Natural Gas: A Bridge To Climate Breakdown

by Lila Holzman, Mike O’Boyle and Daniel Stewart (As You Sow/Energy Innovation) This report serves to inform investors about the evolving risks associated with the use of natural gas within the power sector. At a time when investors are paying increasing attention to power utilities’ exposure and contribution to climate change impacts, natural gas infrastructure build-out is expanding rapidly in the United States. As coal’s inevitable decline within the energy system continues, natural gas, which is largely replacing it, is a growing source of climate concern. In isolation, risks to future cash flow for individual projects may seem minimal, but examination in aggregate reveals a different picture – that investment in new natural gas infrastructure is incompatible with long-term shareholder and societal well-being.

Initially, natural gas was considered a ‘bridge’ fossil fuel to a clean energy future, given findings that it has approximately half the climate impact of coal. Supporters pointed to natural gas-based technologies as a means to ensure reliable electricity service as the world adopted more variable clean energy technologies such as wind and solar. However, natural gas is still a fossil fuel whose use generates large climate warming emissions. To achieve a safe level of climate stabilization and protect investor portfolio exposure to global climate change, the bridge for natural gas and its associated emissions must have a clear end.

And yet, billions of dollars are poised for investment to build natural gas infrastructure throughout the United States. This investment drive, which includes power plants and pipelines with multi-decadal lifespans, is incompatible with maintaining a safe climate and avoiding disastrous and costly economy-wide impacts.

Under current regulatory systems, monopoly utilities able to justify investment in new natural gas infrastructure are rewarded with growth and healthy returns. The company-level risk of overbuilding assets is mitigated, as captive customers are typically required to cover the costs. However, while regulation ensures utilities an opportunity to recover reasonable costs of providing customers with electric service, it does not guarantee utilities cost recovery as a right. The current period of rapid technological and policy disruption creates new risks for monopoly utilities, and public and economic pressure in the future may result in the disallowance of cost recovery. Even with current regulatory protection, utilities face a multitude of risks associated with natural gas.

This report surveys how the proliferation of natural gas infrastructure contributes to distinct risks that threaten shareholder value, including investor portfolio risk, company-level physical risk, regulatory and technological transition risk, and reputational risk. While progress is happening, as seen by the increasing number of utilities setting mid- and long-term decarbonization targets aligned with the Paris Agreement’s goals, concerns remain as to what extent natural gas’ expansion may jeopardize those goals.

The shifting landscape of policy and increasing public attention regarding climate change is a rapidly evolving source of disruption for natural gas infrastructure. Increased levels of awareness, activism, and grassroots mobilization are bringing climate change to the fore of public attention and increasing pressure on policymakers and companies to urgently and decisively act to address greenhouse gas emissions. Enabled by this pressure is a growing tide of newly introduced local and state legislative commitments to ambitious clean energy goals over the coming decades, as well as legislation specifically focused on curbing the use of natural gas.

Further undermining the natural gas ‘bridge’ is the cost-competitiveness of clean energy alternatives.

Some utilities have proposed investment in the substitution of renewable natural gas (RNG) or hydrogen into existing fossil gas infrastructure as a means to lower the carbon intensity of those systems. While research shows that some RNG processes involving sources such as farm waste and landfills can be beneficial to the climate (especially in harder to decarbonize sectors such as industry and transportation),108 use of RNG for distribution applications for rate-paying customers or for electricity generation may not prove cost-effective or achieve longterm climate targets.109 Furthermore, a lack of supply may prove to be a significant constraint to plans relying on this fuel.110 Proposals to inject hydrogen into gas systems raise new concerns including cost and the need to retrofit existing infrastructure currently not equipped to handle hydrogen. READ MORE