As state and local governments across the US pursue increasingly aggressive carbon-reduction targets, the market risks to natural gas are mounting. Some policies could slow or halt future demand growth for gas; others threaten to curtail existing consumption.
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The recent anti-gas sentiment, though, appears to have marshaled the fuel's defenders, with some advocates now arguing that the "electrify everything" movement underestimates how difficult it will be to sideline natural gas.
"There are pockets ... where they clearly want to go to 100% electrification yesterday," said Lillian Federico, analyst with Regulatory Research Associates. "There seems to be a disconnect between what policymakers and legislators are out there saying and wanting to do to grab headlines, and what's feasibly possible for regulators in terms of implementing these things."
Policies to restrict gas use in new buildings have prompted lawmakers in more than 20 states to introduce laws prohibiting gas bans. Meanwhile, the industry has accelerated efforts to decarbonize the gas grid, including through uptake of hydrogen and renewable natural gas, or RNG.
Lately, equity analysts have advised investors to distinguish parts of the country where policy risk truly exists from areas that have merely been swept up in generalized anxiety about the future of gas and the pace of the energy transition.
Perhaps no development has rattled the gas industry like the building gas-ban movement, catalyzed by a surge in electrification ordinances in the San Francisco Bay Area since July 2019.
Most gas bans and electrification codes apply to new buildings, so they chiefly threaten customer growth. Yet, electrification advocates widely see retrofits as the next step, and state policymakers in Washington and New York have put forward plans to phase out gas use in existing buildings.
Five of six states where restrictions on building gas use are advancing at the state or local level are among the nation's largest consumers of gas for building heating. Those states accounted for nearly 26% of residential gas use and about 23% of commercial consumption in 2019, the latest year for which US Energy Information Administration data is available.
Two of those states, California and New York, were the top consumers, while the others — Colorado, Massachusetts and Washington — each ranked in the top 20. Illinois, where some utility stakeholders are advocating for building electrification, ranked third.
Out of eight regions in the Lower 48 states, S&P Global Platts Analytics forecast the Northeast will post the second-highest residential and commercial gas demand growth through 2040. The EIA forecast the highest growth in New England, out of nine US regions.
However, a new climate law in Massachusetts could allow towns and cities to restrict gas use in new buildings, and in Burlington, Vermont, a new all-electric construction policy is in the works. Meanwhile, transitioning residents to electric or geothermal heat pumps is central to building decarbonization plans in Maine and Rhode Island.
In May, the International Energy Agency essentially endorsed those policies, advising policymakers to ban new fossil fuel boiler sales by 2025 and implement net-zero building codes by 2030. Around the same time, the Biden administration proposed federal initiatives to decarbonize and retrofit buildings, boost energy efficiency and electrify heating load.
Additionally, state and local opposition to new fossil fuel infrastructure has led some Northeast gas utilities to impose moratoriums on new gas hookups.
"All of that is suggesting even more limited growth that's possible in the residential-commercial sector, particularly on the coasts, the East Coast and the West Coast," said Rich Redash, head of Global Gas Planning at S&P Global Platts Analytics.
Out of at least 22 states where laws prohibiting gas bans are in play, Ohio, Pennsylvania, Texas and Indiana rank among the largest residential-commercial gas users. Together, the bloc is building a substantial firewall.
Lawmakers have adopted the laws in 16 states that together accounted for nearly 22% of residential gas use and 23.5% of commercial consumption in 2019. If the bills introduced in other legislatures pass, that firewall would expand to states that consumed more than a third of total US residential-commercial gas in 2019.
The effort overlaps with areas where forecasters expect substantial residential-commercial demand growth. Platts Analytics ranks the Southeast first for residential-commercial demand growth through 2040, while the EIA projects that three regions across the southern US will trail only New England in commercial gas consumption growth.
The building gas ban movement presents less risk to the industrial sector. Some California ordinances have excluded industrial facilities, and the laws typically include exemptions for applications where electrification is not viable.
