Public and shareholder pressure to make electric utilities more environmentally sustainable is raising expectations for the power sector’s natural gas suppliers, industry members said June 6.
The Edison Electric Institute, or EEI, which represents investor-owned utilities, has already drafted an environmental, social and governance template for the power industry. But the increasing role of natural gas in electric generation is encouraging EEI to expand that template to lay out more sustainability goals for gas producers.
"I have [anti-fracking] protesters that are in our building at least once a month," Kimberly Harris, president and CEO of Puget Sound Energy Inc., said June 6 at EEI’s annual convention in San Diego. "We are being held accountable for upstream [environmental impacts]."
Those pressures caused EEI to form a task force with the American Gas Association on expanding the EEI ESG template to better address gas supply, said Harris, who is also chairman of AGA’s board. She noted that, when looking at the life-cycle emissions from natural gas production and consumption, 41% of methane is from gas producers and 38% from processing and gathering. That leaves little room for gas-fired electric generators to cut emissions.
Electric utilities "could do everything within our own means to tighten up our own systems but unless we work together upstream, we cannot make that movement," Harris said. PSE is working with Dominion Energy Inc. and DTE Energy Co. to factor gas suppliers into the EEI templates, which demonstrates that utilities are “headed down that path to provide that pressure" on gas suppliers, she said.
"What we would be prepared to do is to not purchase [gas] unless a company actually met those sustainability factors," Harris said of PSE.
Harris added the caveat that Washington state, where PSE is based, is a “least-cost state,” meaning a utility there does not have the authority to forego buying gas from a certain supplier based on their environmental performance if that supplier is also the cheapest option. Harris said the state legislature would need to approve counting environmental concerns as the cost of doing business.
Raising gas suppliers’ environmental performance will also require buy-in from natural gas majors, said Jim Tramuto, president of Tramuto Energy Advisors LLC, which provides consulting services to upstream and midstream producers. Large gas producers have the resources to lead the way on new ESG principles, but smaller independent producers may be challenged. He noted the average number of employees for member companies of the Independent Petroleum Association of America is 20.
"They don't have the ability to do it themselves, but … they look to the majors to provide that technology and leadership," Tramuto said. To improve ESG performance industry-wide, "you have to have the majors" on board, he added.
Although environmental opposition to gas projects, including pipelines, is not dissuading investors on a large scale, panelists at the EEI conference said producers should still be proactive in addressing shareholder concerns on ESG performance.
Passive or index funds can hold up to 45% of a company’s share base, meaning gas producers should reach out to them on ESG concerns before issues arise, said Amy Lissauer, managing director of Evercore Partners Inc., an investment banking advisory firm.
"You have to have the conversations with the big shareholders that are continuing to get bigger," Lissauer said. "Because more and more money is moving into those passive managers. And as they come larger, they become much more important … and they know that they have a big role to play in helping to think about companies’ futures."
