The Future of Gas Utilities Series
The Future of Gas Utilities Series
Transitioning Gas Utilities to a Decarbonized Future
This three-part series outlines the key challenges and opportunities facing the gas industry, and aims to help gas and combination utilities navigate the natural gas transition in a fiscally and socially responsible way.
With approximately $150–180 billion of unrecovered gas distribution infrastructure at risk, gas utilities will need to organize and become a proactive and innovative participant in a clean energy transition. If utilities defer the decarbonization planning needed to build a long-term strategy, the prospect of declining growth or under-recovery of costs for gas utilities increases in the long run.
In this three-part series, The Brattle Group presents a framework for how gas utilities can assess risk and opportunities related to the clean energy transition, develops strategies that grow business and decarbonize, and determines the steps needed to implement solutions.
The natural gas utility industry is facing increased uncertainty and risk in the current environment of decarbonizing the energy sector.
Framework Building Blocks for an Energy Transition
In order to successfully transition to a clean energy system, gas utilities will need to establish building blocks that allow them to understand risks, evaluate the strategies that can address these risks and grow revenue during the transition, and determine the steps needed to implement the strategies.
3
Implement
2
Evaluate
Strategies
1
Assess Risk
3
What steps can be taken to get there?
-
Performance-based regulation
-
Multi-year rate plan
-
New programs
2
What are strategies to enable solutions?
-
Regulatory framework for transition
-
New technologies and infrastructure
-
Securing life of existing assets
1
Is it a real risk? How big is it, and how immediate?
- Policy risk
-
Business strategy risks
-
Cost of capital implications
Risks and Opportunities of Decarbonization
Without proactive adjustments, utilities face increasing cost recovery risks of capital invested to grow the gas system or to maintain safety and reliability requirements.
Gas utilities and regulators will also need to consider the risks and impact of the transition on low-income and less advantaged communities, who may experience rising bills and longer exposure to emissions. In addition, investors are increasingly pressuring gas utilities to reduce emissions and eliminate usage of fossil fuels.
Customer
Base
Safety and Reliability Requirements
Growth
Capital Expenditures
Cost
Recovery
Cost of Capital
and ESG
Equity and
Energy
Justice
Impacts of
Decarbonization
Strategies to Decarbonize While Growing Business
A broader regulatory framework can enable utilities to decarbonize while growing their businesses. The first step to determine what to do is an
“all-of-the-above” evaluation of options to identify which are economically and technologically viable and identify where utilities have comparative advantage.
Increase Performance of Existing Infrastructure and Reduce Stranded Asset Risk
Evaluate Owning &
Rate Basing Gas Replacement Infrastructure
Secure Financial Life of Infrastructure
Decarbonize Supply for Future Gas Demand
Long-Term Business Solutions
A Smooth Transition Depends on Where You Are Today
Enhanced regulatory measures are small but necessary steps to bridge the transition from pilot projects to long-term business lines.
These steps can help secure regulatory support for investment in new technologies, and utilities will need to quickly leverage that support into more paradigm-shifting regulatory strategies.
5
PERFORMANCE INCENTIVE MECHANISMs (PIMS)
4
SHARED NET BENEFITS
3
RATE-OF-RETURN INCENTIVES
2
RECOVERYDECOUPLING / LOST REVENUE ADJUSTMENT MECHANISM (LRAM)
1
PROGRAM COST RECOVERY
Utilities can then use alternative regulation to establish financial stability during transition
5
4
3
2
Early alternative regulation must first focus on aligning utility incentives
1
Learn How to Successfully Transition to a Clean Energy System
Each part of the series will be released on a monthly basis.
Authors
Frank Graves
Principal
Josh Figueroa
Senior Associate
Sanem Sergici
Principal
Long Lam
Senior Associate
Dean Murphy
Principal
Bente Villadsen
Principal
Akhilesh Ramakrishnan
Senior Energy Associate
about brattle
Other Brattle Experts
The Brattle Group answers complex economic, finance, and regulatory questions for corporations, law firms, and governments around the world. We are distinguished by the clarity of our insights and the credibility of our experts, which include leading international academics and industry specialists. Brattle has 500 talented professionals across North America, Europe, and Asia-Pacific.