That reflects the view that industrial sectors reliant on high-heat applications will be the hardest to decarbonize. Emissions reductions pathways such as carbon capture and storage, renewable hydrogen and RNG are also still emerging for those applications.
However, Platts Analytics sees US industrial gas consumption growing 12% from 2020-2040, an indication of how US gas has become critical to manufacturers. That follows 14% growth over the previous 10 years, driven by an economic recovery, greenfield development of gas-intensive manufacturing like petrochemicals facilities and expansion of ammonia and methanol plants, Redash said.
The anticipated slowdown is partly due to decarbonization, the ESG movement, net-zero targets and increased electrification, he said.
"We still see growth continuing in the industrial sector. It's just going to happen at a slower rate than what we saw over the last 10 years," he added.
The nation's third-largest gas consumer for industry, California, is positioning itself to displace fossil fuel use in factories with green hydrogen, produced through electrolysis powered by renewable energy. The Green Hydrogen Coalition and the Los Angeles Department of Water and Power in May launched a partnership to develop the nation's first green hydrogen hub in the Los Angeles area, one of the nation's top manufacturing bases.
Notably, industry observers frequently identify the nation's highest consuming region, the Gulf Coast, as a potential hydrogen production hub. It has plentiful storage potential and is home to much of the current US hydrogen supply and infrastructure, where hydrogen is chiefly consumed in the refining and chemicals sectors.
Texas and Louisiana, which underpin the US petrochemicals industry, together represented more than one-third of US industrial gas consumption in 2019. Since the Gulf Coast is a major contributor to US industrial sector emissions, it is also an ideal place to scale up decarbonization and carbon capture and storage infrastructure, according to Julio Friedmann, a former US Department of Energy principal deputy assistant secretary who led the agency's research and development program for CCS.
That could include building a pipeline network to transport carbon captured from so-called blue hydrogen, produced from natural gas, Friedmann told S&P Global Market Intelligence in an October 2020 interview. Friedmann, now a senior research scholar at Columbia University's Center on Global Energy Policy, believes that blue hydrogen would be critical to building the US' long-envisioned hydrogen economy.
Yet Texas is also the nation's top renewable power generator, presenting a case for the state as a green hydrogen hub. However, green hydrogen — produced through electrolysis with renewable power — presents steep challenges, Friedmann said during a Feb. 24 webinar.
While electrolyzer costs are falling, power prices account for most of green hydrogen's cost, he said. A cheap contract for industrial offtake from renewable resources typically falls around 4 or 5 cents per kWh, which would make it difficult to produce green hydrogen affordably, he said. Projects also need to boast a sufficient capacity factor to generate the excess electricity necessary to make hydrogen, he said.
"I don't want people to necessarily believe that this is going to end up being cheap and easy," Friedmann said. "It will not."
The Gulf Coast states also boast some of the nation's lowest industrial gas prices, potentially presenting a barrier to renewable gas adoption.
Today, RNG typically costs $5-$15/MMBtu, without federal support or tax credits, Northwest Natural Holding Co. President and CEO David Anderson told analysts and investors at the American Gas Association's Financial Forum in May. Hydrogen production from electrolysis and using carbon capture also trades at a substantial premium to natural gas, according to S&P Global Platts' pricing data.
The $600/mt carbon price represents the current carbon price needed for Platts Hydrogen California PEM Electrolysis, including capex, to achieve parity with natural gas at PG&E City-gate. As capex and electrolyzer costs decrease for PEM Electrolysis, though, the carbon price required to achieve parity should also decline.
The same headwinds could apply to building electrification. In announcing the city's intention to pursue all-electric construction, Denver officials noted that the state's very low gas prices could mean all-electric buildings would carry higher operating costs.
Prices for delivering natural gas to residential and commercial customers in Colorado are among the lowest in the nation. Delivery costs are generally lowest in the surrounding Mountain region and the north central US — an area stretching from the Rockies and Southwest through Illinois and Ohio.
The regions with the highest delivery costs to residential and commercial customers are the Northeast, which presents policy risk, and the South Atlantic, home to legislatures that have sought to preserve access to gas utility service.