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California has embraced clean energy, so why is it still building natural gas infrastructure?

Decarbonization advocates are fighting ratepayer subsidies that incentivize the growth of an increasingly obsolete gas system.

Elizabeth McCarthy
Elizabeth McCarthy
9 min read
California has embraced clean energy, so why is it still building natural gas infrastructure?

California, the fifth-largest economy in the world, continues to up its clean electricity game, most recently with state regulators’ groundbreaking mandate for 11.5 gigawatts of new non-fossil resources to come online by 2026 to help decarbonize the grid. But at the same time, regulators are allowing continued long-term investments in climate-unfriendly natural gas infrastructure, including ratepayer-funded gas connections to new homes and rebates for relatively efficient gas water heaters, furnaces, stoves and dryers.

“We have to stop digging the climate hole deeper,” said Panama Bartholomy, executive director of the Building Decarbonization Coalition. “If we don’t, we will see an escalation of the extreme weather events we’ve seen the last month and year, including in Seattle, Portland and Texas, and worsening air quality.” The coalition’s 60 members hail from the building industry, utilities, local governments and environmental organizations.

Ratepayer-subsidized investments extending the life of California’s natural gas industry not only go against the grain of clean energy but also drive up already high electric rates.

Rate increases from California’s investor-owned utilities have far exceeded the annual rate of inflation since 2013, potentially jeopardizing decarbonization investments, according to a white paper released in February by the staff of the California Public Utilities Commission. Pacific Gas & Electric’s rates increased by 38 percent between 2013 and the end of 2019, and San Diego Gas & Electric’s went up by 48 percent. The CPUC ratepayer advocate expects rates to spike even more. Earlier this month, PG&E, the state’s biggest investor-owned utility, filed for a 30 percent rate hike between 2023 and 2026, with half going to improve the safety of its electric and gas systems.

Making matters more complicated is that as California moves toward its 2045 goal of 100% decarbonization, partly through electrifying buildings with clean electricity, costly new investments in gas infrastructure will have to be ditched.

“Once constructed, these facilities become a sunk cost to the system and are typically depreciated over an expected service life of 50 to 60 years,” according to a 2019 report by Gridworks, a clean-energy consulting firm. Because the state has set a goal of reaching carbon neutrality by 2045, new gas connections “could easily become ‘stranded’ well before the end of their useful lives.”

The CPUC says it’s concerned about a broad array of stranded gas investments, ranging from pipelines to gas storage fields. CPUC spokesperson Terrie Prosper said in an email that the issue will be looked at as part of the commission’s Long-Term Gas System Planning rulemaking, which launched in January 2020 and is still ongoing. She said California was the first state in the U.S. to establish a regulatory framework to specifically examine “how to transition its gas system to comply with its climate goals.” It has “since been followed by other states, including New York, Massachusetts and Colorado,” she added.

But the CPUC proceeding is too little, too late for decarbonization advocates, who say time is of the essence because of the worsening climate crisis.

“The CPUC has no sense of urgency,” said Matt Vespa, an attorney with Earthjustice. The second phase of the long-term gas planning proceeding, which is supposed to address the stranded-asset issue, has not begun.

SDG&E, which is owned by Sempra, said its gas system is playing a critical role during the transition to 100 percent clean energy. Spokesperson Jessica Packard pointed to the company’s report on attaining carbon neutrality by 2045, which states that the gas system provides “dispatchable energy during volatile peak demand and ramping needs caused by increasing reliance on intermittent renewables and non-contracted imports in California.” SDG&E and SoCalGas, Sempra’s other utility, also are working on creating a market for renewable gas and green hydrogen.

Meanwhile, the amount California ratepayers pay to keep the overall gas system humming as the climate crisis worsens is roughly several hundred million dollars a year, based on a tabulation of various estimates.

The high cost of new gas hookups

Berkeley, California kicked off a national trend in 2019 when it banned natural-gas hookups in new buildings — a move that was upheld in federal court last week. Forty-five other local jurisdictions in California have banned gas in new homes or restricted its use.  (The trend scares gas utilities so much that they have pushed some 20 state legislatures to try to bar municipalities from restricting new gas connections.)

