Climate Act Avoided Cost of Gas Working Group

There is an immense amount of work that needs to be done to implement New York’s Climate Leadership and Community Protection Act (Climate Act) “Net Zero” target (85% reduction and 15% offset of emissions) by 2050.  It is very difficult to grasp all the different ways that this transition is going to affect all New Yorkers.  Despite the lack of a reliability and affordability feasibility analysis an army of government bureaucrats are developing transition plans to change our energy choices assuming that everything will work out.  This article talks about just one of those efforts.

I have written extensively on implementation of the Climate Act.  Everyone wants to do right by the environment to the extent that efforts will make a positive impact at an affordable dollar cost.  Based on my analysis of the Climate Act I don’t think that will be the case.  I believe that the ambitions for a zero-emissions economy outstrip available renewable technology such that the transition to an electric system relying on wind and solar will do more harm than good.  The opinions expressed in this post do not reflect the position of any of my previous employers or any other company I have been associated with, these comments are mine alone.

Climate Act Background

The Climate Act established the Climate Action Council who is responsible for preparing the Scoping Plan that will “achieve the State’s bold clean energy and climate agenda”.  They were assisted by Advisory Panels who developed and presented strategies to meet the goals.  Those strategies were used to develop the Integration Analysis prepared by the New York State Energy Research and Development Authority (NYSERDA) and its consultants that quantified the impact of the strategies.  That analysis was used to develop the Draft Scoping Plan that was released for public comment on December 30, 2021 and will be finalized in 2022.  At the same time this process is underway various state agencies are already implementing regulations for the transition.  The problem is that the Scoping Plan is just a guide and does not include a reliability feasibility analysis or any affordability specifics about the costs for the transition.  Couple that with the fact that many New Yorkers are unaware of the Climate Act much less its implications suggest to me that this that public blowback will be immense when the realization of what is required becomes obvious.

Gas Planning Procedures

In order to explain what is going on I will provide background information for this example.  The New York State Department of Public Service (DPS) Case 20-G-0131 – Proceeding on Motion of the Commission in Regard to Gas Planning Procedures “seeks to establish planning and operational practices that best support customer needs and emissions objectives while minimizing infrastructure investments and ensuring the continuation of reliable, safe, and adequate service to existing customers.”  The Background for the order instituting the proceeding follows with my explanations:

Gas utilities in several regions of New York State have recently claimed supply constraints that may prevent them from accepting applications for new firm service. LDCs have invoked moratoria on new service connections in some locations, leading in some cases to customer hardships. In resolving the moratorium invoked by KEDNY and KEDLI, the Commission-adopted settlement requires those LDCs to develop a “Long-Term Capacity Report” to address the long-term capacity constraints affecting their operations.

This refers to gas utility load distribution company (LDC) issues.  A footnote to this section explains that:

On January 17, 2019, Consolidated Edison Company of New York, Inc. (Con Edison) notified the Commission of a moratorium on new firm gas service in most of Westchester county, commencing March 15, 2019. Beginning November 2018, The Brooklyn Union Gas Company d/b/a National Grid NY (KEDNY), serving Brooklyn and parts of Queens, and KeySpan Gas East Corporation d/b/a National Grid (KEDLI) (collectively, National Grid) began informing large applicants for new service that National Grid would be unable to provide firm service unless a pending supply project was approved. As of May 15, 2019, National Grid stated that it would not fulfill applications for new firm service connections, or requests for additional firm load from existing customers on Long Island, including Queens and Brooklyn. Based on a settlement adopted and approved by the Commission, National Grid ended its moratorium as of November 26, 2019. Case 19-G-0678, Proceeding on Motion of the Commission to investigate Denials of Service by National Grid, Order Adopting and Approving Settlement (issued November 26, 2019); Case 19-G-0678, supra, Confirming Order (issued December 12, 2019). Additionally, New York State Electric and Gas Corporation (NYSEG) has declared a moratorium on new gas customer attachments in the Town of Lansing, in Tompkins County in February 2015.

