A Low Carbon Bridge for Gas LDCs

Over the past year we have continued to see much interest and urgency around the future of gas LDCs and their critical role in the energy transition. In fact, around 90% of utilities have a plan of some sort to diversify into low carbon fuels.

As we covered previously in previous articles Challenges and Opportunities for LDCs and How LDCs Can Support the Energy Transition and Fulfill Their Regulatory Compact, there are a number of challenges that gas LDCs need to consider in navigating energy transition. However, energy transition also raises new opportunities for LDCs, stemming from the need to develop a low carbon bridge from natural gas. Full electrification is not a viable approach for all use cases, and therefore low-carbon fuels will play a critical role in full decarbonization.

As utilities develop low-carbon fuel strategies, they face choices about both fuel and business model diversification. Utilities need to make tradeoffs on cost and feasibility across multiple fuel options as they diversify away from fossil natural gas. On one hand, renewable natural gas (RNG) is available now, but concerns persist on supply and cost implications. On the other hand, cost-competitive, clean H2 supply is emerging, but a substantial build out of renewable energy generation and electrolyzer capacity is needed for green H2, supportive policy/regulations are needed to enable CO2 storage for blue H2, and transportation network is needed for both. Of note, recent Department of Energy funding for Hydrogen Hubs is paving the way to spur H2 economies across the United States.

Moreover, with low-carbon fuel markets still developing, utilities need to define business models to enter markets, potentially expanding upstream from distributor roles via unregulated plays. This will require adjacent/new thinking on the traditional regulated business model for LDCs. Additionally, such diversification will require consideration of off-take agreements, strategic partnerships with RNG/H2 producers and developers along the value chain, or capability builds to own and/or operate assets further up the value stream.

Given the many unknowns such as technology and regulation, utilities that test low-carbon fuel strategies will need to follow an adaptable fuel, operational, and regulatory strategy. We can already see utilities experimenting across a broad range of fuel and business model options. As utilities experiment, we expect that they will encounter several supply chain, operational, or regulatory/legislative bottlenecks.

Consequently, low-carbon fuel strategies must remain adaptable, with utilities simultaneously evolving:

i)        Fuel strategies: Shifting focus across RNG, green hydrogen, and blue hydrogen, as appropriate

ii)       Operational strategies: Adjusting supplier management, customer programs, financial hedging to support fuel strategies

iii)     Legislative and regulatory strategies: Engaging with public-sector stakeholders to activate new fuel and business model plays including enabling ratemaking

More broadly, utilities will need to follow “no regrets” enhancements of capabilities to support these adaptable strategies; for example, cost optimization, life-cycle emissions measurement, stranded asset risk management, and safety practices.

At the same time, regulators and investors often view with suspicion the ability of LDCs to move outside their traditional space. As a former board chair at a large NW gas utility commented, “Regulators and investors are skeptical of utilities operating outside their traditional distribution role…to get directly involved, utilities need to convince regulators and investors that their core competencies are the right fit for these investments.” It’s clear that building credibility and clarity is paramount.

BCG has developed a robust set of tools and expertise to help utilities as they continue to consider their go-forward strategy on low carbon fuels. Specifically, we offer:

• Detailed local jurisdiction modelling of decarbonization pathways and low-carbon fuel demand
• Deep market analysis and forecasting for low carbon fuels (hydrogen, RNG etc.)
• Development of low-carbon fuel strategy, to help LDCs answer questions ranging from where they should play in value chain to how to source these fuels
• Crafting, synthesis, and buy-in to the low carbon fuel strategy narrative with regulators, investors, and community

This article was written by: Anshul Gupta and Leo Weitzenhoff.