Gas utility RNG investments face a hurdle: building electrification policies

Gas utilities have lately drawn support from several state regulators in their bid to recover the cost of renewable natural gas investments, though the continued spread of building electrification policies clouds the outlook for the low-carbon fuel in some parts of the country.

Gas utility operators in several states have recently advanced requests to offer voluntary renewable natural gas (RNG) tariffs and link up their systems with RNG production facilities, creating opportunities to decarbonize their business. Farms, landfills and other facilities that produce methane waste avoid venting the planet-warming gas into the air by capturing and processing it into pipeline-quality fuel.

Gas distributors are increasingly seeking permission from regulators to pipe that fuel into homes and businesses. But in policy circles, RNG must compete with other decarbonization pathways, namely building electrification, which has gained traction over the last five years.

For one, AltaGas Ltd. is "seeing significant opportunities to advance energy efficiency and alternative fuels," said Donald "Blue" Jenkins, executive vice president of the company's utilities business and president of its Washington Gas Light Co. subsidiary. "The energy evolution provides long-term opportunities to make ancillary investments that can reinforce the core utilities distribution business."

Outlining those plans during the company's 2023 Investor Day on Dec. 5, Jenkins said RNG is the next near-term opportunity that really excites AltaGas. But capturing those opportunities will likely require changes to the regulatory construct across the company's Maryland, Michigan, Virginia and Washington, DC, service territories, Jenkins said.

Virginia is for (RNG) Lovers

Utilities have already had success on that front with the 2022 Virginia Energy Innovation Act, according to Jenkins. Developed with industry input, the act allows utilities to earn 100 basis points above their approved return on equity for investments in pipeline system interconnections with RNG production facilities.

Washington Gas on Dec. 4 filed with the Virginia State Corporation Commission for approval of its first project that would qualify for the ROE bonus, an interconnection with Prince William County's landfill RNG project (PUR-2023-00220). The utility proposed investing $28 million to purchase an 8-mile pipeline and related facilities. The company would enter a 10-year agreement to purchase RNG volumes and their associated environment attributes from Prince William RNG LLC. The total purchased volumes would equal 2.4% of Washington Gas's weather-normalized annual firm sales in Virginia.

Washington Gas would recover the infrastructure investment and RNG purchase costs through a rider. Those costs would be offset by a service fee and tariff revenues under the interconnection agreement, savings from avoided gas purchases and the sale of credits tied to the RNG's environmental benefits, the company said. Washington Gas projected that the arrangement would generate customer savings beginning in the second year of operation.

A decision is pending, but the Virginia State Corporation Commission approved Roanoke Gas Co.'s biogas supply investment plan in January, as well as NiSource Inc. subsidiary Columbia Gas of Virginia Inc.'s proposed RNG tariff in May.

"Virginia is our most advanced jurisdiction when it comes to regulatory support for energy evolution due to strong industry collaboration and engagement with regulators," Jenkins said. "We expect to build on our successes and lessons learned here and carry those through across to the rest of our jurisdictions."

Potential challenges in other jurisdictions

Jenkins expected the Prince William project to spur additional RNG activity in Virginia and have "positive spillover effects" in the greater Washington, DC, area. Washington Gas is evaluating 10 RNG interconnections with up to 4 Bcf of supply potential across its eastern US territories. It anticipates acquiring another 10-15 Bcf of out-of-territory RNG supply. In Michigan, SEMCO Energy Gas Co. is evaluating five RNG interconnections, with a focus on dairy farm and landfill supply.

Policy support appears less certain in some of those territories. State lawmakers in Maryland have directed building code officials and utility regulators to develop all-electric building codes and study the electric grid's capacity to accommodate them. Meanwhile, several Maryland counties and Washington, DC, have advanced restrictions on gas use in construction or set deadlines for new buildings to achieve a net-zero standard. In January, the Maryland Public Service Commission rejected Columbia Gas of Maryland Inc.'s carbon offset proposal.

Maryland aims to be at the forefront of energy transition policy with states such as California, Massachusetts and New York, Maryland Energy Administration Director Paul Pinsky said during a Dec. 14 event hosted by The Hill.