In other words, there have been examples where people who want to hook up to natural gas have not been allowed to get service.  This is the crux of the gas transition problem.  The net-zero transition to natural gas alternatives means that at some point the choice to use natural gas will no longer be an option.  The Background goes on:

These circumstances demonstrate that conventional gas planning and operational practices adopted by natural gas utilities have not kept pace with recent developments and demands on energy systems.  Gas utilities need to learn from recent experience and adopt improved planning and operational practices that enable them to meet current customer needs and expectations in a transparent and equitable way while minimizing infrastructure investments and maintaining safe and reliable service. Additionally, planning must be conducted in a manner consistent with the recently enacted Climate Leadership and Community Protection Act (CLCPA).

Implicit in this is that customer choice will have to be limited.  I do not believe that many New Yorkers understand that this transition is coming at them.  The Background notes:

Moratoria can create adverse customer impacts, as they prevent at least some applicants from receiving firm gas service. Some types of development projects can utilize viable alternatives to firm gas service, if they are practically available. Others, however, may have more difficulty without firm gas service. Additionally, reliance on alternatives can have emission impacts. Reduced emissions impacts may result where the alternative to gas is efficient use of clean electricity, while increased emission impacts may result where the alternative to gas is oil or propane.

If viable alternatives were available, and by that, I mean affordable above all, then applicants would be choosing them willingly.  I published a post describing the comments on the Draft Scoping Plan submitted by a small manufacturer in Rochester who replacing equipment that is powered by natural gas now would cost over a million dollars and said that his company could not afford that conversion.  I will quote one last paragraph from the Background:

Given these potential impacts, the public interest demands that gas utilities provide information to and communicate with customers in a way that promotes effective customer planning, reduces confusion, and avoids inequities or the appearance of inequities. Similarly, the public interest demands that gas utilities provide information to and communicate with the Department, with other government entities and agencies, and with stakeholders, so as to promote effective planning and best consideration of alternatives, thus benefiting costs, emissions, and economic development.

What this means is that the DPS and gas utilities in the state are grappling with a tradeoff between providing safe and reliable natural gas to existing and new customers at the same time the Climate Act net-zero transition calls for the natural gas system to be shut down or transitioned to use something other than natural gas.  A presentation at a recent meeting of the Avoided Cost of Gas Working Group offers some insight into the practical considerations that Albany bureaucrats are starting to deal with and are completely unknown to most natural gas consumers despite the public interest in this topic.

Avoided Cost Working Group First Meeting

On July 6, 2022 the Avoided Cost Working Group (ACWG) met for the first time.  The presentation described the purpose of the group in the following slide.  The Benefit Cost Analysis Framework Order required Department of Public Service staff to develop a white paper on benefit cost analysis.  That process did not address gas industry issues.  This workgroup is supposed to provide the Commission with a report describing recommended calculations and specific elements for each LDC, which will then be issued for comment from stakeholders.

The BCA white paper included the following list of benefit and costs components to be included in the framework.  The workgroup will be adjusting the calculations for the gas industry but there are no plans for changes to the list.

The first meeting discussed the plan to address four main topics.  They want to determine the avoided bulk system costs for the gas commodity, the costs necessary to meet peak loads and pipeline capacity costs.  Another topic is avoided distribution costs for the high, medium, and low-pressure components of the pipeline system.  There has been much discussion about the use of renewable natural gas and they want to determine what qualifies for that label.  The final topic is the subject of leaks in the system.  As monitoring technology has improved more leaks have been found and this has been a point of contention on the Climate Action Council.

