The transition to zero-carbon homes and buildings is a critical step in California’s efforts to fight climate change, but the state must urgently develop a coordinated, equitable and cost-effective plan to proactively manage the decommissioning of the legacy gas system.
That is the conclusion of a new report from Environmental Defense Fund, which lays out strategies to guide decision-makers as they grapple with the question of who will pay for the existing fossil fuel infrastructure when California homes and buildings no longer use gas.
“Replacing gas appliances with low-emitting electric options that run on clean energy is a proven way to reduce greenhouse gas emissions,” said Tim O’Connor, Senior Director of California’s Energy Program at EDF. “But we need a coordinated and equitable plan in place to manage the impact of transitioning away from gas – for customers, workers, the economy, and ultimately, the success of our climate goals.”
Generally, utilities can incorporate the costs of building gas infrastructure into the rates they charge customers, so long as the California Public Utilities Commission deems the equipment “used and useful”. When the gas system no longer meets this threshold of being “used and useful”, the remaining investment is considered “stranded”.
As California reduces gas use in buildings, the pool of customers footing the bill for the gas system will shrink, which could raise costs and unduly burden lower-income and other vulnerable communities.
The framework finds that these stranded assets could create issues for affordability, equity and future investments in a cleaner energy system. While the full value of the gas system is unknown, California investor-owned utility assets in 2017 were valued at around $6.2 billion.
“While it may not happen tomorrow, California will have to deal with these stranded assets soon, so it is prudent for this be a proactive, planned transition – to allow costs to be spread out,” said Michael Colvin, Senior Manager of California’s Energy Program at EDF. “We can start by identifying an effective forum, possibly through the CPUC or legislature, to evaluate and manage this process.”
The framework also recommends gathering data from gas companies about the overall value and age of the current gas system as a first step, to clarify the full dollar value of the infrastructure, what has yet to be paid off, and how this information interacts with the expected timeline for electrification.
To help guide policymakers, the framework lays out other key tools and steps that can reduce the risks of stranded assets. These include:
- Strategic targeting of electrification: The state should develop a methodology to support a coordinated roll out of electrification based on specific criteria, such as customer equity, age/value of gas infrastructure, cost of maintenance, risk of gas leaks, cost risk of stranded assets, and ease of deployment. Such a methodology can help maximize grid and customer benefits from electrification and minimize the risk of stranded assets compared to an ad hoc roll out of electrification.
- Developing pathways to pay for early retirement: Creative financing strategies for mitigating stranded value impacts are also needed to minimize and mitigate the stranded value from specific legacy gas assets, including bonds and changes to regulated investment recovery through accelerated depreciation and changes to return on equity where appropriate.
- Proactive planning for decommissioning: End of life expenditures (i.e.depressurization or removal) normally occur after a gas asset has reached the end of its useful life, but with a customer base shifting from gas to electric, it becomes more relevant to plan for these decommissioning costs now. A few notable options for this include new distribution system charges, creating a line-item on customers’ bills, and establishing a trust fund.
- Alternative uses of existing assets: In certain circumstances, there may be a role for lower carbon fuels, like biomethane and hydrogen, as an alternative to fossil gas to extend the useful life of gas assets. Due to concerns over fuel availability, cost, and safety, deployment of these fuels should be focused on applications that may have difficulty electrifying — such as heavy duty industrial facilities, and should be coupled with specific leakage abatement measures for the gas infrastructure.
- “Bright Line” for new investments: For future near-term gas infrastructure investments, California should establish an investment framework to provide for continued operations and safety, an effective transition, and investor confidence. A first step is developing a “bright line” for determining when investments are more at risk of being stranded and which stakeholders are responsible. Clear mandates for electrification would also provide regulatory certainty and a transition timeline for utilities.
Download the full report online here.
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New Report Identifies Proactive Strategies to Manage California’s Renewable Energy Transition, by Environmental Defense Fund Staff, Environmental Defense Fund, March 14, 2019.