TODAY’S STUDY: How California Will Squeeze NatGas Out

Draft Results: Future of Natural Gas Distribution in California

June 6, 2019 (Energy + Environmental Economics via California Energy Commission)

This project evaluates gas customer implications and health impacts of a low-carbon future in California

Key questions

• What are the economy-wide costs of achieving a lowcarbon future? What strategies are available to reduce the consumer cost impacts of decarbonizing buildings, and make the transition more equitable?

• What are the health implications of different electrification and decarbonization strategies? …

Draft conclusions

Using renewable natural gas (RNG) to decarbonize buildings—with foreseeable technology—is an expensive strategy

• The high cost of RNG would likely encourage economic electrification for some

Replacing gas equipment with electric equipment upon burnout lowers the societal cost of achieving California’s climate policy goals

Gas demand decreases in all of the GHG mitigation scenarios. As gas demand falls, average costs for remaining customers increase

• Absent policy intervention, low-income customers who are less able to electrify may face a disproportionate share of those costs

A gas transition strategy is needed to reduce the costs of the gas system and protect consumers. Such a strategy could include:

• Reducing gas system expenditures (i.e. via targeted retirements of gas pipelines)

• Changes to gas rates & rate design

• Recovery of gas system costs from electric ratepayers or from other funds

Building electrification improves air quality and health outcomes in urban centers

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Technology Options to Decarbonize the Natural Gas System

Methods to evaluate the costs of renewable natural gas technologies

Renewable natural gas (RNG) is a term used to encompass: Biomethane, climate neutral hydrogen, and synthetic natural gas (SNG)

UCI estimated production efficiency, levelized capital costs, and variable O&M costs over time for each biomass feedstock type (e.g. manure, wood waste, etc.) for RNG production

Costs are a function of:

• Industry learning rate and global installed capacity

• Electrolysis technology

• Load factor

• For SNG, the CO2 source

Developed assumptions about global installed capacity of RNG technologies

Applied learning rate assumptions to develop cost trajectories over time

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Biomethane is an important resource in all scenarios, but feedstocks are limited…Hydrogen and SNG are less constrained by feedstock potential, but face other challenges…Base case and low cost assumptions for hydrogen and SNG are evaluated…

California Economy-wide Decarbonization Scenarios

There is insufficient low-cost RNG to fully decarbonize the pipeline without electrification

Expensive RNG would likely be needed to decarbonize gas demand without electrification, even with aggressive technology learning and use of best-case out of state resources to produce hydrogen and SNG

Analysis focuses on three key scenarios

1. Current Policy Reference Does not meet 2030 or 2050 economy-wide GHG goals

• Reflects SB 350, consistent w/ a “zero-carbon retail sales” interpretation of SB 100

2. High Building Electrification Achieves economy-wide 40% reduction in GHGs by 2030 & 80% by 2050

• High electrification of buildings (50% heat pump sales by 2030, 100% by 2040) and light-duty vehicles

• Pipeline biomethane (along with liquid biofuels) mostly serves industry & CNG trucks; remaining fossil budget used in transportation and industry

3. No Building Electrification Achieves economy-wide 40% reduction in GHGs by 2030 & 80% by 2050 \

• No electrification in buildings, high electrification of light-duty vehicles

• In addition to using all available biomethane, adds hydrogen and SNG in the pipeline and more ZEV trucks than high electrification scenario

• Pipeline gas blend remains 56% fossil in 2050, so a large share of the 2050 emissions budget is in buildings

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Gas throughput declines in all scenarios: Gas use in buildings is a key difference…

Building electrification projected to lower economywide cost

Use of hydrogen and SNG drive cost increases post-2030 in No Building Electrification Scenario, with a wide range reflecting uncertainty in SNG cost

Costs in the High Building Electrification scenario stabilize as other mitigation costs (e.g., renewables, electric vehicles) continue to decline post-2030

Transfer payments (e.g. LCFS, cap-and-trade) do not increase the total societal cost

Remaining emissions in 2050 and implications for net-zero GHG emissions

Both scenarios would require additional GHG mitigation measures throughout the economy to achieve net-zero GHG emissions

• The High Building Electrification decarbonizes buildings more completely by 2050 and has more low-cost options remaining in transportation and industry.

• Using SNG to reduce building sector emissions to the same level as the “Building Electrification” scenario would require more DAC

• $4 - $9/therm à an additional cost of $11 - $24 Billion/year in 2050

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Implications for Natural Gas Customers

California’s current energy cost challenge

Natural gas costs are increasing

• Following the San Bruno explosion and Aliso Canyon gas leak, gas utilities in the state are in the midst of safety driven expenditures, markedly increasing their costs

Electricity costs are increasing

• Electric utilities expect increases in cost due to wildfire liability and to harden their systems against wildfire risks

The extent and duration of increases remain uncertain

The structure of gas utility revenue requirement today

E3 estimates that California natural gas utilities collect $7.5B in revenues per year

• E3 developed a gas utility revenue requirement tool estimating gas rates through 2050 under different scenarios Ê These revenues cover both ongoing operations and maintenance (O&M) costs, as well as pay for infrastructure replacement and expansion

• O&M costs are just over half the revenues of gas utilities.

• Costs related to capital investments are just under half of gas utility revenues.

The costs of commodity gas are tracked separately from the utility revenue requirement and are a pass-through expense

Current Policy Reference scenario gas system costs are uncertain, but will likely increase over time

By 2050, gas system costs would be substantially higher even in a “Reference” scenario due to capital cost escalation and continued safety enhancements and system reinvestments

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Statewide gas utility revenue requirement and commodity cost in 2019 and 2050

Today, delivery costs are the majority of residential gas bills.

By 2050, gas distribution costs may be larger than today, even in a future with high building electrification and gas infrastructure retirement

By 2050, gas system costs are substantially higher in the No Building Electrification scenario than the High Building Electrification scenario due to 1) higher throughput and 2) more expensive commodity costs

Average residential utility bills

Low-income gas consumers would likely need rate protection and/or transition assistance if large numbers of customers opt for economic electrification

Post-2030, mixed-fuel homes always have higher bills than all-electric homes

This scenario assumes no economic electrification. Gas rates and bills would increase further than shown here if customers choose to electrify

Thought experiment: electric rates

How high would electric rates have to increase for mixed-fuel and all electric customer bills to be equal in 2050 in the No Building Electrification Scenario?

In 2050, electric rates would need to be $0.55/kWh to reach a break-even utility bill with mixed-fuel customers. This would impose significant affordability challenges on all California customers High electric rates would reduce the economic advantages of electrification in both the transportation and buildings sectors

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Examples of a Gas Transition Strategy…Air Quality Analysis…

Initial Conclusions

• Technological strategies to reach 2050 carbon goals attain notable co-benefits to air quality and human health – Impacts vary by season, source, and region

• Reductions from MDV/HDV attain important benefits – Widespread benefits to ozone and secondary PM2.5 in summer from NOx reductions

• Building electrification has important impacts in densely populated urban areas – Impacts on secondary PM2.5 in winter from NOx reductions from NG appliances

Next Steps

• Integrate and assess the potential impacts of biorefineries – Results presented here do not account for emission impacts of renewable fuel production

• Develop methodological framework for contextualizing results through impacts to disadvantaged communities – Integration of results from CMAQ and BenMAP with CalEnviroScreen 3.0

• Develop and asses scenario considering potential emission impacts from hydrogen/NG blending – End-use impacts could be positive or negative…

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