, it seeks to accelerate technological breakthroughs in clean energy solutions within 10 years to help reach the Biden Administration's goal of net-zero carbon emissions by 2050.  

Simultaneously, federal dollars are going toward climate change mitigation and decarbonization. The IIJA provides up to $65 billion in funding to build energy efficiency and resilience, including $3.2 billion available to states for clean energy, grid integration, and energy efficiency improvements at public schools, municipal government buildings, wastewater treatment plants, daycare facilities, and colleges/universities. 

Growth of clean energy market  

Given the spate of policy initiatives, it’s no surprise that the largest share of new electric generating capacity additions come from solar photovoltaic and wind power—while projections show continued retirement of nuclear and coal generation. And as costs of clean energy technologies decline, job growth in the sector continues to grow. For example, as of this past December, the New York City metro region clean energy sector alone is home to some 222,489 of the more than 3.7 million private sector jobs.  

Advancing the use of green hydrogen and RNG as a supplement and alternative to natural gas is another pathway in support of decarbonization: Since 2018, the number of RNG projects in the U.S. more than doubled from 74 to 169—with continued growth expected. And as costs for developing hydrogen power decrease, using clean hydrogen for power generation will ultimately be the lowest-cost solution to backing up renewable generation if natural gas is banned. The reason? Most natural gas-fired power plants are already located along transmission lines.  

Transformation of modern electric grid  

The modern electric grid is evolving to become a distributed, multidirectional power flow grid with multipoint communications. The need for electric transmission and distribution infrastructure to remain balanced in this multidirectional system—while providing reliable and resilient service—is more important than ever to support the grid of tomorrow. A transition to cleaner energy sources is critical to maintaining reliability in the near term until longer-term solutions can be put in pace.  

Natural gas remains dominant fuel source—for now 

Despite local natural gas bans in five states, natural gas doesn’t look to be going anywhere soon.  According to the 2022 Annual Energy Outlook (AEO), an assessment by the U.S. Energy Information Administration (EIA), natural gas represented approximately 37% of U.S. electricity generating capacity in 2021 and is projected to remain a significant part, around 34%, by 2050.  However, the share of renewables in the U.S. electricity generation mix more than doubles to 41% by 2050, overtaking natural gas as the dominant fuel source.  

The need for a balanced approach  

These trendlines present a series of challenges. Natural gas companies, specifically local distribution companies (LDCs), are working to reduce GHG emissions produced by natural gas by replacing methane leak-prone pipes and piloting new carbon-free fuel sources, such as green hydrogen and RNG. 

However, cities and municipalities in states in which these natural gas LDCs operate may choose to eliminate natural gas as a fuel. These competing interests demonstrate that key stakeholders are often in conflict with one another on the future of natural gas in a lower carbon or carbon-free energy system. Investment dollars will not flow to natural gas pipeline replacement as a means for reducing methane leaks if cost recovery is not assured.  

The challenges of replacing natural gas in the near term 

With natural gas serving as the dominant fuel in power generation, eliminating it to heat buildings, for example, requires an increase in electricity production and transmission. Natural gas combined-cycle power generation, like battery storage, can be of value here when used to balance electricity loads as more intermittent and distributed renewable energy resources are added to the electric grid. Yet, unless the electricity powering buildings is generated solely from clean energy sources, bans on natural gas will only shift emissions from the buildings sector to the power generation sector—instead of reducing emissions. What’s more, natural gas use in buildings is more efficient than natural gas used to generate electricity.  

Fortunately, many of the local natural gas bans have a phased rollout over many years, potentially allowing time to build the renewable generation and transmission and distribution infrastructure needed to meet future electricity demand.  

Natural gas bans conflict with pipeline replacements to reduce emissions 

The average age of natural gas distribution pipe in the U.S. is 42 years, and nearly 90% of emissions declines from gas distribution systems since 1990 have been due to pipeline replacements. That’s probably why many state regulators hoping to achieve GHG emission reduction goals are looking to speed leak detection and pipe replacement. At the same time, it’s estimated that there are 112 new natural gas transmission projects being built across the U.S., totaling nearly $89 billion and representing more than 5,000 miles of pipe.

