Utility Financing and the Last Grandma - CivicWell

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Utility Financing and the Last Grandma

by Audrey Schulman, the Co-Founder and Co-Executive Director of HEET.

Climate Change & Energy


July 22, 2022


Think of all the scary stories we can tell to children in a few decades about what life was like before they were born. I think my personal favorite will be to whisper in a ghostly voice, “You know, we used to pump an explosive gas into our homes and light it on fire to cook our food.”

“Nooooo,” they will squeal, eyes big.

For by then, natural gas in homes will be a thing of the past.

Reasons to Transition

There are so many reasons to move off of gas.

We all understand the fact that gas can potentially be unsafe. As part of a Massachusetts nonprofit, HEET, which studies the gas system, I saw up close some of the results of the Merrimack Valley gas disaster –where the gas infrastructure in an urban area was drastically over-pressurized, causing 80 fires, a death and over 5,000 families to flee.

There are, however, other problems. The combustion fumes from gas stoves are bad for our health, and appear to leak even when turned off. So perhaps it’s no surprise that children who live in homes with gas stoves are 24% more likely to develop asthma.

Additionally, before it’s combusted, natural gas is overwhelmingly methane, a potent greenhouse gas. Leaked into the atmosphere unburned, it damages the climate dozens of times more than carbon dioxide. And there’s a lot more methane leakage than anyone ever imagined, from the wellhead to the stove. Given the atmospheric measurements of leaked gas, overall, natural gas might damage the climate more than coal per energy unit delivered.

Thus, perhaps it’s no surprise that California has already started to transition off of gas being used in buildings. California building codes are getting more stringent; regulators are in the midst of several dockets on the issue, and there’s $1.5 million available for a data-driven tool that can figure out how to tactically decommission the gas system.

And California isn’t the only one. Nine other states are in the midst of similar decarbonization dockets. New York has declared that by 2040, none of its buildings will use fossil fuels.

But How?

California is the world’s fifth largest economy. It has over 100,000 miles of gas pipes under the ground. How could that much gas infrastructure be unraveled? Luckily most of the state has a relatively moderate climate, so the largest gas needs in buildings are to heat domestic hot water and warm homes and businesses. Let’s concentrate on those two needs. What else could provide these services?

If California figures the answer out, it will have a headstart in an industry that will upgrade energy systems, buildings and appliances across the country.

Utility Financing

The purpose of a utility is to install expensive infrastructure for all to use, while spreading the cost of that infrastructure across all customers and over 50 years or more. This method of financing erases upfront costs, allowing everyone to access those needed utilities in an equitable way. Without utilities, each of us would have to install our own electric power plant, water well, etc. in our backyard.

However the slow financing of infrastructure means that, in our current gas bills, we are still paying for pipes installed in the 1970s. If we try to switch too quickly to a different system, we will not only have to continue to pay for all the old pipes, but also for the increasing amount of the new infrastructure. If not thought out well, this can raise customer bills quite significantly.

If the bills become more expensive than the alternatives, then customers who can afford a different type of heating, will move off the gas system. Having fewer customers means fewer people paying for the operations of a system that still has just as many miles of pipe in the ground–raising their costs, which in turn increases their motivation to get off of gas. A vicious cycle like this can result in the only customers left being renters and those who cannot afford a new heating system. Europeans call this “the last grandmother” problem, where they picture just one grandma left on the gas system, struggling to pay for the costs of all those miles of pipes.

Gas workers will also be stranded. These jobs, generally union jobs, are some of the few left where a high-school graduate can earn a family-friendly salary with decent benefits. Renewable energy jobs, on the other hand, tend to pay a fraction of that kind of salary and have few benefits. This salary differential is why gas workers are frequently dead-set against renewable energy. They have to be, for their families.

So how can we transition off of gas without raising costs for customers or laying off gas workers? Are gas utilities even capable of change?

Past Innovations

Although gas utilities might not be known for their ability to innovate, they have transformed their product in a major way approximately every 30 years. Over the last 100 years, they have shifted from “coal gas” (made by cooking coal with steam in huge ovens) to “natural gas” (mined by drilling a pipe down into large bubbles of methane underground), to “fracked gas” (releasing many small pockets of methane by breaking rock up underground with pressurized water and chemicals). Each of these innovations provided the needed fuel at a lower cost.

With each change, infrastructure and appliances had to be retrofitted. Natural gas, for instance, burns differently than coal gas, thus in order to transition, every regulator in every appliance had to be replaced. In New York City, that meant that 4.8 million appliances were modified in three short years, gas workers in shifts accomplished this.

This is the speed and scale of change that the gas industry can meet when it needs to.

