The role of natural gas utilities in a decarbonizing world

Policy efforts and discussions of decarbonizing the energy sector are spreading across the country. How do natural gas utilities make sense of this trend and build strategies to avoid being a bystander?

Watch this webinar to understand the landscape of decarbonization efforts, how a New Jersey natural gas utility is positioning itself to participate, and what other utilities can do to avoid being a bystander.

Overview:

• Decarbonization policy landscape and continuum facing gas utilities
• New Jersey policy and analytical baseline for decarbonization costs
• Decarbonization policy and technology approaches for a gas utility

Transcript

Felix Amrhein: Good afternoon. And thanks everyone for joining us today for a webinar on the role of natural gas utilities in a decarbonizing world. Before we get started, we have just a few housekeeping items for the webinar today.

All attendee lines will be muted during the presentation. And you can submit questions to us using the Question Box at the bottom of your control panel. We look forward to your questions, and we'll be addressing them at the end of the presentation.

This webinar is being recorded. And a link to the recording will be shared with all registrants. Presentation slides are also available upon request.

I'm excited to be joined today by Michael Sloan, managing director of ICF Natural Gas Advisory Services Practice. Also here with us today are Tom and Larry from New Jersey Resources. And we want to extend our appreciation for their participation today.

For those not familiar with us here at ICF, we are a consulting firm with a large presence in the energy industry offering end-to-end solutions designed to help our clients solve their most complex issues. And shown on this slide are just some of our areas of expertise. And now, before we get started, just a quick standard disclaimer. And once everyone has had a chance to take a quick look, I'll hand it off to Michael Sloan.

Michael Sloan: Thank you, Felix. I'm glad everybody could join me today. Before we get started, I'd like to express my appreciation to Tom Massaro and Larry Barth from New Jersey Resources. It's a pleasure to have them on board today to share some of their experiences in looking at decarbonization and electrification policy issues in the state of New Jersey.

The energy and environmental policy landscape

Michael Sloan: I want to start by providing a brief overview of the energy and environmental policy landscape, discussing the issues and scope of the decarbonization debate. Then we'll shift to what the policy implications for the natural gas industry are and look at the full range of policies that are being proposed and debated and considered in different regions.

After that, I will turn the discussion over to Tom Massaro to talk about environmental policy issues in New Jersey from the New Jersey Resources perspective, and then to Larry Barth to talk about work that New Jersey Resources is doing to provide an analytical basis for the decarbonization debate.

Finally, I'll take the webinar back and finish it with a discussion of how natural gas utilities are responding to the decarbonization debate and the approaches and options available to natural gas utilities. I'll go ahead and shift to the state and local efforts.

State and local decarbonization efforts

Michael Sloan:If we look at the decarbonization debate today or for that matter over the last couple of years, it's really been focused at the local and state level. While we don't know what happens at a national level in the future, and, certainly, it's possible that what's happening today at the local and state level will be addressed at a national level in the future. At least currently, the activity is at the local and state level.

And it's broad spread. If your utility or your state or your locality is not in the middle of a climate change debate now, it likely will be in the future. Twenty-five states have joined the US Climate Alliance or at least last time we added up the numbers, including Montana, which joined in just a couple of weeks ago. Four hundred cities or more have pledged emission reduction goals. And more than 50 utilities have stated decarbonization goals, as well.

On the utility side, they're generally combined utilities, so gas and electric utilities, and also, electric-only utilities. And these companies are pushing the debate. They see potential growth opportunities in the decarbonization debate.

How are natural gas utilities engaging in the climate debate?

Michael Sloan: So far, we've not seen a lot of participation in this type of association or organization by the natural gas utilities, although there are many gas utilities that are actively engaged in participating in the climate change debate and contributing to reductions in carbon emissions in a variety of different ways. So if you're not engaged in a climate debate today, it's likely that you'll be engaged in a climate debate in the future.

If we look at the climate change debate from the perspective of the gas utility, currently, the residential and commercial sector, which is the core of the natural gas utility business, accounts for only about 8.5% of U.S. emissions. And that was in 2017. The power sector is a much bigger contributor to overall emissions. And even when you look at the contribution of power to the residential and commercial sectors, the power accounted for not quite 20% of U.S. emissions.

And emissions from transportation sector accounted for about 29% of U.S. emissions. And that often raises the question of, well, why are we focused on natural gas when most of the emissions are coming from other areas?

But when you look at the specific states and local governments and regions that are pushing the climate debate for natural gas utilities, in those states, the percentage of carbon emissions or global greenhouse gas emissions from the residential and commercial sector is much higher on average than it is nationally.

So it's not possible to reach the stated goals, which are typically 80% reduction in total greenhouse gas emissions by 2050, without significantly addressing carbon emissions, greenhouse gas emissions from natural gas use in the residential and commercial sector.

And that has led to a bit of a shift in the view of natural gas. Natural gas has played a fundamental role in reducing emissions from power generation over the last 10 or 15 years, pushing out coal primarily on an economic basis. And that shift will continue over time. But as we have moved further into the climate debate, the role of natural gas by the organizations that are most concerned about climate change has shifted from a bridge fuel to a part of the problem.