Avoided Cost Working Group Second Meeting

The second meeting of the ACWG on August 4 included two presentations.  The first presentation from the DPS staff discussed the typical non-pipelines alternatives process.  This is another of the Climate Act magical solutions where an existing fossil-fuel service can supposedly be replaced by an alternative that will not affect reliability or affordability.  National Grid provides a summary of the approach:

Non-Pipeline Alternatives (NPA) is the inclusive term for any targeted investment or activity that is intended to defer, reduce, or remove the need to construct or upgrade components of a natural gas system, or “pipeline investment.”

These NPA investments are required to be cost-effective compared to the infrastructure investment and are required to meet the specified gas system need.  An NPA can include any action, strategy, program, or technology that meets this definition and these requirements.

Some technologies and methodologies that can be applicable as an NPA investment include demand-side measures, such as demand response, sewer heat recovery, advanced controls strategies, new business models, energy efficiency or electrification. Additional technologies may be feasible as a demand-side NPA. NPA projects can include these and other investments individually or in combination that meets the specified need. A benefit-cost analysis (BCA) will be used to determine the cost-effectiveness of the NPA project.

In my opinion there are a lot of assumptions and biases that can skew the NPA study to prove whatever the utility wants and, in order to survive and make their earnings targets, that will be what the PSC wants.  The Administration’s response to public input leans to whatever constituency the Administration wants to please rather than what is best for the majority or the strength of adverse comments.

The DPS presentation outlined the process for a NPA study, reviewed the list of benefit and costs components and presented a list applicable to the natural gas system.  I don’t think there is anything particularly controversial or, frankly, of interest to the general public.

The second presentation by staff from New York State Energy Research & Development (NYSERDA) and their consultant Energy + Environmental Economics (E3)  described the work done to date in the Integration Analysis and Draft Scoping Plan.  They gave an overview of the Avoided Cost of Gas (ACG) framework developed by E3 for NYSERDA and DPS in 2020,  provided insights into other “Future of Gas” projects E3 has contributed to since 2020 , and presented key similarities and differences with the ACG framework.

The following slide is an overview of the approach.  E3 has set up a model that quantifies avoided costs that will be used to eventually justify the transition of New York’s natural gas system to net-zero consistent with the Climate Act.  At this time the framework has only focused on business-as-usual and has not been used to examine the impacts of the Climate Act.  It quantifies the following avoided costs:

• Upstream supply costs
• Leakage rates and other losses
• “Peak gas” value
• Local avoided infrastructure costs
• Avoided GHGs (methane and CO2)

The presentation describes the ACG framework approach.  The following slide explains what the avoided costs results tell us.  The costs include installation, program and fuel costs.  The benefits include avoided utility costs and the alleged benefits of avoided greenhouse gas emissions.  Noticeably absent, in my opinion, is consideration of added costs to customers.  For example, the aforementioned small manufacturer in Rochester uses natural gas because it is the best alternative for his processes.  Any alternative is going to add costs not included.  In my case, I value natural gas because it is extremely reliable.  In the 41 years I have lived in my home there never has been a natural gas outage.  There were two long duration electric blackouts including one due to an ice storm that we survived because I can provide electricity to my furnace and keep the house warm.  This approach ignores these impacts and benefits.

The presentation goes on to discuss cost shift analyses in the next slide that will “help understand longer term ratepayer impacts”.  At this point transition complications start to become evident.  If the utility avoided costs lead to bill savings, then no cost shift occurs.  The slide explains that if customer bill savings are higher than avoided utility costs, a cost shift is likely to occur.  In that case the first adopters make out by saving money but the ‘remaining’ ratepayers have to cover more system costs and will see their costs rise.  It may be that avoided utility costs could be higher than customer bill savings so an “inverse cost shift” is likely to occur where ‘remaining’ ratepayers see bill decreases.  However, the slide concludes that “With more customers switching to electrification, there is risk of significant cost shift” because “embedded costs will need to be collected from a smaller customer base”.