So we are at that point of change again. We need a new method of delivering domestic hot water and heat to buildings. The method needs to be non-emitting to meet state mandates, and in order to protect that last grandma, the new method can’t increase costs to the point we start the vicious cycle of defecting customers. Let’s discuss the possibilities.

Heat Pumps

The current preferred method of reducing emissions from buildings is to move all of the energy needs to electricity and then create that electricity with renewable energy.

Efficiency of the method used is important, since the greater the efficiency:

  1. the less renewable energy and storage you need
  2. the less you need to upgrade the electric grid to deliver all that electricity

The greater the efficiency, the less this transition will cost and the faster it will happen.

Thus, because of heat pumps’ extraordinary efficiency, they are the natural choice. A heat pump is similar to the technology in your fridge, except it can pump forward or backward, so they can move heat into your hot water tank and into or out of your home or business.

Because they move heat rather than create heat through combustion, they are much more efficient than any gas furnace, which always loses some heat up the chimney. There are several kinds of heat pumps.

Air Source Heat Pumps

Air source heat pumps pull temperature from the air. They tend to cost a little less than a gas furnace to buy, but can achieve two to three times the efficiency, and can pump heat out of your building, providing air conditioning (increasingly critical in a warmer world).

One of the few problems with air source heat pumps is when the air temperature is extreme –for instance over 100 degrees Fahrenheit– they have to work much harder to deliver the cooling you want. Even under these circumstances, they are still more efficient than the best gas appliance, but, in the future, all of our energy needs will come from electricity: transportation, buildings, most industrial processes. Imagine a heat wave hitting the west coast, with every building dependent on air source heat pumps. Not only will all of those buildings have the air conditioning cranked as high as possible, but all those heat pumps will be working at their lowest efficiency. The result is a vast electric peak load.

Electric peak loads are when California turns on its dirtiest and most expensive power plants. Increasing the electric peaks will cost all of us a lot. At the same time we will have to upgrade the electric grid to deal with the higher load, and find enough renewable energy and storage to meet the need. The higher the electric peaks, the more the transition will cost and the longer it will take us.

Air source heat pumps also spell the end of gas utilities, since this method has nothing to do with pumping thermal energy through pipes under the street. Unless we tactically decommission the gas system –mandating customers on specific streets switch to air source heat pumps by specific deadlines– we will end up with a rapidly increasing mismatch between the size of the gas system and the size of its rate base, leading to the last grandma problem. Mandates about customer choice are not something Americans like to do.

Ground Source Heat Pumps

Ground source heat pumps are another option. In this case, the temperature is pulled from the ground –water is moved through underground pipes, absorbing the ground’s temperature, and then delivering that temperature to heat pumps in the building. Since the temperature of the ground a few feet down is always the same, in the fifties, the heat pump in the building doesn’t have to struggle with temperature extremes and always works at peak efficiency. This flattens the electric peak load and makes that load very predictable –an electric grid operator’s dream. Ground source heat pumps are more than five times as efficient as gas heating and tend to last almost twice as long as air source heat pumps.

However installing pipes under the ground, whether horizontal or vertical, increases the cost of installation and most people can’t afford that upfront cost.

Although this system does involve pumping thermal energy through pipes under the ground –something that gas utilities have expertise in– they can’t install systems that are not “utility scale,” so ground source heat pump systems for single buildings is not an option for them.

Blended Gasses

In an effort to meet decarbonization mandates, gas utilities are currently proposing pumping other types of gas. Let’s discuss the ones that arguably can reduce emissions.

Renewable natural gas (RNG) is pipe-quality gas made from the methane created through decomposition, for example from sewage or food waste. In California, optimistically it can only meet 20% of the need and it costs two to 10 times as much as natural gas per energy unit. Thus RNG is likely to speed up that vicious cycle of fleeing customers.

Some gas utilities suggest blending hydrogen into natural gas. The hydrogen could be made using electricity from wind turbines in the middle of the night, when demand for electricity is low, and the appliances we currently have could work on a gas blend of 20% or less of hydrogen.

However, currently there is no green hydrogen available at scale. If there were, it would cost cost two to five times more than gas and that cost is not likely to reach parity with gas until 2050. Also, in terms of heating homes, a blend of gas and hydrogen in older metal gas pipes would make them more brittle and can cause them to crack catastrophically. Probably that is not something desirable in a state prone to earthquakes. Finally, hydrogen contains only a fifth of the energy of gas per cubic foot.

It seems unlikely consumers will choose a product that costs more, is less safe and contains less energy.