The changing political and policy environment

Michael Sloan: And we've seen that over time, where Scientific America just nine years ago said, natural gas would be a bridge fuel to a low-carbon future to today, where the quotes are more along the lines of "natural gas isn't a middle ground. It's a climate disaster." Or the NRDC's quote, "natural gas is still expanding and still not a clean fuel." So the political environment, the policy environment is changing over time.

And we're seeing it become more aggressive over time, as well. And I just picked three examples to illustrate recent pronouncements about climate change policy to illustrate that shift over time. And I deliberately stayed away from the California examples because I wanted to focus on what most people would say would be less extreme views.

California is certainly not very aggressive. We're seeing significant activity on the rest of the West Coast, as well. But I chose three recent quotes from the East Coast. New York state recently announced that the need to reduce greenhouse gas emissions would require reduced economy-wide consumption of fossil fuels by 85% by 2050. So fundamentally reducing natural gas consumption across the board, including the residential and commercial sector.

In New Jersey just last month, the 2019 New Jersey Energy Master Plan defined 100% clean energy by 2050 to include maximum electrification of the transportation and building sectors. And in New Jersey, transportation and buildings are the sectors that produce the largest carbon emissions in the state. So what we're seeing is a progression of different policy statements, policy objectives, and different approaches to setting policy.

On the policy side, we're seeing a significant range of different activities being proposed. Mandated transition to renewable power generation in terms of renewable portfolio standards and clean energy standards, carbon mass caps are in place in many states today. Almost every state that has started with an RPS has strengthened that RPS over time. We're also seeing significant efforts to electrify the transportation sector, much of that on the West Coast, but being considered in other areas, as well. And building sector energy efficiency, so aggressive demand side management and building codes.

The potential for building sector electrification

Michael Sloan: Today, we're talking more and more about the potential for building sector electrification. And that's through building codes that would slow down or ban the use of natural gas or other fossil fuels in new buildings and appliance standards, and potentially, in the long-term incentives to shift away from fossil fuels entirely.

In the states where we're seeing aggressive decarbonization efforts, the gas utilities are responding by working to decarbonize natural gas, reduce the carbon content of the gaseous fuels that they're providing to their consumers both in terms of the carbon content, as well as reducing methane emissions all along the supply plane. So that's renewable natural gas, power-to-gas, and hydrogen.

When we look at what's happening, we see a continuum of policies and how they impact the natural gas industry. On the least aggressive side, I'll call this a traditional business-as-usual policy approach, although we're seeing more DSM and energy conservation playing a role here. We're seeing the utilities very focused on reducing methane emissions from their systems.

But on the least aggressive side of the policy spectrum, the gas utilities will remain consistent in their business models and their approach to business with moderate efforts to reduce carbon emissions, greenhouse gas emissions from their systems.

Cost-efficient decarbonization

Michael Sloan: The next step on the policy continuum, I call it cost-efficient decarbonization. And here, we think that you can achieve about a 50% reduction in overall carbon emissions in a cost-efficient way—not cost-effective in an economic fashion, but cost-effective in a societal perspective—by transitioning away from coal generation, expanding renewable power, partial vehicle electrification, and significant efforts at energy efficiency and decarbonization of fuels where it's cost-efficient.

And we're seeing more efforts in this direction although most of the policies that we're hearing are more focused on the policy approaches further to the right on the policy continuum. The next approaches are where we're really seeing the policy debate headed.

The technology-neutral decarbonization efforts established an 80% reduction in greenhouse gas emissions by 2050, but are somewhat technology agnostic or neutral in terms of how that is approached. And for here, there's a significant decarbonization of fuels, aggressive energy efficiency, significant growth in renewable power, but a continuation of the role of natural gas both in the residential space heating and commercial space heating, and for off-peak power generation.

And analysis suggests that you can get to an 80% reduction using this approach. Probably, the approach that's currently being talked about the most—and while there have been a number of policy statements to this effect, they haven't been fully implemented—is the electrification priority decarbonization that has determined that fossil fuels should be avoided wherever possible, and that the energy system should be based around renewable power.

Finally, there is a significant amount of discussion today about net-zero carbon standards and what amounts to a long-term ban on fossil fuels in certain segments. And that's certainly an important part of the policy debate, although I'm not convinced that we have seen how that would work to date.

If we look at what that policy continuum means for a natural gas utility, the business as usual is fairly modest growth as a continuation of current business practices. The electrification priority by 2050 would result in a decline in throughput of between 75% and 85% by 2050. From a gas utilities perspective though, it's not really the throughput that's critical. It's the infrastructure use and requirements.

This is, again, a hypothetical showing the overall meters. And the overall meters and infrastructure requirements for a gas utility are maintain their value and maintain the usefulness of the existing natural gas system in all of the cases other than where we're talking about aggressive electrification priority.

And when we are talking about aggressive electrification, we are talking about, what happens to the gas distribution system thereafter? And then the slide is similar to one that EDF has used in some of their work. But it really highlights two issues associated with the current policy from the gas utilities perspective.

