Gas utilities to play key role in US manufacturing revival – industry group CEO

➤ The gas industry will continue to stress its role in economic development and advanced manufacturing.
➤ The conversation around building gas bans is tilting toward greater support for fuel choice, the head of the American Gas Association said.
➤ The industry is exploring ways to incentivize high-efficiency gas appliances through state policy.

Karen Harbert has led the American Gas Association through a period of upheaval marked by efforts to restrict access to natural gas for heating and cooking in progressive cities and states. Under President Joe Biden, the federal government has embraced building electrification.

But the gas industry continues to add customers and sees Biden's push to revitalize US manufacturing as opening new growth opportunities for gas distributors.

Just before the AGA's new board chair, DTE Energy Co. Chairman and CEO Jerry Norcia, outlined his priorities for 2024, Harbert discussed the group's core messages for the next year. The following is an edited transcript of that discussion.

S&P Global Commodity Insights: You are in New York City talking to the financial community. What is the message from the AGA this year?

Karen Harbert: I just wanted to touch on the recent weather events. ... We really stress-tested the system, and it performed. We didn't lose a customer. A couple of reasons why: We are running at about 20% above average on storage; we had enough warning and there was enough supply to go purchase additional reserve in case we needed it; and we really involved our customers earlier in this in asking for their cooperation.

But two new things are really driving some of our business decisions, too. It is not just the coldest day, but now it's also the hottest day. So this past year, it was July 27, when we provided more natural gas to power [generation] than we ever have before. ... And why is that? It is air-conditioning. ... And then third, which you're not able to really forecast and plan for quite as nicely, is being the backup to renewables.

And on top of that, you layer in the emissions reductions and how we're approaching that through modernizing the pipes, through energy efficiency — all the ways we always have — driving down our methane emissions about 60%. But now we've got a pretty healthy renewable natural gas business.

So that's the narrative that we are going to be pushing out this year. It is real, it is true and we're stepping up to the plate. We're going to help America achieve the advanced manufacturing dream that the Biden administration has put out there. All of it requires natural gas, either directly or indirectly.

Gas utilities' role in economic development was a big theme that came out of the AGA Financial Forum in May 2023. How did that come about?

It sort of started at a board meeting, somebody explaining that the chip manufacturers came to them and said, "I'll locate here, but can you?" Or the batteries or the datacenters. And these are big requests. These aren't like, "I need 3 megawatts, or I need a dedicated pipe." These are significant asks.

So AGA joined the association of economic development authorities and started talking to them about this. Is this something that is on your checklist now? And they started thinking about it, and the manufacturer or the facility was coming to them, and it was on their list. ... And so now we've connected the dots that energy is a huge selling point for a lot of these energy-intensive industries and that we're a solution for them.

Where is growth most pronounced?

It is happening in places that have abundant energy, a good workforce and a good tax policy.

Texas is number one for obvious reasons. Number two is Ohio, so think intense manufacturing. The next one is California, and that's more because of the footprint, the size in California and agriculture. Florida is the next one because ... you look at the tax base ... then you go to New York, we're still growing here. Arizona and Utah, those are very competitive states for new growth.

Is this mostly commercial and industrial gas demand, or does that include residential growth, too?

It is mostly driven by C&I. We've got some residential growth. In 2022, we added 640,000 residential customers. Last year, it was bigger than that — 763,000 new residential customers. But really, when you look at the longer-term growth, that's going to level off because of energy efficiency. We'll add customers, but we won't add molecules.

But you look at the mid-Atlantic, South Carolina, North Carolina, Georgia — all that area is growing because that's where a lot of the new manufacturing is going.

We are approaching the fifth anniversary of the Berkeley, Calif., gas ban that touched off a national building electrification movement. The courts recently upheld a decision striking down Berkeley's ban. Where do you see the momentum on this issue?

The practical reality is creeping into the conversations. If you close the door, the regulators will fully acknowledge it.

Are we ever going to get the full-on activist zealots that are electrify or die? No. But the customers are starting to speak up. They're terrified. Nobody can afford that type of change. That's European change.

It really was the crisis in Europe caused by Russia and Ukraine that really woke a lot of people up. Because we have a choice not to look like them. So what do we need to avoid, and what do we need to do, and how do we be better allies? And all of a sudden, national security, global security, stability, reliability, affordability — all of those things are back on the table, in the conversation.

So, I do sense the conversation is changing. There are still going to be pockets. There is still going to be another Berkeley somewhere. But the reality is you've got half the country saying, "I want choice."

Atmos Energy Corp. just proposed a gas heat pump pilot project in Colorado. How will high-efficiency gas appliances fit into the AGA's messaging this year?

Prominently. And we support that project. [Stone Mountain Technologies Inc. is] the manufacturer of one of the gas heat pumps. They got $15 million of additional monies to scale up their production, so they could be a meaningful player.

I always point to this ... If I get the molecule out of the ground, and I turn it into [energy] in your house, I deliver 91% of the energy. If I get the molecule out of the ground and I turn it into an electron, I only get 36% of the energy delivered to your house. So now I am really going to need three times more energy to replace that molecule with that electron. Is that in anybody's interest?

What are the challenges to bringing technology like gas heat pumps to market?

Incentives on the other side. They're paying you to take an electric heat pump — free — without telling you, "Oh, by the way, this is going to cost you at the end of the month." You look at some of the provisions in the [Inflation Reduction Act (IRA)] that could have been interpreted by the different agencies executing that [legislation]. Gas heat pumps could be included. They are excluding them.

And we're also using the Defense Production Act to produce electric heat pumps. That is reserved for a time of war when you desperately need something. We desperately don't need electric heat pumps.

And so [we are] working with the states also to figure out if there's something they can do in their own tax codes that would incent some initial [gas heat pump] uptake. Nobody can exist on subsidies forever, nor should they. But what are some policy mechanisms? That will vary place by place. You're not going to need them in Georgia, but North Dakota — maybe.

Have you identified any new opportunities for gas utilities in the IRA now that federal agencies have given more guidance on incentives?

I'll point to a problem first, which is hydrogen and how they've interpreted hydrogen, which is very narrowly focused. Our folks wouldn't be able to take advantage of [the hydrogen production tax credit] if we're specifically excluded from it. And if you're trying to make a hydrogen market, you probably want to be able to get as many sources as possible, scale the market and then start narrowing it.

There are tax credits in there for RNG used in specific ways that we're working with our members to see how you can take advantage of it. The hydrogen hubs are interesting for our members to be able to prove it out with the assistance of government.

The electrification push is something that we fought against. We fought against the methane fee and were successful to bring it down so it wouldn't be passed on to us.

But by and large, it's a very big giveaway program for the electric side.