Networked Ground Source Heat Pumps

So, what about the idea (created by Zeyneb Magavi of HEET) of transitioning the gas system to networked ground source heat pumps? A networked heat pump system like this could be installed in the right of way of the street, the same as gas pipes are currently. Systems like this are used in European cities and American college campuses. The technology and components are well known and have been used for decades. A pipe full of water would run up and down the street, with closed vertical boreholes installed beneath the loop of water. Service loops would deliver the water to each building, where heat pumps would pull off the temperature needed, keeping showers hot, and rooms comfortable.

There are a variety of synergies that come from networking heat pumps. Since some buildings require cooling throughout the year (office buildings, data centers, ice rinks, etc.), their energy use would return the water warmer, providing heat for the nearby buildings. During the winter, cold can be stored via the boreholes in the bedrock until needed in the summer. Through this reuse and storage of excess thermal energy, networked heat pumps are at least six times as efficient as gas heating. And unlike solar or wind, this renewable infrastructure is non-intermittent and requires no large swaths of new land (since it would be under our streets).

Pumping thermal energy down the street to different buildings through expensive shared infrastructure is something gas utilities have expertise in. They would, however, have to learn how to maintain the temperature of the water in the pipes in the 40 to 90 degree fahrenheit range –a range that keeps heat pumps happy and working at their greatest efficiency. The utilities could control the temperature through many methods such as sending the water through the borehole array or actively seeking out energy sources and sinks (whether buildings, water bodies, etc).

Since California primarily needs cooling, the problem will generally be what to do with the excess heat. Because the utilities can choose when and how to release the heat, there are a variety of options–for instance, they can pre-warm irrigation water during the colder months to keep crops growing for longer. Or they can use air source heat pumps to cool the water in the pipes during the shoulder months, when the temperature is cool and the electric load is low.

The first networked heat pump installations can be installed on the distal ends of the gas system or where there are gas constraints or new developments being built. The system is filled with water once, like a radiator, so it would not be a drain on water supplies. Each street-segment can interconnect like Lego® blocks, growing larger networked systems over time and transitioning gas utilities gradually into thermal utilities. The networked heat pump system channels the power and finances of gas utilities for —not against— decarbonization.

Several gas utilities in Massachusetts and New York are installing regulator-approved demonstration projects, with pending requests in other states and utilities. New York has just passed legislation allowing gas utilities to function as thermal utilities. The law, passed in just two months, was pushed by the unusual trifecta of labor unions, utilities and environmentalists. Labor unions pushed for it partly because the shared-loop water pipes are so similar to gas pipes that gas workers are already certified to work on them and thus can transition with their salaries and benefits.

Pipes filled with water would be safer than explosive gas. The indoor air would be improved without combustion. It is even possible the customer energy bills might be lower than with gas. In Massachusetts, Applied Economics Clinic has predicted significantly lower bills so long as the infrastructure is amortized over its lifetime in the same manner as gas. This projected lower price is because the fuel (gas) part is erased, leaving the customer paying for just a minimal amount of electricity.

Of course, there’s still the problem of the needed retrofits in the buildings. A just and speedy transition cannot include a huge upfront cost to participate.

If a few successful demonstration installations of networked geothermal in California showed that customer energy bills in California would likely be lower than gas, then there are a variety of options that regulators could consider for erasing the upfront cost of building retrofits. In terms of the heat pump, the utility could lease it to the customer or the utility could own it (moving the meter on the far side of the heat pump as the legal dividing line between utility and customer property).

Any other needed retrofits in the building –such as insulation or electric panel upgrades– could be paid for through 0% loans (with the interest paid for by the state or the utility) attached to the meter. This type of loan would work even for customers without good credit, and would stay with the property if the occupant moved, getting paid off through the energy bill savings.

In order to make this transition more attractive to customers, the local electric utility could lower the electric rate for the networked-heat-pump customers. After all, the customer’s electricity use would be an electric utility’s dream –an overall increased use, that’s very predictable, with lower peaks. NYSERDA in New York has calculated this type of rate reduction for non-networked heat pumps should be between $300 and $1,200 per customer per year, depending on utility territory. The rate reduction for networked heat pumps should of course be larger, given the greater predictability and lower peaks. An attractive opt-in electric rate, would make it more likely customers would want, if not demand, the tactical transition of their street to networked geothermal system. Offering a better product at a lower rate is how the gas utilities transitioned from coal gas to natural gas, retrofitting every appliance in the country as the transition rolled out.

Now it is time to transition again. Networked heat pumps are surely not the answer to every situation. However, in terms of gas utilities, it might be one of the best options available. With it, they can transition street segments and whole neighborhoods in a tactical way, moving their companies, workers and customers over time into our non-emitting future, increasing the speed of our transition while avoiding the problem of the last grandmother.

Author: Audrey Schulman is the co-founder and co-executive director of HEET, a nonprofit climate solutions incubator. HEET takes no funding from any industry, including gas utilities.