The first is that they're effectively stopping investment in new natural gas infrastructure. And that, in the short term, may actually be carbon detrimental since it will reduce improvements to the overall grid and slow down reductions in methane emissions. In the longer term, in addition to slowing down investment, it's also leading to a stranded value in the existing natural gas system, which is going to have to be recovered from somebody.

If we're looking at the different points of the policy continuum, ICF's analysis indicates significant cost differences between the different approaches to decarbonization. We estimate based on work done in the mid-Atlantic and northeast regions of the United States that you could reduce carbon by about 50% at a cost of roughly $200 per household per year. That's an annual cost per household to get to about a 50% reduction in emissions. You can't get to an 80% reduction at that type of price level.

The per-household costs of decarbonization

Michael Sloan: If you are looking at electrification priority and choosing renewable power and electric appliances to replace natural gas and fuel oil and propane and gasoline and other fossil fuels, at least based on our calculations, that's going to result in a cost of about $2000 per household per year.

We think that you can get to the same place at the 80% reduction in carbon emissions by 2050 for about half that price, or a little bit more than half that price, by selectively using natural gas in space heating and other applications, by selectively using natural gas as a power generation fuel, particularly for heating and backup power purposes.

A very fundamental difference in the cost to consumers of the different approaches with perhaps not a significant overall impact on the carbon reduction results at least in terms of the technology neutral versus electrification priority cases.

The actual costs, of course, differ by region. Warmer regions will be impacted less by electrification because they don't have to build the electric grid to meet winter peak. In colder regions of the country, the costs are significantly higher than what we're showing here.

That is the result of a range of different types of activities in terms of the carbon emissions reductions costs. And based on our estimates, there are a range of activities primarily in transportation and fuel efficiency measures, power sector emissions that result in fairly reasonable cost or negative cost to carbon reductions.

When you start talking about more aggressive approaches, renewable natural gas can be up to $100 per ton. Low carbon fuel standard applications in California $200 per ton. And the aggressive technology approaches to removing carbon, the estimates add up all they are at this point tend to range from $95 to $240, $250 per ton.

When we look at residential electrification, we're looking at numbers that are closer to $600 per ton or $800 per ton. Those numbers are all-in. They include the full cost of the impacts on the electric grid.

There are other estimates of cost impacts out there that are much lower than what we're seeing based on different assumptions about improvements in efficiency, improvements in technology costs, and assessments for what the impact on the electric grid would be. So there can be a significant range of what these costs look like depending on how inclusive the cost estimates are.

Given that range of costs and given the discussion of policy that we're seeing, where the policy goals and objectives are being promoted and considered without what in our view is a full consideration of the overall costs, we see a range of challenges to the implementation of these policies and would consider it very possible that what we will see as an implementation of very aggressive policies without a full understanding of the costs and implications, leading to a reconsideration of the policies or a delay in implementation of the policies in the future for a number of reasons.

And the first reason is cost. Our cost numbers are based really to a significant degree on two components. One of the cost of converting existing homes and buildings from fossil fuel to electricity, which is expected to be a significant cost, significantly more than new building conversion costs, which would be much lower, but also significant impacts and significant costs associated on the power grid side.

And if we just take a look at the chart which shows our estimate of the impact on peak electric capacity requirements in a mid-Atlantic area for different types of household conversions, and a high-efficiency air source heat pump conversion in this case would convert the system from summer-peaking to winter-peaking and require an additional expansion of the electric grid of about 55%.

If you use a cold climate heat pump that is not quite as bad as it's about 135%. You can avoid that if you're converting to a hybrid gas/electric furnace heating system. And you have to do that. You have to convert to a hybrid system if you're going to reach an 80% reduction in overall greenhouse gas emissions.

So that's an overall view. The other concerns that we have that we think will become more important over time as consumers start to see the impacts of some of these policies include concerns about consumer choice. "Don't take away my natural gas stove." Security of supply, the combination of the electric grid and natural gas grid provides a significant duplication of energy delivery systems, which helps security and resiliency.

Without natural gas, the resiliency and the security become extremely expensive to implement. It's also not using the existing infrastructure in an efficient way. So with that discussion, I'm going to turn over the webinar to Tom Massaro of the New Jersey Resources.

The New Jersey Natural Gas perspective

Tom Massaro: OK, thanks, Mike. I just want to start off talking a little bit about New Jersey Natural Gas.

We are a gas only LDC. We're the principal subsidiary of New Jersey Resources, and the majority of the assets and the employees are in, and the earnings come from the regulated utility. Some things that differentiate us from other utilities: we continue to have a growing customer base. So our new customer growth rate is 1.8%, we're adding about 10,000 new customers a year, a little under that. And it's coming from a mix of new construction and conversions primarily in the residential marketplace.

95% of the buildings being constructed in our service territory are adding natural gas. We have great penetration in the residential new construction market. And for the conversions, about 70% are coming from fuel oil, 20% from electricity, and then the remaining 10% from propane.

And the mix right now is about 2/3 of our customers are coming from the new construction market, about one third from conversions. That has switched over the last few years. It was closer to 50-50.