The next slide explains what the consultants want you to know about the avoided cost results.  The avoided costs outputs show the monetized utility costs plus the carbon costs.  They claim that significant non-monetized utility value may result from NPA projects but the examples shown are pretty weak in my opinion.   They also claim that additional environmental value may also result, beyond what is captured by the social cost of carbon metric all the while ignoring that those costs are buried in the New York version of the social cost of carbon metric.  Finally, they note that the avoided cost framework does not consider potential cost avoidance related to embedded system costs of existing infrastructure.

Of particular interest is the example given.  After a long description of the values of the BCA approach for non-pipeline alternatives the thumb on the scale is evident.  Even though the example NPA found a negative benefit cost ratio the utility went ahead and did it anyway!  The BCA approach includes many value judgements despite its quantitative output.  At the end of the day the State and the utility made more value judgements to justify going ahead to implement an alternative to adding natural gas infrastructure.  The cited the following reasons.  They claim that it will increase local reliability but that does not consider the fact that the natural gas system is much more reliable than the electric system.  Going ahead may be consistent with Climate Act goals but that criterion suggests that all this is window dressing.  The third rationale is that it “Supports Joint Proposal goal of no net increase in gas utilization”.  I believe this is a specific component in the utility’s rate case settlement.  If true it is incontrovertible proof that New York utilities are forced to meet specific Administration goals to get rate case approval.  The final rationale is that it “supports local environmental advocacy”.  This is blatant acknowledgement that political appeasement of a preferred political constituency is a consideration in development considerations and that any pretense that the methodology that is supposed to be used is just a sham.

The next slide describes the inter-relationships of cost shift impacts.  I want to emphasize the two final points on the slide.  There is a possibility that a “’feedback loop” may develop that could drive gas costs higher.  In my opinion that kind of feedback is to be expected.  It is telling that they admit that customer impacts may be inequitable without a transition strategy and that it will disproportionally affect those unable to switch away from gas (renters and low-income customers).  So much for the environmental justice advocacy component of the Climate Act.

The presentation goes on to argue that a structured transition could help to mitigate these impacts.  E3 presented results of an analysis for a similar transition program in Massachusetts.  I am not going to discuss these results in this post.  The bottom line is that they believe that the better approach going forward is to target customer transitions rather than just transitioning natural gas customer use as their appliances age out. 

The following slide discusses the factors that affect the feasibility of the transition conversion away from natural gas.  I think this is important particularly because this kind of discussion is not included in the Draft Scoping Plan.  First there is a concession that the transition to “targeted electrification or networked geothermal hinges on several factors”.  Because the natural gas system is inter-connected there are limitations on which segments that can be removed “without adversely affecting the safety, reliability or other operational parameters of the system”.  Not surprisingly the consultant analysis keeps the customer satisfied by claiming that cost savings are achievable.  However, the slide mentions two caveats relative to customer choice.  If voluntary conversions are proposed “all consumers served by part of the gas system would need to accede to losing gas service”. The caveat is that the scale of the project drives the likelihood that there will be holdouts: “It may be possible to find 5 customers who are all willing to switch, 500 is likely a different matter.” The other alternative is to force customers to switch.  In that case: “Barring widespread shifts in consumer preferences, the nature of LDCs’ obligation to serve existing customers may need to change, with implications for customer choice.”  The second main point is that this feasibility analysis notes that there will likely be additional costs of decommissioning not captured in the analysis.

The slide also includes a highlighted section that asks the question “What do you need to “believe” in order for gas system conversions or cost avoidance to be achieved?”  In order for this this to be feasible then the conditions described above have to be met.  The other aspect is that “High levels of upfront planning and high levels of constructability & workforce availability” are needed.  A study from Palo Alto Utilities also notes there will likely be workforce issues related to decommissioning work.  That is a career with a built-in end date so training people for a short career might be a problem.  Given that all of these conditions have to be met to achieve the goal I am skeptical that it will be successful.