Mandating that new construction is all-electric is considered essential to attaining a decarbonized energy system. The California Energy Commission, which is responsible for building code updates, considered requiring this as part of its forthcoming code changes for 2022 but ultimately postponed the decision. The next opportunity to mandate all-electric new construction won’t come until 2026. That delay is expected to result in more than $1 billion in unneeded and wasteful spending on new gas-connection infrastructure, RMI found. (Canary Media receives support from RMI.)

Adding gas connections to new California homes costs ratepayers at least $100 million a year, said Merrian Borgeson, a senior scientist at the Natural Resources Defense Council. Gridworks estimated that the yearly cost for PG&E, SDG&E and SoCalGas ratepayers is closer to $150 million.

There also is the ratepayer tab for rebates for replacing broken gas appliances with new gas appliances, albeit more efficient models. These ratepayer-funded rebates amounted to $81 million last year, according to the CPUC.

Borgeson urged the CPUC to end the new home gas hookup subsidies “to align our investments with the state’s climate and clean air goals, and so millions of Californians can breathe easier.” She pointed to CPUC documents showing that PG&E, SDG&E and SoCalGas spend between $1,660 and $1,800 on each gas connection to a new home.

These costs, known as line extension allowances, are picked up by ratepayers, but the utilities do not consider them subsidies because the new homeowners ultimately pay into the system. The line allowance “reflects that a new customer contributes to revenue to fund gas infrastructure over many future years once the gas connection is completed,” PG&E spokesperson Melissa Subbotin said in an email.

California’s ratepayers are not alone in being forced to fund new-build residential gas connections that will be in place for many years. Other states include this subsidy in utility bills, including New York, whose ratepayers pay roughly $200 million a year for such line extensions, Bartholomy said.

California is adding at least 120,000 new homes every year

While ratepayers around the country pay for gas connections to new homes, this has a particularly significant impact in California because of the large number of new homes being added in the state every year.

About 120,000 new homes are expected to be built annually in California over the next few years, and if the pace of building keeps up with demand, that figure could be closer to 180,000. Between 2010 and 2019, the state added more than 570,000 residential gas customers, more than any other state, federal data shows.

How many of these new residences will be all-electric is not known. The California jurisdictions that prohibit or limit gas use in new buildings are primarily in Northern California, which is home to only about 10 percent of new construction in the state, said Pierre Delforge, NRDC senior scientist. “So subsidized gas hookups remain a major cost to ratepayers, particularly in Southern California,” he said.

Decarbonization advocates are seeking a forum at the CPUC to try to halt the new home gas line extensions. Borgeson hopes the issue will be taken up as part of the commission’s upcoming phase of its building decarbonization proceeding, which is separate from its long-term gas planning proceeding.

“We anticipate considering revisions to the line extension allowances in a proceeding in the next few months,” the CPUC’s Prosper said.

PG&E said it supports addressing the issue in either the decarbonization proceeding or the gas planning proceeding. The Sempra utilities did not respond to queries on whether and where to best address the issue.

Ratepayers are still paying tens of millions of dollars for gas appliance rebates

The $81 million spent last year on private utility gas appliance efficiency rebates comes out of total combined efficiency budgets for PG&E, SDG&E, SoCalGas and Southern California Edison amounting to approximately $500 million. The budgets also include funds for efficient electric appliances, weatherization, workforce training and administration costs.

PG&E said the proportion of residential efficiency program incentives expected to be spent on gas-only equipment has remained relatively flat: 7 percent in 2020 and 8 percent in 2021. Of approximately $10.3 million in incentives this year for residential customers, about $9 million is earmarked for equipment that saves both electricity and gas, such as smart thermostats. PG&E added that it expects to provide another $800,000 for equipment that saves only gas.

SDG&E’s and SoCalGas’ total efficiency budgets for this year are $82 million and $106 million, respectively. SDG&E declined to determine how much of its efficiency budget would be spent on rebates for gas appliances because “it would take weeks” to calculate, spokesperson Jessica Packard said in an email.