But with the new construction market doing very well in our service territory, specifically the multifamily market, we continue to have great customer growth. And we're doing it with a very high level of customer satisfaction. It's measured both by JD Power and MSI Cogent Reports.

New Jersey Natural Gas conservation incentive program

Tom Massaro: We went to a conservation incentive program back in 2006. It's a decoupling type of mechanism where we saw very high gas prices back then after hurricanes Rita and Katrina. So there was a push towards conservation.

We were able to come up with this regulatory mechanism that allowed us to align the interest of our customers, our policy makers in the state, and our customers and companies, to aggressively promote energy efficiency and conservation programs.

And then in 2009, we launched the SaveGreen Project. We've provided over $160 million in rebates and incentives to over 50,000 customers to help them save energy both natural gas and electricity over that period. So we've been promoting conservation and sustainability for over a decade now and, most recently, in the last 12 to 18 months, really making a push toward sustainability more publicly. And we are looking at it from the way that we source the gas, which is our IES E&P program, where we're purchasing responsibly sourced natural gas.

We're upping our game in the Methane Challenge and joining ONE Future to really show that the emissions conversation is along the entire pipeline distribution channel. So although we are only in LDC, we realize we need to take those efforts further upstream.

A little bit different than what Mike talked about nationally. Are emissions in New Jersey primarily driven from transportation and the residential and the commercial sector? So 43% of the emissions are coming from the transportation sector. And with that, 95% of those emissions are coming from on-road vehicles. So petroleum-based fuels driving the largest part of our emissions and transportation sector, and the residential and commercial being at 25%. The key drivers there, one where the most densely populated state in the nation, the gas distribution system is pretty well-established throughout.

Three out of four homes in New Jersey use natural gas for heating, and five out of six customers in our service territory use natural gas. Knowing that this emissions is from 2015, we started having the conversations about what the role of a natural gas-only company is going to be in a low-carbon future many years ago.

Because we knew that as the policy started to move towards that low-carbon future, we were going to be right in the spotlight from both our natural gas vehicle program from the transportation side and our new customer growth on the residential and commercial market.

And as Mike mentioned back in June, the state issued the Draft Energy Master Plan, and just as we suspected, focused on the transportation and the building sector. When they're looking at transportation, the state is not only focusing on light duty electric vehicles, but they're also looking to electrify medium-duty and heavy-duty vehicles. You can see in the second to the last bullet with battery or fuel cell technology. Most of the time, when we're talking about fuel cell technology, it's around green hydrogen, [INAUDIBLE], not necessarily stripping the hydrogen out of our stage four molecule.

The last bullet does cover natural gas as far as alternative fuels. But in the entire section of the Energy Master Plan that deals with transportation, there are probably about two sentences that mention biofuels, renewable, and natural gas, or anything that would be related back to a gas only LDC. So we knew the transportation was going to be front and center.

And I think what was a little eye-opening to us was the focus on the medium- and heavy-duty vehicle markets, as well, because we, as a company, have invested in a number of compressed natural gas refueling stations inside our service territory. And they were all with regulatory support.

It also moved towards electrifying heat in buildings. And it pretty much was across the market. So the top bullet talks about electrifying residential new construction. And it focuses on using codes and standards to work towards net carbon zero buildings emission buildings in 2024.

So looking at a very short timeline to target the residential new construction market, there were some public hearings yesterday. The New Jersey Builders Association came out with comments just asking the state to take a look at that, the costs associated with that, and what impact that would have on jobs as it moves forward. They also looked in the second bullet, put language around something that they proposed in the clean energy program, the energy efficiency programs run by the state earlier this year.

They put out a draft that was going to remove the incentives for customers using oil or propane to get an incentive to install a high-efficiency natural gas furnace. And instead, the state was going to provide incentives to move them directly to an electric heat pump.

The New Jersey Chapter of the Air Conditioning Contractors of America, ACCA, came out with some public comments through that proceeding, warning against the comfort level that an air source heat pump provides in very cold temperature and also the costs associated with operating an electric heat pumping and much more expensive than a high-efficiency natural gas furnace. So there were a couple of allies that were out there along with the industry, saying the technology at this time may not be ready to move as aggressively forward as the state is targeting.

And then the last bullet talks about the roadmap, as Mike mentioned, really not looking so much towards a role of natural gas and an 80% reduction in a 2050 future, but working on a roadmap that would transition existing building stock away from fossil fuels, and at the same time, providing financial incentives for natural gas heated properties to "upgrade to electric heating and cooling now and ramp down on the natural gas incentive." So there are a number of programs that are being proposed in New Jersey that look at the transportation and building sectors.

As I mentioned, we've been thinking about this for a few years now in a conversation with ICF and others. And we really were looking to answer three key questions.

Three decarbonization questions that natural gas utilities need to answer

Tom Massaro: Number one, would electrification actually reduce carbon emissions? And if so, what part of the economy does it make sense to move forward with at what times? So trying to figure out from a gas LDC perspective, where are there challenges and opportunities moving forward as we look to decarbonizing New Jersey's economy? What would the cost of electrification be for each one of those different sectors? And then lastly, are there other technologies that can decarbonize energy consumption more cost effectively?

