Gas Utilities Are Facing The Heat Death Of Their Business Models, & We Need To Help Them

In the past few weeks, I’ve had a lot of conversations about pipelines, which is kind of a weird thing for a strategist focused on electrifying everything possible, building lots of renewables, building lots of storage, and buildings lots of transmission. But the transition makes everything messy.

A lot of this is due to hydrogen. One of the things that the oil and gas industry and the pipeline industry are hoping will save them is hydrogen. The oil and gas folks, and the coal folks too, hope that they’ll be allowed to make bruised hydrogen from their fossil fuel reserves, capture as little of the CO2 from the process as we’ll let them, bury it in facilities that they’ll monitor for leakage as little as possible, and take public money for this. The pipeline industry doesn’t actually have a job in the future without oil and gas flowing through its lines, so they are hoping that CO2 and hydrogen will replace it. Sorry folks, not going to happen.

My recent article about the scrap steel awaiting reuse in pipelines received a reasonable amount of attention. My article about the increasingly expensive pipeline to nowhere that the Canadian government bought and is now mismanaging expansion of received attention. My article pointing out that HVDC was the new pipeline continues to get attention (wait for a YouTube from a prominent tech explainer inspired by it). My article on the head-scratching decision of the British Columbia public servant pension plan to join Macquarie in buying the privatized UK gas transmission and metering business got some attention. And, of course, my assessment of hydrogen pipeline claims received some attention.

My recent article on Australia’s botched Net Zero plan — no, the country isn’t going to double its energy exports that are already four times domestic consumption — led to a long-time Australian contact pointing out that the Australian Pipelines & Gas Association (APGA) was a big sponsor of the study. My contact also pointed out that APGA was getting very aggressive about hydrogen blending. No, that’s not a useful thing.

A couple of days ago, a British Columbia contact asked me my opinion of FortisBC’s big plan to put biomethane into the gas distribution system, saving their business model with methane from landfills and the like. I told them that it was BS greenwashing, as it faced the heat death of its business model.

And so to a conversation I had with Michael Liebreich, founder of BNEF, former UK Olympian and regular bettor on where the next trillion dollar cleantech industry would be. We’d finally managed to connect, after our earlier attempt had been sidelined by a combination of COVID and COP27. One of the many topics of conversations was what the heck to do about gas utilities and the death spiral that they were racing toward.

What’s a utility death spiral? Let’s start with utilities being natural geographical monopolies. That means that they have a patch of ground where they don’t have to compete with anyone. Utilities like electricity, water, and gas, all of which have to build and maintain a lot of wires and pipes, are natural monopolies, meaning it doesn’t make sense for society to allow 47 different organizations to build massive amounts of wires and pipes and compete for customers.

Where does the death spiral come in? Well, when better alternatives arise to the thing the utility provides, then customers will slowly peel away across its entire geographical service area, reducing its revenue, but it will still have to provide service everywhere, hook up new customers if they want it, and maintain the entire network of linear assets. Reduced revenue, no reduction in expenses. That means that it has no money to improve service or reduce price point, so the competitor takes more customers, and the problem gets worse. The death spiral leads to bankruptcies of regulated utilities.

Natural gas utilities, like FortisBC which delivers gas in my geography, all the utilities served by APGA, and the gas utilities in the UK served by its gas transmission pipelines, are all facing this death spiral. The future of all energy is electricity and HVDC is the new pipeline, so the gas utilities won’t have anything to do except manage the withering of their organizations.

And that’s a problem we have to actively help them with. If we don’t, many people will suffer absurd heating and cooling bills, especially the least affluent among us. Natural monopoly utilities around the world vary widely in their service levels, consumer prices, and degrees of venality, but one thing that they share is typically a regulated right to charge sufficient amounts to consumers to make a profit.

That means that as their revenues drop while their expenses remain the same, they can increase rates to their remaining customers without those customers having any recourse. For the bottom 40% of the socioeconomic ladder, that means that they get squeezed between capital costs for switching to better choices that they can’t afford and monthly utility bills that they can’t afford. Punishing the less affluent seems to be considered acceptable in the United States and possibly in the United Kingdom, but not in the rest of the developed world.

Liebreich’s interesting point about hydrogen for residential heating and cooking — a terrible idea he was incensed enough about to travel to a town hall meeting in one of the proposed guinea pig communities for it, Whitby, a five-hour drive or train ride from his home in London, and castigate the Cadent utility representatives who drew the short straw — was that it was a completely venal and exploitative regulatory hack. He asserted that Cadent and other utilities like SGN, which want to do something similarly inane in Fife, are hoping that they’ll be allowed to spend a big part of a billion dollars creating a parallel hydrogen pipeline in communities, and then be able to get paid for it for 40 years even if it delivers exactly zero value.

My focus was somewhat different. I wasn’t incensed at the venality of the utilities or the willingness that they had to expose their customers to both significantly increased safety risks and massively higher energy bills, but about how we could assist utilities to avoid that trap, which would be so negative for so many.

Gas utilities are regulated industries providing significant value today, and with significant negative externalities. They are facing a utility death spiral, don’t know what to do about it, are incentivized to do venal things which will harm many, especially the least economically secure among our populations, and so need to be helped. But how?

As I said to Liebreich and my Australian contact, there’s an obvious strategy. Every utility distribution network has a hierarchy of chunks that are geographical in nature, even if it doesn’t make much sense where the boundaries are. Sometimes it’s easy, with a river, a ridgeline, or a big park separating chunks. Sometimes it’s just something that evolved, with one side of a street being served by one set of pipes, wires, and distribution stations, and the other side by another set. But there are clear physical chunks, and the appropriate level to plan retirement at is likely the isolation sub-network or tier. They have valves in one or two places that allow the entire isolation sub-network’s gas to be turned off, allowing work to be done more safely on the infrastructure. Every building within that zone could be starved of gas by shutting down a couple of physical components with software commands or by sending workers to them.

And that means that they can be targeted and shut down gracefully in a sensible order.

It’s not like we don’t have alternatives to natural gas as a source of heat for comfort, cooking, and light industry in 99% of the cases. Home heating and cooling? Heat pumps. Home and restaurant cooking? Electricity, especially induction hobs which are 10% more efficient than the best glass top resistance stoves and over twice as efficient as gas stoves, without any of the nasty indoor air pollution impacting kids. Everything in industrial heat can be electrified, as I discussed with Kanthal global SVP Dilip Chandrasekaran a few months ago.

All the buildings in a specific isolation sub-network of a city or suburb or county can be targeted. They can be given a schedule, they can be cajoled with carrots, and they can understand that the stick of no gas exists. Heat pump incentives. Induction cooking incentives. Industrial heat electrification incentives. Education programs. Mobilized contractors. A deadline.

These isolation sub-networks can be targeted in a sensible order. Nerds can run Markov Chain Monte Carlo simulations, and polling types can figure out the human angle sufficiently well to find an optimal enough path through the messiness so that humans can manage the undoubtedly ugly process.

This means that entire isolation sub-networks can be decommissioned and made safe, and all the costs associated with them removed from the utility’s books. This is a rational and strategic approach to sunset gas without causing a utility death spiral.

Are utility regulators capable of forcing this sane bit-by-bit shutdown on gas distributors? Well, some of them will be. And when they succeed at it, they will be the unevenly distributed future that others slowly gravitate toward. But what gas utilities like FortisBC, SGN, and CADENT, their regulators, and their suppliers as represented by APGA are doing most visibly is denying the heat death of their business model and trying vainly to pretend that they’ll pipe hydrogen or biomethane instead.


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