Renewable natural gas and hydrogen projects could represent a new wave of gas utility investments that bolster earnings and attract investor attention, according to David Anderson, Northwest Natural Holding Co.'s CEO and the American Gas Association's chair.
Anderson offered the assessment in an interview after presenting the investment case for natural gas utilities to the CFA Society New York, a forum for financial analysts, on Jan. 27. Anderson covered the industry's steady dividends, strong credit ratings and operational performance through the pandemic, but he also dedicated time to addressing gas distributors' role in the ongoing energy transition.
"Through RNG, we are capturing methane that would normally be going into the atmosphere. It's carbon neutral, it's versatile and it's fully compatible with the U.S. pipeline system," Northwest Natural CEO and AGA Chair David Anderson said. |
A new dynamic is emerging in the market for renewable natural gas, or RNG, a natural gas alternative processed from methane waste sources such as farms, water treatment plants and landfills, Anderson said. A few years ago the fuel did not present a significant investment opportunity for gas utilities, but today companies like Northwest Natural, Dominion Energy Inc. and DTE Energy Co. are bringing RNG onto their systems and leveraging their access to low-cost capital to back biomethane projects, he said.
"That's exactly what utility investors love to see," Anderson said. "I think it's the right thing to do for our customers — to get more of these decarbonized products on our system — but I'm also seeing it, as an investor, as the opportunity to grow earnings and grow investment opportunity."
Anderson compared the situation to the opportunity for incremental investments that wind turbines brought to electric utilities. In explaining the premium that electric utility stocks now command over gas distribution equities, analysts have pointed to the perception among investors that wind and solar power expansion gives electric utilities greater investment opportunities.
The financial community was focused on environmental, social and governance issues during the Jan. 27 virtual event, following a year that saw ongoing efforts to restrict natural gas use in the U.S. by coastal state governments and climate activists.
Asked what the industry is doing to combat a movement to mandate electric heating in new buildings, Anderson said the cornerstone of its efforts is outreach to policymakers, stakeholders and the broader public.
"I would argue the energy literacy of our country is not very good," Anderson said. "I don't think people understand, 'why does a gas [local distribution company] exist?' On the coldest day, in my part of the country, my company is delivering 90% of the energy to the household."
Anderson also fielded questions about the potential to displace fossil fuel gas with hydrogen in distribution systems. He acknowledged that utilities are still determining the amount of hydrogen that can be blended into gas streams. However, he said a lesser-known process can pair renewable hydrogen with waste carbon to create a synthetic methane that is interchangeable with natural gas. Northwest Natural is currently developing a project to produce this so-called methanated hydrogen, and Anderson noted that there are at least seven U.S. hydrogen projects being piloted by utilities.
The AGA also debuted the Natural Gas Sustainability Initiative Methane Emissions Intensity Protocol. Growing out of AGA's work with the Edison Electric Institute to provide ESG measurement tools to utility investors, the protocol offers a standardized approach to reporting company-level methane intensity across the gas supply chain.