That's pointing towards one of my slides, as well. When does carbon capture and reuse become economically viable against some other electrification or decarbonization options? So we hired ICF to do a study to answer these three key questions. I'm going to hand it off to my colleague Larry Barth to talk about that study.

Larry Barth: Great. Thank you, Tom. Here is some context on the past, present, and future of New Jersey's greenhouse gas emissions. In 2006, aggregate emissions in the state were 128.6 million metric tons a year.

The Global Warming Response Act, which was passed about 10 years ago in New Jersey, is something that we looked at that would be providing—as Tom said, we had started this analysis some time ago before the Draft Master Plan was issued. And that act provided that we require that we reduce emissions in the state 80% from that 2006 level by 2050. And so we used that as the planning target in our analysis here.

On the far-right hand side of the chart, you can see that in 2050, following that green dotted line down, target emissions are 25.7 million metric tons a year by 2050. As of 2016, aggregate emissions in the state where 102.7 million metric tons. And that's tracking below the target set by the Global Warming Response Act for 2016. And it looks like we should be on track to remain below those levels as a state into the early 2020.

Some of the reasons for our success to date in emissions reductions are attributable to the reductions in energy consumption due to the effects of energy efficiency measures in the state. We had a pretty significant global economic recession that had something to do with this, as well. We saw some positive impact from the federal car fuel efficiency standards in the transportation sector. And the shift in heating fuel from oil to natural gas has also contributed.

Renewables have so far had a modest impact in New Jersey. We're one of the top five states in the nation in solar capacity. Solar only represents about 5% of our total electric power generation in the state. Meeting the 2050 goal of getting us close to that 26 million metric ton emissions level per year is going to require that the state reduce emissions by another 75 million metric tons a year, which is about 75% of the level that we're currently operating at.

And as indicated in the orange line on the graph, the current trajectory for emissions, according to Energy Information Administration 2018 Annual Energy Outlook, as applied to New Jersey, is flat to 2050. So clearly, there are the major effort ahead to change that trend line.

What this chart shows you is the work that we did together with ICF to come up with the cases that really address the question of, OK, how are we going to take our current pace of emissions down by 75%? So we came up with basically four cases.

The four emissions-reduction cases

Larry Barth: Case one is the Energy Information Administration 2018 Annual Energy Outlook, as applied to New Jersey. This became our baseline business-as-usual case and largely reflects what would happen if fuel prices, equipment costs, consumer adoption rates, and power dispatch curves are left to determine the resource mix. Costs in all the other cases that we look at here are expressed as incremental costs relative to this case.

Case two reflects the Clean Energy Act that was passed in New Jersey back in May of 2018. And this act requires New Jersey to achieve 50% renewables by 2050, with specific targets for offshore wind energy efficiency and battery storage. In this case, we extended the 50% renewable energy goal to be 100% by 2050.

And while this was not part of the Clean Energy Act, we also added a goal for electric vehicle penetration, consistent with New Jersey's commitment to the zero-emission vehicle standard of 330,000 vehicles to 2025, which we extrapolated out to 2050 to be about a 23% overall penetration rate of EVs.

If you look at the net effect of this case, it's principally to decarbonize the power sector. The costs in this case are largely driven primarily by the substitution of fossil generation with renewables, offset by the net benefits of energy efficiency. The key assumptions that affected the costs in this were the cost trajectories for renewable energy and storage. We relied a lot on NREL or ICF relied a lot on NREL estimates for that, National Renewable Energy Lab.

Case three is the electrification priority case similar to what Mike had mentioned before. It builds on case two, but as major efforts to electrify the heating and transportation sectors in the state. In this case, 83% of residential and commercial buildings in New Jersey are converted from natural gas, oil, and propane, and electric resistance to electric heat pumps. These conversions, they require the participation of about three million households and 240,000 businesses.

In transportation, by 2050, the assumption here is nearly 80% of new light-duty vehicle sales are assumed to be electric vehicles with the result being that about 50% of the 8 million vehicles in New Jersey are electric by 2050. Costs in this case are driven by the capital and operating costs of conversions to electric vehicles and heat pumps. And the associated impact on electric load is considered an IPS power system dispatch model, which is based on hourly load data to 2050.

While all EV charging was assumed to be off-peak, the model meets new electric generations with renewables. And battery storage added to firm those renewables. NREL's assumptions on cost and performance trajectories on electric heat pumps were again important here as with some of the work ICF did to better understand expected heat pump performance in cold temperatures.

In the low-carbon fuel priority case, we considered a more targeted approach to electrification, still relying on electric heat pumps, but combined with natural gas furnaces for backup and reliability on the coldest days of the year.

The case also relied on even more aggressive energy efficiency assumptions than in the previous cases and relies on more low carbon fuels, including our renewable natural gas to reduce the carbon content of the fuel mix and as a strategy to reduce conversion costs by leveraging existing delivery, heating, and fleet infrastructure.

