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CenterPoint's yearslong push yields RNG, hydrogen cost recovery in Minnesota

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Essential Energy Insights - October 2021


CenterPoint's yearslong push yields RNG, hydrogen cost recovery in Minnesota

Minnesota's special legislative session yielded a long-sought prize for CenterPoint Energy Inc.: a pathway for public utilities to recover the cost of displacing standard natural gas supplies with low- and zero-carbon alternatives in the state's distribution system.

The passage of the Natural Gas Innovation Act marked the realization of a CenterPoint effort to establish a regulatory framework for flowing renewable natural gas, or RNG, and green hydrogen to Minnesota gas customers. These fuels offer gas utilities a pathway to further decarbonize their operations. RNG is processed from methane waste sources like farms and landfills, while green hydrogen is produced in electrolyzers powered by renewable electricity.

CenterPoint, which serves 890,000 gas customers in Minnesota, first proposed the Natural Gas Innovation Act in February 2020, after the state rejected the company's proposed pilot project to flow RNG to Minnesota gas customers. The law was not signed into law during the 2020 and 2021 regular sessions of the Minnesota Legislature, but lawmakers incorporated it into an omnibus package during a June special legislative session. Gov. Tim Walz, a Democrat, signed the bill into law June 26.

"This new law will help promote new Minnesota-produced, low-carbon or zero-carbon gas resources that can diversify the state's energy supply, improve waste management and support new economic development," Brad Tutunjian, CenterPoint's vice president for the Minnesota region, said in a July 6 press release.

The law could also impact WEC Energy Group Inc., which serves 243,000 Gopher State gas customers through Minnesota Energy Resources Corp., and Xcel Energy Inc., whose Northern States Power Co. subsidiary distributes gas to about a half million customers, chiefly in Minnesota. MDU Resources Group Inc. subsidiary Great Plains Natural Gas Co. and Greater Minnesota Gas Inc. also distribute gas in Minnesota.

"Our environmental goals, which are some of the most ambitious in the utility industry, include plans for net-zero methane emissions from natural gas distribution operations by the end of 2030," WEC Energy said in a statement. "The Natural Gas Innovation Act will help us as we continue exploring emerging technologies, including renewable natural gas."

Under the law, utilities can submit a natural gas innovation plan to the Minnesota Public Utilities Commission, or PUC. In rendering a decision, the PUC will consider whether the plan produces net benefits, reduces or avoids greenhouse gas emissions, and promotes local economic development. The plans will run for five years, and utilities will have to file annual reports on program criteria.

According to the law, its goal is to "reduce the overall amount of natural gas produced from conventional geologic sources delivered to customers." Minnesota failed to meet its 2015 greenhouse gas emissions reduction goal and is not on track to meet its 2025 and 2050 goals of reducing emissions by 30% and 80% from 2005 levels, respectively. Commercial and industrial emissions were up 15% and 18%, respectively, between 2005 and 2018, while residential emissions were up 32% over the same period, according to the state's biennial emissions inventory report.

While clean energy investments are not limited to renewable gas under the legislation, the act favors this decarbonization pathway. At least half of a utility innovation plan costs must go towards procuring and distributing RNG, biogas, green hydrogen or ammonia produced through a power-to-gas process.

During their first five-year innovation plan, utilities can propose annual program spending equal to 1.75% of their gross operating revenues generated by in-state natural gas service. The PUC can approve additional spending equal to 0.25% of annual revenue if the incremental expenditures go toward procuring RNG produced from food waste, municipal wastewater systems or blends made from local crops. The ceiling on annual program costs steps up to 4% of revenuesand an additional 1.5% for qualifying RNG purchasesif the utility meets cost-effectiveness objectives during two five-year programs, or by 2033 at the earliest.

For large gas distributors with 800,000 customers or more, the benefit of passing on renewable gas investments to ratepayers comes with commitments to operate several pilot projects as part of the first innovation plan. The customer count threshold means the requirement would only apply to CenterPoint.

CenterPoint will have to pilot thermal energy audits for small- and mid-sized businesses to identify emissions reductions opportunities and incentivize business owners to implement recommendations. It must also pilot innovative energy resources for industrial customers with hard-to-electrify manufacturing practices.

The law also required CenterPoint to pilot cold climate air-source heat pumps and deep energy retrofits for homes with gas heating. Lastly, it mandated a pilot project to develop or expand district energy systems, which utilize combined heat and power plants, geothermal resources, biogas or other energy sources to heat and cool buildings in a defined area, like a college campus.

In November 2020, the PUC approved CenterPoint's proposed framework for interconnection agreements with RNG suppliers. An attempt to prohibit local governments from restricting gas use in buildings failed for a second straight year in 2021.