SoCalGas is in the crosshairs of some decarbonization advocates for continuing to increase its gas appliance rebates. They include rebates of up to $1,000 for a tankless gas water heater, up to $750 for a natural-gas pool heater and $500 for a gas fireplace insert.

Rebates matter because appliances last for decades

Efficiency rebates are important because they can incentivize households to either stay with gas appliances or switch to electric ones, and these choice points occur only every few decades.

A key hurdle is that replacing old gas appliances with electric ones often costs more. Electric replacements such as heat pumps are more expensive to purchase and often require costly electric panel upgrades before they can be installed.

Pending legislation in California, Senate Bill 68 introduced by Sen. Josh Becker (D), would direct funds to lower the consumer cost to switch from gas to electric appliances and provide subsidies to cover the costs of panel upgrades. In the same vein, CPUC staff in April proposed using nearly $45 million a year of funding from Self-Generation Incentive Program to cover a chunk of the costs of electric panel upgrades and electric heat water pumps. It proposes subsidies of between $2,800 and $3,600 for electric-panel upgrades, depending on a customer’s income level, and between $3,100 and $4,185 for water heaters.

At the federal level, Sen. Martin Heinrich (D-New Mexico) is expected to soon introduce the Zero-Emission Homes Act, which would authorize $225 billion in federal investment over this decade to equalize the upfront costs to replace fossil-fuel-powered appliances with electric ones.

A recent report by the nonprofit Rewiring America concluded that 86 percent of U.S. households, or more than 103 million of them, would save money by electrifying their furnaces and water heaters — a combined $37.3 billion a year in savings across the U.S. and $3.5 billion in California alone. That also would create more than 1 billion direct and indirect jobs and reduce rates of childhood asthma.

Jim Lazar, the author of the handbook Electricity Regulation in the U.S. and moderator of the Electricity Brain Trust discussion group, wrote a couple of reports on the cost-effectiveness and environmental desirability of converting homes from electric heat to gas heat in the early 1990s. Using the same methodology today “but updating the assumptions, I'd reach the opposite conclusion,” he wrote in an email.

Don’t dump gas infrastructure costs on lower-income ratepayers

A key issue going forward is developing strategies to ensure that reduced gas consumption does not create inequities by foisting higher costs mainly on low-income households that are left behind as their wealthier counterparts make the shift to electric appliances.

Gas utilities want their customers to pay for maintaining gas pipelines and other infrastructure, and if the number of customers is declining, that can mean higher costs for the ones who remain. As Lucas Davis of the University of California, Berkeley and Catherine Hausman of the University of Michigan wrote in a recent blog post, “when utilities are shrinking, they do not remove pipelines. A 10% decrease in the number of residential customers has a precisely estimated 0% effect on pipeline miles.”

Not only do utilities have their ratepayers fund gas connections to newly constructed buildings, but the ratepayers also foot the bill to dig up and replace old pipelines that supply existing homes. California’s investor-owned utilities estimated in a recent CPUC proceeding that replacing a gas connection to a mobile home costs between $10,000 and $15,000, according to Richard McCann, an energy economist for M.Cubed. This replacement cost is roughly the same for other existing homes — but it’s about 10 times more than ratepayer-funded hookups to new homes, he added.

Proposals to avoid overburdening customers left on the gas system include imposing exit fees on gas customers who electrify their homes, having taxes cover the tab or making utility shareholders pay. But controversial exit fees would likely discourage people from electrification, and using tax funds would divert money from other priorities.

How to divide up the costs among customers is the wrong question, said McCann. He pointed to the telecommunications industry, which regrouped and devised new strategies in response to cellphones making landlines obsolete without being bailed out by customers or taxpayers.

“A fundamental part of capitalism is that shareholders bear the costs of that [obsolescence],” McCann said.

(Lead photo by David McNew/Getty Images)

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Elizabeth McCarthy

Elizabeth is cofounder and managing editor of California Current. She has reported on energy, the climate crisis, water and health issues for various publications and organizations.