Results in this case are dependent on assumptions relating to sustaining aggressive annual energy efficiency reductions, hybrid heat pump performance and costs, as well as renewable natural gas availability and costs.

As comprehensive as this study was, there were a number of factors that can be expected to have major impacts on the cost and time frames associated with the energy transition that were not considered, including the impacts on electric transmission and distribution capacity, the use and integration of electric appliances and other distributed resources in managing the supply side of the electric grid, a secondary effects of the growth in renewables, and intermittency on fuel prices, wholesale power markets, and market rules.

There were no specific assumptions on carbon pricing taxes or caps. There were no specific assumptions of the feedback impacts on all this on electric utility rate structures, regulatory paradigms, and rate design. To give you a sense of some of the preliminary findings of the analysis where we're continuing to work this with ICF to get to final results, let me give you a thumbnail sketch on some of the major findings.

First of all, as it relates to decarbonizing the power sector largely the case two, which we mentioned before, there are some keys we found to keeping costs within a reasonable range. First of all, that energy efficiency is absolutely mission critical to keeping the total bill down. So the state's goals in ramping to 2% annual savings in electric and 3/4% in annual savings in gas are well above the current pace.

But getting to those levels is essential. And it's far from trivial from an implementation standpoint. But it does go far in keeping the bill impact of this controlled.

Nuclear plants here in New Jersey were extended out to 2050 with associated costs to do so. And that helped also keep the costs under control here. We understand both sides of the debate on nuclear as whether it is or is not a clean energy resources.

The implication we found from a power system modeling standpoint is that nuclears might crowd out the need for more renewables as you start to go down in time. And there could be excess generation as soon as 2030, as must run nuclears meet must run renewables and reduce load from energy efficiency. This could have some implication on both wholesale markets, as well as the need for storage.

Finally, we found that allowing gas generation to run for peaking and load balancing needs was also critical to having to add renewables or storage that are only going to be used at fewer hours of the year at cost of hundreds of dollars per kilowatt hour.

Electric vehicles, particularly light-duty vehicles, seem to be low-hanging fruit in the transition. There are operating cost savings assumed that can have a favorable impact on costs. And the carbon savings from oil are relatively significant here, relative to other options.

The third bullet and the one that we look the hardest at to make sure that we've got right is the electrification of space heating in cold climate regions like New Jersey will be very challenging from a cost standpoint. Not only do the cost of the conversions and the higher operating costs of heat pumps which are expected, but also to the logistics. In fact, the $3 million homes and 250,000 businesses are now turning on their heat at 7:00 AM, which will create the winter-peaking utility in the state that might get spoke about and could conceivably double our peak demand day relative to current summer peak and generation requirements.

And with that load being intermittent, renewables in storage, cost, and reliability will become issues. Finally, in the low-carbon fuel case, we're able to see how more targeted electrification, aggressive energy efficiency, and low-carbon fuels do provide cost-effective alternatives to the forced electrification path, in particular, by relieving burdens on the power system.

Case four, in particular, illustrates the importance for policymakers to keep technology pathways open, so that innovation can be unleashed to develop and bring new solutions to market. In addition with proper alignment of policy, goals, regulatory structures, and utility business model models, we're confident that gas LDC's like NJNG with trusted brands, operational expertise, and a leverageable and resilient gas network can play an important role we've always played in helping the state achieve its public policy goals, and in this case, doing it better, faster, and cheaper.

The next steps for NJ are in this report. We're working with ICF to finalize the results, supporting our engagement and public policy discussion with policy makers and stakeholders in forming our own corporate vision and strategy for the company as we look to 2050, and then developing our product development and R&D agenda.

In addition to what we've already been doing in energy efficiency and leakage reduction, new technologies like hybrid heat pumps, gas heat pumps, renewable natural gas, and power-to-gas are a high priority for us. So thanks for your time. And I'll turn this back over to Mike.

The need for natural gas utilities to be part of the decarbonization solution

Michael Sloan: Thank you, Larry. Thank you, Tom. It's fascinating to see what New Jersey Resources has been doing and how they're responding to the discussion about climate change and the need for climate change mitigation in the state of New Jersey. I want to talk now to wrap up the webinar. Just a few thoughts on how other gas utilities are approaching the policy imperative to decarbonize the economy.

The first and most fundamental point that I want to make is that, at least from our perspective, the gas utility is not going to be able to be part of the discussion unless they have demonstrated a continuous commitment to contribute to emissions reductions. To be part of the discussion, part of the solution, you have to have that initial commitment to the process. And that's participation.

The other role is education. We see in many of the jurisdictions that are debating policy change a lack of full understanding of what the costs and the implications of different policies will be, or if they are looking at the costs and the implications. The analysis is based on what may turn out to be very aggressive assumptions about technology development, technology availability, and technology costs.

In order to balance that discussion, it's important to educate the stakeholders and consumers that will be affected by the policies, as well as the regulators and the policy makers that are developing the policies. And a big part of that is education about the need for a flexible, adaptable approach to addressing the climate change issue that allows for multiple different approaches, different fuels, and does not lock in the approach based on existing policy, or forecasts of the costs, or availability or performance of future technologies that have not yet been developed.