"We're going to use [Inflation Reduction Act] money to increase energy efficiency and to electrify. We think there's a big, big future in heat pumps and moving away from gas and oil in some cases," said Pinsky, who sponsored Maryland's landmark Climate Solutions Now Act as a state senator.

In other states with evolving energy transition policy, regulators have lately taken a more cautious approach to utility RNG investments.

The Oregon Public Utility Commission in October approved Northwest Natural Gas Co.'s request to recover the cost of three RNG offtake agreements and investments in two RNG facilities. But in August, the PUC rejected NW Natural's multiyear plan to prioritize RNG investments to comply with state-mandated emissions limits for gas utilities, saying the company had not adequately demonstrated that RNG is the best compliance pathway.

PUC staff earlier recommended that NW Natural prioritize investments in projects that phase out gas use over RNG purchases. The company is now exploring electric-powered ground-source heat pump systems with natural gas backup as an additional emissions reduction pathway, Northwest Natural Holding Co. CEO David Anderson said during a Nov. 3 call.

RNG vs building electrification

New Jersey gas distributors Public Service Electric and Gas Co. and New Jersey Resources Corp. have also recently proposed hybrid electric-gas heating projects.

The New Jersey Board of Public Utilities earlier shelved Public Service Electric and Gas' proposal to build a $123 million facility capable of injecting 1 Bcf per year of landfill RNG into the company's gas distribution system, pending the commission's findings in a future of gas proceeding.

As the state explores strategies to decarbonize heating, with a focus on building electrification, Public Service Enterprise Group Inc. President and CEO Ralph LaRossa told analysts that regulators had concerns about hydrogen and renewable natural gas project proposals.

"Those are fair policy conversations that need to take place," LaRossa said during an Oct. 31 conference call.

In California, Southern California Gas Co.'s 2023 Research, Development and Demonstration program proposal yielded mixed results in regards to RNG and hydrogen programs.

On Nov. 30, the California Public Utilities Commission (CPUC) approved a $2.8 million program to study cost-effective RNG and hydrogen production using various feedstocks and technology pathways. It also approved a $148,829 program to integrate RNG and hydrogen blends into a program that serves the hard-to-electrify commercial food service industry.

However, the CPUC denied SoCalGas's request to record more than $1.2 million in total costs for two other programs. The first would study integrating RNG and hydrogen with distributed generation systems, while the second would develop residential appliances compatible with the fuels. The CPUC said the distributed generation project's benefit to ratepayers was "vague and unclear." In denying the second program, the CPUC cited California's transition to residential electrification.

RNG tariffs advance elsewhere

Some companies operating in states that prohibit gas bans experienced less-qualified support for RNG programs.

In November, the Oklahoma Corporation Commission approved a joint stipulation and settlement agreement that will allow Oklahoma Natural Gas Co. customers to offset their gas use by purchasing the environmental attributes of RNG (PUD2022-000128). Under a pilot program that will run through 2027, customers would purchase the attributes in blocks of 0.25 Dekatherms priced at nearly $3.04 per block.

The Oklahoma Corporation Commission authorized the One Gas Inc. subsidiary to recover up to $5 million in RNG procurement costs and purchase $2.4 million in RNG-linked environmental attributes. As part of the stipulation agreement, Oklahoma Natural Gas will prioritize purchases of RNG produced within Oklahoma and credits linked to in-state supply. The company also agreed to release participating customers from their 12-month purchase commitment should a customer experience financial hardship.

Black Hills Wyoming Gas LLC in October filed a settlement agreement in its pending gas rate case, which supports the company's Green Forward program application (Docket 30026-78-GR-23). The program would offer customers blocks of environmental attributes linked to RNG and carbon offsets. The proposed monthly rate is $5 for a block representing 20.5 therms. Black Hills Corp. offers similar voluntary tariffs in Colorado, Kansas and Nebraska.

"With our ongoing growth in Wyoming, we appreciate and value the constructive regulatory environment which supports our ability to provide safe and reliable service to our customers," Todd Jacobs, senior vice president for growth and strategy at Black Hills told analysts during a Nov. 2 call.

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