Certified gas, carbon offsets spark fight over Xcel's Colo. clean heat plan

Just two months after an Xcel Energy Inc. subsidiary became the first natural gas distributor in Colorado to submit a clean heat plan, a fight has broken out over whether utilities can rely on certified gas and carbon offsets to achieve state-mandated greenhouse gas emissions reduction.

A coalition including climate and renewable energy groups filed a motion in September seeking to block Public Service Co. of Colorado and other investor-owned gas utilities from including certified gas and carbon offsets in their clean heat portfolios. The maneuver has drawn diverse stakeholders into a dispute that state utility regulators will ultimately settle.

The outcome could determine the scope of emissions reduction options available to Atmos Energy Corp., Black Hills Corp. and Summit Utilities Inc. as their subsidiaries prepare to file their own clean heat plans.

Under Senate Bill 21-264, gas utilities must file the plans to demonstrate how they will reduce emissions from their distribution systems and homes and businesses that combust gas. The 2021 law mandated a 22% emissions reduction from 2015 levels by 2030, directing utilities to use strategies such as demand-side management, building electrification and low-carbon fuel blending.

Public Service Co. of Colorado, which does business as Xcel Energy, submitted its preferred clean heat plan for the 2024-2028 period in August. Analysis commissioned by Xcel found that the company could substantially reduce the cost of hitting the 2030 target by using strategies beyond those explicitly designated as clean heat resources in state law, specifically certified gas and carbon offsets.

Question over clean heat resources

The filing prompted a swift response from the city of Boulder, environmentalists, renewable energy trade groups and consumer advocates. They said the Colorado Public Utilities Commission (PUC) cannot consider Xcel's preferred plan because certified gas and carbon offsets do not count towards emissions reduction under the law.

Compounding the groups' concerns, these strategies would play an outsize role in Xcel's first five-year clean heat plan, delivering 43% of projected emissions savings, they said.

At the heart of the groups' argument is SB 21-264's direction to utilities to cut carbon dioxide and methane emissions from three sources linked directly to gas utility operations: leaks from pipelines that connect city gates to end-use customers, combusting gas in homes and businesses and gas delivery to other distribution companies. Certified gas reduces emissions further upstream the natural gas value chain, while carbon offsets tackle climate pollution in parts of the economy unrelated to gas distribution, the groups argued.

Certified gas, also known as responsibly sourced or differentiated gas, is verified at the wellhead to meet certain emission intensity thresholds and other environmental, social and governance standards. Carbon offsets typically involve investments in carbon sinks such as reforestation projects.

"The company's position that the commission can approve any emission reduction measures whatsoever, from any sector of the economy, threatens to turn this proceeding into a free-for-all in which the commission must choose among emission reduction measures from all sectors of the economy," the opponents said.

SB 21-264 does allow utilities to count some indirect emissions reduction towards achieving the 2030 target. However, these are largely limited to recovered methane strategies, a category that includes renewable natural gas but not certified gas and carbon offsets, the groups said. Additionally, recovered methane strategies can only account for 5% of the plan's overall emissions reduction through 2030, they noted.

The groups sought partial summary judgment, asking the PUC to rule that commissioners lack legal authority to consider certified gas or carbon offsets or any clean heat plan that includes them. The PUC should also rule that Xcel's preferred plan does not comply with state law and consider striking it or requiring the company to refile it, they said.

Xcel alleges misreading of law

In response, Xcel said the groups misread SB 21-264 and distorted its purpose. In the company's reading, lawmakers explicitly stated their intent to use "available tools," which included clean heat resources named in the legislative text, as well as "other measures."

Lawmakers did require gas utilities to present a clean heat portfolio that used only resources specified in the law but did not place the same limits on other proposed portfolios, Xcel said.

"Movants disagree with the policy choices reflected in the company's preferred portfolio and therefore seek to convince the commission at the outset of this proceeding that it does not have the authority or discretion to consider them," Xcel said in a Sept. 27 filing. "Excluding consideration of [certified gas] and emissions offsets entirely at the outset of this case would improperly and unnecessarily limit the options the commission may consider in deciding how best to achieve Colorado's emissions reduction goals."

Xcel drew support from a group of energy companies with operations in Colorado — Chevron Corp., Occidental Petroleum Corp. and Williams Cos. Inc. — and emissions measurement company Project Canary PBC, a pipefitters union and the city and county of Pueblo. In a joint Sept. 27 filing, the stakeholders said the opponents appeared intent on securing judgment before the PUC could investigate the matter and consider Xcel's application on its merits.

The Colorado Energy Office and Colorado Department of Health and Environment's Air Pollution Control Division did not agree that Xcel's preferred portfolio violates SB 21-264. However, the state agencies concluded that certified gas and carbon offsets do not meet the definition of clean heat resources and therefore the PUC should determine that Xcel cannot use them to achieve the 2030 target.

The city and county of Denver came to a similar conclusion in a Sept. 27 filing. Denver agreed in part with the Sept. 6 motion, saying the PUC should resolve the issue at the outset of the proceeding to avoid spending time litigating emissions reduction strategies that commissioners could ultimately deem unlawful.

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