So when we're seeing gas utilities that are deeply engaged in the discussion, these are the two points that they're really trying to make. They're participating in the process. They're trying to educate the stakeholders and policy makers.

In terms of the participation in the process and the activities as part of climate change efforts, probably the longest standing, of course, is the decarbonization of natural demand through energy efficiency and demand-side management. And that's not new. That's been a standard part of many utility practices for a long time.

If you are valuing carbon and carbon reductions, then that makes DSM more overall cost-effective than what most of jurisdictions are currently using to evaluate DSM however. So a decarbonization policy may include more aggressive DSM than is currently allowed in many jurisdictions because of cost concerns. We're also seeing the gas utilities developing new efficient technologies like CHP and higher efficiency residential applications, micro turbines, and other natural gas applications that are able to reduce carbon emissions, as well.

Of course, the gas utilities would very much like to continue to convert higher carbon fuel use to natural gas. And that's certainly an area where they can reduce carbon emissions in the near to medium and potentially long-term. So New Jersey Natural Gas has been converting fuel oil customers now for a significant amount of time with significant benefits in terms of overall carbon reductions. Many of the policies that are being discussed would slow down that process and make that more challenging. It also is true for CNG and RNG vehicles.

After the demand side, we're seeing, today, more and more interest on the part of gas utilities and decarbonizing natural gas demand. That includes renewable natural gas, as well as reductions in methane leakage both in terms of the utility's own systems, as well as upstream emissions, where the utilities do have some impact some influence on upstream producers and transporters to address methane emissions. We're also seeing movement towards clean gas supply, and an awareness of where the gas serving the utility customers is sourced from, and the emissions associated with the different sources of natural gas supply.

Finally, we're seeing significant interest today in new technologies in power-to-gas, and hydrogen, and carbon capture and reuse eventually. Two or three years ago, the aggressive technology was probably renewable natural gas. Today, many of the utilities that are addressing these issues are turning attention to power-to-gas in order to allow the utilities, the gas utilities to provide an outlet for excess renewable power.

And finally, we're seeing the utilities express more of an interest in an integrated energy systems approach to allow natural gas and gaseous fuels delivered by the natural gas distribution system to contribute to the power grid in terms of supporting and backing up renewable power, providing power system resiliency and providing peak energy supply.

An overview of available technologies

Michael Sloan: Renewable natural gas, of course, is a significant interest to the gas industry. AGA and ICF are currently preparing a study on the potential for renewable gas that will be released in the next couple of months. Power-to-gas, again, there's significant more interest in this technology. And SoCalGas is probably leading the charge on the technology.

The other technology that I want to talk about is the hybrid space heating system. And in an aggressive decarbonization policy environment, a hybrid space heating system allows the natural gas system to support the decarbonization through electrification. Much of the cost associated with electrifying space heating occurs due to a shift of the peak electric demand from summer-peaking to winter-peaking and the need to expand the electric grid in order to support the winter peak associated with that increase in electric space heating.

Even with cold cycle heat pumps, very efficient cold cycle heat pumps, very efficient conventional heat pumps in most of the colder jurisdictions, the electrification will drive peak electric demand in the winter well above current peaks during the summer. Hybrid space heating system allows the natural gas to be used during peak periods, avoiding the need to expand the electric grid, at the same time, maintaining the value of the natural gas distribution system even though throughput has dropped dramatically.

But if you're going to approach decarbonization policy from that perspective, if you're going to achieve an 80% reduction in carbon emissions, that does result in a fundamental decline in natural gas throughput through the system. You can mitigate some of that with RNG and power-to-gas, which reduces the carbon content of the natural gas. But you still have to be very efficient. And in many cases, the use of a hybrid heating system will allow that.

No matter what you do, you're going to be significantly reducing throughput, which is going to change the regulatory pressures on the gas utilities and either push prices per unit of throughput up or require a different approach to recovering the revenue requirement for the utility. It does, however, maintain the value of the system, and the value of the existing investment, and the need for future investment in the natural gas system.

What that does mean though, is that a partnership with the regulators is a critical part of the gas utility's ability to contribute to the climate change debate. Fundamental decarbonization will require significant changes to the baseline operations of gas utilities that will need to be supported and rewarded by regulators through changes and regulatory processes that provide incentives for utilities to participate further in the decarbonization debate.

Closing thoughts on natural gas utility decarbonization

Michael Sloan: Just to wrap up with a few thoughts on decarbonization, these are our views on the market. They're quite similar to what Larry was talking about on the New Jersey study. But the easiest approach to decarbonization is aggressive transition to renewable power to natural gas, shifting away from coal and significant investments in renewable power with the proviso that natural gas still plays a very fundamental role in meeting peak power requirements, transitioning away from natural gas. And that part of the power grid substantially increases costs above what we would otherwise expect to see for relatively small incremental reductions in carbon emissions.

And then in pretty much every jurisdiction, transportation is going to need to be a fundamental part of any effort to decarbonize the economy. In the light-duty vehicle sector, there will be a significant role for electric vehicles. In the medium-duty vehicle and heavy-duty vehicle sector, that's probably split more between natural gas or renewable natural gas and potentially some applications of electric vehicles.