Finally, the presentation described an alternative approach to the avoided cost framework.  The Climate Act transition is a mandated large-scale customer transition described in a “Future of Gas” framework.  The avoided cost of gas framework appears to me to be better suited for smaller scale transition components.  Like it or not New York is stuck with a larger scale transition.  The alternate framework evaluates long-term revenue requirement implications for such a transition, considers geographical constraints, considers long-term implications of large-scale customer transitions and can evaluate long-term cost shifts in the absence of regulatory measures.  The presentation concludes that ca ombination of these two approaches may be useful.

Discussion

I have always maintained that a fundamental flaw in the Draft Scoping Plan is that it is just a guide and does not include a reliability feasibility analysis or any affordability estimate of the costs for the transition.  The point of this article is that the extraordinary effort necessary for New York State to transition to net-zero is underway without that information.  Despite the recognized need that providing public information is appropriate, there are many activities going on that are necessary for the transition but are proceeding without significant public oversight.  In the first place there are so many components to the transition that no individual or outside organization can follow them all.  Notice and documentation of the activities are buried in the DPS DMM: Matter Master that is not user-friendly even to professionals who follow these actions.  Even if someone manages to find out about an activity and tracks down the description of the activity, trying to decipher what is in the jargon-filled reports is a challenge.  They may be able to claim that there is publicly available information but reality is different.

This article described the transition activities of one aspect of the net-zero transition.  In order to meet the net-zero transition targets major changes to the natural gas distribution system are needed.  The Avoided Cost Working Group is trying to force fit the natural gas transition analysis into the same framework as was used for the electric system benefit cost analysis.  The NYSERDA consultants have suggested that it may be necessary to also include another approach and it remains to be seen whether that will be considered.  I get the impression the emphasis is on getting it done rather than taking the time to get it right.

Most importantly, it is clear that there are feasibility issues to the natural gas net-zero transition.  The Scoping Plan is only intended to provide a framework for the transition but what if that framework isn’t feasible?  With regards to the natural gas transition, the Draft Scoping Plan insinuated that the transition would occur as the appliances aged out.  In other words, at some date owners would not be able to replace their broken appliances with a natural gas-fired option.  However, it appears that the ACWG is considering options to transition certain segments of the network and is grappling with how to deal with the practical issues associated with that approach.  I doubt very much that this will be the only situation where the Scoping Plan implied implementation approach does not past muster as a viable methodology.

I am also troubled by the overt manipulation of the analytical techniques to make them consistent with the Climate Act narrative.  The framework analysis depends on a model that is large, includes many value judgements, and has so many variables that it can provide any answer that the Climate Action Council wants.  For example, I believe that the modeling approach ignores the benefits of natural gas options and does not include the costs to replace it with other less reliable and affordable options which makes the transition conversion more beneficial than it actually will be.  This bias is also evident in the application of the benefit cost analysis methodology.   An example is given where the NPA calculation did not project that the benefits would out-weigh the costs.  Nonetheless the utility went ahead and chose that option anyway.  At some point the public has to ask what is the point of all this if you modify the rules to get the answer you want anyway.

Conclusion

The background for the DPS order for this effort states that “public interest demands that gas utilities provide information to and communicate with customers in a way that promotes effective customer planning, reduces confusion, and avoids inequities or the appearance of inequities”.  There is no way that is happening at this time and all indications that it will not occur until it is too late for meaningful public input and the possibility of changing anything significant.

The Administration is controlling the implementation approach for the Climate Act’s net-zero transition.  A fundamental assumption in the Climate Act is that this transition is only a matter of political will and there are people involved in this process that actually believe that is the case.  This approach over-simplifies the problem and the solution.  The lack of a detailed reliability and affordability feasibility analysis kicks the problem down the road.  State agencies are rushing ahead to implement plans and regulations for the transition without taking into account this risk.  Moreover, the analyses and processes for the implementation are biased and even if the results suggest that implementation now is premature, decisions are being made consistent with the narrative and not reality.  I cannot believe that this won’t end badly.