The Future of Heat in Buildings Has Policymakers Reconsidering How We Plan Natural Gas Infrastructure

Posted by Sarah Steinberg on Nov 2, 2022 3:00:00 PM

BLOG GRAPHIC 2022 As building electrification accelerates new gas investments get risky

2022 has been a banner year for clean energy, with several important policy, market, and geopolitical drivers shifting the conversation. Electric building heating technologies are no exception and as the use of natural gas declines in response to these trendlines, a lot remains “TBD” on how to transition away from the fossil fuel. Because the decisions we make today will lock in infrastructure and costs for decades, state policymakers are beginning to reexamine the way we plan and pay for the use of gas in buildings today. They need new tools, and AEE is here to help. 

What’s happened in 2022? 

Together, President Biden and Congress delivered the most significant investment into energy efficiency and electrification in U.S. history by passing the Infrastructure Investment and Jobs Act (IIJA) and the Inflation Reduction Act (IRA). Using direct consumer rebates, tax credits, and workforce development and manufacturing incentives, the bills nudge consumers across the country towards serious energy savings via clean and efficient appliances and home upgrades. AEE’s more detailed breakdown of these incentives is available here 

These federal actions were accompanied by a slew of state and local policy changes and new programs, including California’s move to sell only electric heating appliances after 2030, Massachusetts legislation to require building energy use reporting and allow for demonstration projects for fossil free communities, Maryland’s omnibus climate bill that creates building performance standards, New York’s new building codes and thermal network pilot program, Rhode Island’s Green Buildings Act, Colorado’s new model energy code directive, D.C.’s net zero building codes requirement, and a slew of new city and utility appliance rebate programs like the City and County of Denver’s generous new heat pump and panel rebates 

Appliance manufacturers are preparing to meet the moment by scaling up production and innovation in building technologies, forecasting five year market growth (2021-2026) of $35.2 billion (a compound annual growth rate of 8.64%). In fact, several major market players have spoken up in support of efforts to move towards electrified heating, including Carrier, Daikin, Fujitsu, Johnson Controls, Mitsubishi Electric, Rheem, and Trane. Rheem launched a new electric heat pump water heater that can plug into a regular 120-volt outlet, with several similar products on the way from A.O. Smith, General Electric and Nyle. And while recent studies have demonstrated that cold weather air source heat pumps already on the market are performing well in some of the country’s most frigid climates, the Department of Energy is also partnering with Lennox International to develop the next generation of electric heat pump technologies. 

This positive momentum is set against a dark backdrop: Russia’s war on the Ukraine has put Europe’s natural gas supply (used directly in buildings and in electricity generation) in serious jeopardy. As winter approaches, countries in the European Union are instituting drastic measures to slash their energy consumption by 15% before March 2023. This includes reducing heating and lighting in public spaces, even at iconic landmarks such as the Eiffel Tower, and imploring the public to turn down their heaters, unplug devices, buy blankets to keep warm, and shift appliance use off peak. Several countries are also focusing on moving residents from gas furnaces to high efficiency electric heat pumps in the event there’s not enough gas to go around. Austria is ending the sale of all new gas boilers beginning in 2023, the Netherlands is requiring heat pumps or hybrid heat pump systems for all new homes and replacement projects beginning in 2026, and Germany is targeting the installation of 500,000 new heat pump units per year beginning in 2024. The global market will be forced to scale quickly to meet this new demand. 

Where do we go from here? 

These trends all beg the question: How will America heat its buildings moving forward, and what can states and utilities do to make sure we transition to that future in the most cost-effective, equitable, resilient, and reliable way?  

 An electric future profoundly changes our long-term infrastructure needs – from gas distribution pipelines to electric distribution and transmission wires, and from natural gas extraction wells to more gigawatts of solar, wind, and batteries. The investment decisions that utilities make (and Public Utility Commissions approve) today will have financial consequences for ratepayers for decades, yet most states do not have robust, long-term planning processes in place to ensure that those investment decisions minimize costs and risks to customers. The current gas regulatory environment incents system expansion and capital investments without a pathway to accommodate a decline in gas use. It also creates silos between electric and gas utility services, preventing economy-wide energy optimization that could direct resources to their highest value use (e.g. renewable natural gas or hydrogen to industrial and other hard-to-decarbonize sectors of the economy) and obscuring interactions and dependencies between the closely related systems.  

Policy-makers in Governor’s Offices, in legislatures, and at Public Utility Commissions have recognized that America is at an inflection point marked by rapid technological change, high uncertainty, and more questions than answers. As a result, they’re searching for near-term steps they can take to avoid the worst case scenario: a gas utility death spiral that results in widespread and unorganized system defections and rising rates that most seriously harm low-income, fixed-income, and other vulnerable populations.  

Many states have responded by opening “Future of Gas” Investigations to ask utilities and stakeholders to grapple with competing visions for how we’ll heat our buildings in the coming years. These conversations are ongoing in California, Hawaii, Massachusetts, Minnesota, Nevada, Oregon, Rhode Island, Washington, Washington D.C., and Wisconsin 

Several states have gone one step further to draft new regulations that require gas distribution utilities to begin filing, on a regular basis, gas resource supply and distribution system plans. These plans ask utilities to forecast their load over a long-term horizon, pinpoint vulnerable areas of their system that require near-term investment, and conduct analyses to examine where “non-pipeline alternative” (NPA) solutions (e.g. efficiency or end-use appliance electrification) could be used to minimize the risk of large new investments becoming stranded assets. New York adopted its new rules in May, and Colorado is looking to finalize its draft rules, which will implement the Clean Heat Standard, create new Gas Infrastructure Plans, and updated Gas Demand Side Management procedures.  

Another handful of Public Service Commissions have bit off a distinct, but related, issue: Gas Line Extension Allowances. Line Extension Allowances determine how gas system expansion costs are socialized among existing customers. They rely upon continuous growing gas throughput which puts downward pressure on rates for all customers. But if throughput is not expected to increase, these allowances finance risky new pipeline investments without conferring the assumed benefits. To date, California has gone the furthest by eliminating the allowances entirely. The move is expected to save ratepayers about $164 million a year. Colorado is currently considering a similar policy in its gas rulemaking. Washington took a more moderate approach by updating its line extension methodology to better align with the state’s policy direction. Meanwhile, in Minnesota, CenterPoint Energy agreed to a stipulation within the utility’s rate case to reduce the “free footage” of line extensions by 50 feet to reduce future risk to customers. The utility had previously been spending about $20 million per year on these allowances.  

 As the energy transition continues, states AEE has begun developing policy briefs and case studies on several crucial elements of gas planning to help regulators, legislators, and other stakeholders navigate these thorny gas transition issues. Explore our first set of materials on the topic here:  

Topics: 21st Century Electricity System, Regulatory, Energy Efficiency, Manufacturing and Infrastructure