In pretty much all of the analysis that we've done, we have found electrification of space heating to be a very expensive approach, particularly when you start talking about shifting existing buildings off of fossil fuels and to electricity. Having said that, there is a significant role that gas utilities can play in local and regional decarbonization efforts. They can help achieve very aggressive carbon reduction targets as long as they're allowed to participate and as long as the approach doesn't predetermine the technological path to decarbonization.

And with that, thank you for your time. We appreciate your participation. Again, I want to thank Larry and Tom for their contributions here. And we have a time for a few questions.

Felix Amrhein: Thank you again, Mike, Larry, and Tom, for the presentation. My name is Felix Amrhein. I'm a senior consultant here with IFC's Environmental Strategy Team of the Advisory Services Group. And I'll be moderating a quick Q&A session.

All right, to get to the first set of questions, we had a few questions relating to general trends on decarbonization. And, Mike, you had mentioned initially that there are new states on the West Coast and the East Coast. But what are some of the indicators?

What are some of the policies that are being tracked that can indicate states maybe not that are not known to be aggressively decarbonizing to move towards decarbonization of the economy? And is it similar to cap and trade where there's going to be more of a state level or regional approach, or do we see other indicators and trends on a national level, as well?

Michael Sloan: Well, at least right now, there's not been much activity on the national level. And we don't see any fundamental change in that at least unless there is a change in the federal government. So if there's a Democratic administration, then we would expect a great deal more interest in a more aggressive approach to decarbonization and certainly the return of some of the regulations that the current administration is trying to roll back.

Having said that, where we're seeing the activity right now is at the state and local level. The state level on the power regulation has been active for quite some time. And we're continuing to see more aggressive renewable portfolio standard regulations, clean energy standard regulations.

And in fact, in almost all of the states, with RPS standards or CES standards, we've seen the states ratcheting up those standards or at least talking about ratcheting up those standards over time. The power sector is probably the most direct and the easiest sector to reach. So states that are moving into or jurisdictions that are becoming more active in the climate change debate are likely to focus there first. So the activity on the electric side acts as a bellwether, if you will, in terms of where state activity, local activity is becoming more aggressive.

How natural gas utilities can engage in the decarbonization discussion

Felix Amrhein: Thank you, Mike. And now a question for NJR. And the gas utility is asking and mentioning that they're struggling to find ways to engage. I'm wondering, within the frameworks that are out there driving the decarbonization commitments, where natural gas has already been kind of ruled out as has been mentioned, what are some thoughts and idea of where and how to engage earlier in the conversation?

Tom Massaro: Number one, right now, the documents are in draft mode. And what we're learning is there's a wide variety of stakeholders that should get engaged in the conversation. And one of the most important aspects we keep touching back on is always looking back towards that North Star. And it's not really to get rid of a fossil fuel from a policy perspective. Obviously, there's differing views across the spectrum on that.

But if the ultimate goal is decarbonization, there are a number of ways in order to get there. And that includes energy efficiency, renewable natural gas, energy storage, power-to-gas, CNG, carbon capture and reuse it. And what we like to do is talk about the possibilities of each of those technologies and not foreseeing policies down a path that can lead to increased customer costs. If they get you to the goal, but it just might get you there in a more expensive way and frankly in a way that could derail some of the efforts and increased emissions. And I think we've seen that in other nations and in other policy decisions.

So it's really keep the pathways open. Keep the focus on what the ultimate goal is. And that's decarbonization.

It's not to rule out any one technology or to favor another. And most importantly, keep the customers up front. Realize that the customers are the ones that are paying their energy bills, and you need to do it in a thoughtful, mindful way.

Engage the advocates. Focus on the ultimate policy objective. And realize, at the end of the day, that it's going to be a number of different technologies that's going to get you there. And whether it's a gas heat pump, an electric heat pump, a battery, a solar panel, or renewable natural gas, there are multiple ways to come to a decarbonized future across all of our economies.

Felix Amrhein: Thank you very much. And we'll have time for one more quick set of questions. A couple of questions came in regarding, how energy resources earn on conservation measures, and how can sort of security of supply measures be monetized?

Tom Massaro: Tom again. Some of the programs, the energy efficiency programs we earn on, the conservation programs, come from shareholder dollars, so it's a mix of expenses and opportunities to earn on the energy efficiency investments.

And the second question if it's about monetizing-- what we like to talk about is the value-- if I'm interpreting the question correctly-- we do talk about the value of the gas distribution system or the network of pipes as a storage, as energy storage. And the value of having that natural gas pack in that pipe is much different than electricity, right? When there's an interruption, it's immediate versus having that line pack. And there's a value of using the distribution system as energy storage.

How you properly monetize that, I think, it's by region and more specifically by regulator. It's going to be valued differently. But there is a value that we talk about—having a natural gas network. And I think as Larry Barth touched on earlier, finding a way to leverage the investments that we've made in that to utilize it in a much different way in this decarbonized future through lower carbon fuels.