Installing new pipe and replacing older ones can reduce methane leaks and achieve GHG reduction goals, but it also directly competes with bans on new pipeline infrastructure to phase out and eliminate gas use. This creates a challenging dynamic in which continued investment in pipe replacement will slow or cease all together if natural gas companies don’t want to risk investing in and carrying assets they’ll never fully recover. 

Investors might shy away from making further investments in critical natural gas infrastructure as a result, potentially threatening electric and gas system reliability and resiliency—especially as new opportunities to use green hydrogen and RNG as a decarbonization pathway emerge. 

One solution? Pivot to hydrogen and RNG  

Experts say that it makes sense to leave critical natural gas infrastructure in place to carry low-carbon fuels. This means that pivoting ongoing pipeline construction and replacement projects to support hydrogen and RNG blending could reduce major asset losses and contribute to decarbonization goals.  

If the goal of policymakers is to phase out gas altogether, it can be argued that utility depreciation policies requiring investment recovery over an asset’s service life inhibits innovation and the use of new technologies. Investment recovery will be stranded and unrecoverable. Any effort to phase out gas while also requiring utilities to replace leak prone pipes will necessitate regulators to accelerate deprecation over a much shorter period of time to enable utilities to raise capital to pay for pipe replacements. 

Repurposing natural gas pipelines for transmission and distribution of green hydrogen or RNG can also help mitigate these concerns. Continued investment in natural gas infrastructure in the near term also benefits the electric grid by supporting reliability and state GHG reduction goals by replacing leaking pipe—all while ensuring utilities don’t suffer major monetary and infrastructure losses. 

Enable solutions for stakeholder needs through innovation  

To rebuild and enhance existing electric grid capabilities effectively and efficiently—while also considering climate change and future needs—stakeholders must seek innovative solutions that can align utilities, regulators, investors, and customers around common goals.  

For instance, utilities need the support and backing of customers, communities, and regulators to gain approval for infrastructure investments. Customers need assurances by utilities and regulators that investments are in the best interest of customers, society, and the environment. Investors, who can provide capital for grid expansion, renewable and distributed generation, transportation and building electrification, and natural gas pipe replacement to meet decarbonization goals, need assurances that their investments will be recovered and yield a reasonable return on investment.  

There are many innovative solutions that can enable all stakeholder needs to be met, including:  

  • Leak detection technology that can help LDCs detect, quantify, prioritize, and repair methane leaks. For example, using sensors on Google cars to detect and assess high-emitting leaks, a New Jersey utility prioritized replacements that have led to an 83% reduction in methane emissions and reduced the miles of pipe needing to be replaced by one-third. 

  • Machine learning, deployed via advanced metering infrastructure and connected devices, can help utilities collect and leverage customer data to assess asset health, asset management, and help predict excavator damage from replacing pipe. For example, National Grid and NiSource, two Northeast natural gas distribution utilities, have used predictive analytics to decrease third-party excavation damages to pipelines by applying available ticket data with proprietary statistical analysis methodology to identify high-risk areas.  

  • Using existing natural gas assets for hydrogen and RNG. As noted above, using natural gas infrastructure to support hydrogen and RNG power can diversify the energy supply while reducing GHG emissions. The DOE’s Earthshot Initiative aims to help here by providing resources to reduce the cost of clean hydrogen by 80% in the next decade. And utilities have announced at least 26 hydrogen pilot projects in the past year as the industry works to understand how to make and transport hydrogen and migrate customers and equipment to the low-carbon fuel.  

A once-in-a-generation opportunity  

To meet ambitious decarbonization goals, utilities must be empowered to make significant investments in a range of new technologies and infrastructure. Financial support from legislation like the IIJA—which aims to do everything from repairing/upgrading infrastructure to developing clean and renewable energy sources to building smart power grids, improving transportation systems, and updating existing US buildings—can play a vital role. 
But we can’t proceed with blinders on. Choosing only one path to decarbonization could depress innovation and dismiss the needs of maintaining current infrastructure. For instance, with so much uncertainty created by cities executing individual mandates and bans on natural gas, utility investors might decide to slow or stop financing crucial infrastructure updates and projects that simultaneously support decarbonization efforts.  

That’s why utilities (and regulators) should consider a balanced, blended approach—one that can help navigate the complexity of today’s accelerating decarbonization efforts. Near-term and longer-term solutions need not be in conflict.

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