NET ZERO: Utilities accelerate net-zero targets as cracks appear in gas' role as bridge fuel

Cracks are starting to show in utility support for using natural gas as a bridge fuel to a low-carbon future.

Many utilities think that future must arrive much sooner, and they are considering how to bypass the bridge altogether, which could lead to even more near-term downward price pressure on natural gas.

Some signs that the narrative is shifting include a recently canceled major gas pipeline project and a raft of utilities setting net-zero emissions targets amid changing customer preferences, new state mandates, and investor concerns that the recent glut of gas generation and pipeline investments could result in stranded assets.

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"Politically, natural gas is no longer seen as a bridge fuel," said Josh Price, a senior analyst on energy and utilities at investment research and advisory firm Height Capital Markets. "On the electricity side, there certainly appears to be a major shift away from gas due to public pressure from investors, from policymakers."

As of mid-July, 13 of the 30 largest US publicly traded electric and gas utilities had set goals to achieve zero or net-zero greenhouse gas emissions or 100% clean electricity by 2050 or earlier, according to a review of the companies' plans by S&P Global Market Intelligence and S&P Global Platts.

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Three additional companies have set aspirational net-zero goals. Alliant Energy Corp. on July 22 announced an aspirational goal of achieving net-zero carbon emissions by 2050 for its electricity fleet and said it would eliminate all coal from its generation fleet by 2040.

In addition, many of the 30 largest US utilities that have not set net-zero targets are still aiming to cut their emissions by 80% by 2050.

At least 10 of the electric and multi-utilities, including three companies that have not set net-zero targets, plan to reduce emissions of greenhouse gases, primarily methane, from their gas distribution and retail sales operations.

NiSource Inc., CenterPoint Energy Inc., Southern Co., Eversource Energy, CMS Energy Corp., Xcel Energy Inc., Sempra Energy, Avangrid Inc. and Exelon Corp. are on that list, as is DTE Energy Co., which announced in late June that it would include gas distribution and retail sales operations in its target for net-zero emissions by 2050.

DTE aims to achieve net-zero emissions both with its upstream suppliers and its own assets, DTE Gas President and COO Matt Paul said in an interview. He also noted that DTE has proposed to enable downstream customers to achieve net-zero emissions by bundling natural gas purchases with carbon offsets.

"This isn't just a pie in the sky commitment or announcement," Paul said. "This is something that we spent a lot of time researching and analyzing and studying."

Another recent crack in support for the use of natural gas as a bridge fuel came when Dominion Energy Inc. and Duke Energy Corp. in early July canceled the Atlantic Coast Pipeline, or ACP, due to "ongoing delays and increasing cost uncertainty which threaten the economic viability of the project."

That same day, Dominion announced it would sell its gas transmission and storage business to Warren Buffett's Berkshire Hathaway Energy as part of Dominion's plan to comply with Virginia's 2045 net-zero target for both carbon and methane emissions. Dominion aims to invest up to $55 billion over the next 15 years in emissions reduction technologies, including zero-carbon generation and energy storage.

Christi Tezak of the research firm ClearView Energy Partners LLC said the trend away from natural gas as a bridge fuel started long before Dominion and Duke canceled ACP. She noted that some states have indicated they are not interested in expanding gas infrastructure.

"ACP's cancellation is the biggest casualty of the bridge-fuel trend," Tezak said. "But this ship has been turning for a while."

State and investor pressure

A number of utilities other than Dominion have indicated that their goals are also designed, at least in part, to align with state objectives.

For example, Daniel Cregg, Public Service Enterprise Group Inc.'s executive vice president and CFO, said in an interview that his New Jersey-based company set a net-zero target as "an acknowledgement of what the science is telling us of where we are headed and wanting to continue hand in hand with what the state has targeted within their energy master plan." New Jersey Gov. Phil Murphy is pushing the state to achieve 100% clean energy by 2050.

Dominion's gas-related announcements were not due to Virginia's new decarbonization mandates alone. Dominion CEO Thomas Farrell II said on a July 6 call with investors that the growing importance of environmental, social and governance practices was one of the "key considerations" Dominion took into account in weighing the sale of its midstream gas assets and narrowing its focus on cleaner energy resources.

Dan Bakal, senior director of electric power at the sustainability-focused group Ceres, said that in the mind of investors, "the big challenge is how big a role or how little of a role natural gas can play going forward. There does seem to be too much investment and focus on natural gas on the part of power companies, so it's definitely an area of concern."

Ceres is the organizer behind the Climate Action 100+ investor initiative to push the world's largest corporate greenhouse gas emitters, including 13 of the largest US utilities, to take action on climate change.

One of the companies targeted by that initiative, NRG Energy Inc., is aiming to cut its greenhouse gas emissions by 50% by 2030 from a 2014 baseline and achieve net-zero greenhouse gas emissions by 2050. The goal reflects the recommendation of the 2019 Intergovernmental Panel on Climate Change report, which said the world must achieve net-zero emissions by about 2050 to limit global warming to around 1.5 degrees C relative to pre-industrial levels.

Also driving the company's target, said NRG's Sustainability Director Laurel Peacock, was the need to compete for large industrial customers, such as Walmart Inc., that have set their own decarbonization targets. "We see this as an imperative in order to remain competitive in that space now and in the coming years," Peacock said in an interview.

Achieving deep decarbonization may be easier for some power companies than others. Avangrid, for example, is the third-largest wind producer in the US and aims to have its power operations become carbon neutral by 2035.

In 2018, it had the second-lowest carbon emissions intensity levels — surpassed only by Exelon — and will need to either buy carbon offsets or retire the only natural gas plant in its portfolio to achieve its target.

Most of the utilities that have set deep decarbonization targets are counting on major advances in related technologies — such as carbon capture and sequestration, advanced nuclear reactors, green hydrogen, longer-lasting battery storage and carbon offset credits — to achieve their ambitious goals.

Not all utilities shift away from gas

Even as some utilities are making strategic moves away from gas, several others, including DTE, Duke and Southern, say gas will remain a key to reliability for the foreseeable future because it will be needed to balance the intermittent performance of wind and solar projects. Battery storage technologies are not quite suited to play that role yet, they maintain.

Along those lines, Rob Rains, a senior energy analyst at the research firm Washington Analysis LLC, said gas peaker plants will likely have a role to play "for some time to come." But he also noted that the shrinking costs of onshore wind, solar and battery storage are eating into the profit margins of natural gas generation.

Rains also suggested that once offshore wind, which has significantly higher capacity factors than its onshore counterpart, is built up along the US Atlantic coastline, those projects would further put the squeeze on gas.

Regardless of utilities' plans, ClearView's Tezak noted that regulated utilities must also get their power-related investments cleared by state regulators. Utilities "don't make a step without the regulators backing because they can't," she explained.

For example, the Arizona Corporation Commission in 2018 rejected the integrated resource plans of Arizona Public Service Co. and two other utilities for being too heavily reliant on new gas-fired generation. APS in June 2020 proposed a new plan to replace its coal-fired capacity entirely with battery storage and solar power.

"The bridge hasn't just cracked, I think it's crumbling," said Dennis Wamsted, an energy analyst at the Institute for Energy Economics and Financial Analysis.

Pointing to APS' new proposal, Wamsted said, "You can make a very compelling argument that nobody needs to build new gas plants in the US to make the transition work to renewable energy."