Washington state proposes legislation to phase out natural gas utility service

Source: By Tom DiChristopher, S&P Global • Posted: Thursday, January 7, 2021

Legislation developed by Washington Gov. Jay Inslee’s office could substantially reduce — and potentially eliminate — natural gas utilities’ role in delivering energy to many state ratepayers over the next 30 years.

Washington House Bill 1084, the Healthy Homes and Clean Buildings Act, would require all new buildings in Washington to be zero-carbon by 2030 and seek to eliminate fossil fuel consumption in existing buildings by 2050, according to a Dec. 15, 2020, policy brief from Inslee’s office. The legislative text would provide a roadmap to phasing out gas utility service in Washington through changes to state code, regulatory mechanisms and incentives.

The legislation put Washington on pace to become the first U.S. state to implement statewide restrictions on natural gas infrastructure in new construction, while simultaneously tackling retrofits in existing buildings.

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More broadly, the bill spelled out a sea change in Washington, illustrated by a provision that would strike the state’s policy to “preserve affordable natural gas and electric services to the residents of the state.” Instead, Washington would safeguard the affordability of “energy services” and “limit and reduce the use of fossil fuels for space and water heating and advance the use of high-efficiency electric equipment.”

The bill envisioned a role for renewable natural gas, or RNG, as well as synthetic natural gas and hydrogen produced through carbon-neutral processes. This would potentially leave some role for the existing gas distribution system, but the legislation chiefly sees electric utilities taking responsibility for heating homes and businesses.

The legislation could have major implications for Washington gas distributors Avista Corp., Puget Sound Energy Inc., Northwest Natural Holding Company and MDU Resources Group Inc. subsidiary Cascade Natural Gas Corp.

State energy code would push building electrification

Washington state Democrats Rep. Alex Ramel and Rep. Vandana Slatter sponsored HB 1084 in the state legislature. Ramel served on the advisory task force for the Washington Department of Commerce’s review of the state’s energy strategy, which contemplated how the state could achieve its climate goals while maintaining reliable, affordable energy.

“Healthy Homes and Clean Buildings is a comprehensive approach to decarbonizing our building sector to meet science-based climate goals,” Ramel said in an email. “We’re committed to setting standards for new construction, making investments in electrification, and ensuring justice in the transition for energy users and for workers.”

The legislation reflected recommendations from the draft state energy strategy, which recommended requiring zero-energy, zero-carbon and all-electric construction in the state’s 2027 energy code. The current trajectory of code updates will not prompt fossil-fuel-free construction by 2030, which means buildings will not meet decarbonization targets until the mid-to-late 2030s, the report said.

The bill would require construction permitted under the 2027 code to eliminate onsite fossil fuel combustion for space and water heating and reduce net energy use by at least 70% compared to the 2006 energy code. It would also require the Washington State Building Code Council to design the state energy code in a way that achieves the construction of buildings with zero fossil-fuel greenhouse gas emissions by 2030. Under the code, space and water heating in new buildings would have to minimize direct and indirect greenhouse gas emissions.

The state energy strategy also recommended overturning a policy that restricts local governments from adopting residential building codes that are more stringent than state codes. HB 1084 included a provision that would allow cities, towns and counties to mandate greater building energy use and emissions reductions than Washington requires.

This change is critical for tackling existing building emissions, according to the state energy strategy document. The report said some jurisdictions may interpret the current code as blocking them from adopting residential performance standards and retrofit requirements for existing homes. Bellingham, Wash., is advancing a policy that would require homeowners to convert to electric heating systems when they replace a fossil fuel combustion unit.

HB 1084 also would require the Department of Commerce to extend state energy management and benchmarking requirements to small commercial buildings. The requirements would apply to buildings with floor areas exceeding 10,000 gross square feet.

Utility regulation facilitates gas service phase-out

The legislation would prohibit gas utilities from offering new service to customers beyond the territory authorized in their certificate of public convenience and necessity as of July 1, 2021, effectively blocking customer growth outside a company’s current footprint.

Under the law, Washington would establish a statewide clean heat standard to limit the expansion of the gas distribution system and promote use of electric equipment and clean fuel production and distribution. Gas utilities would have to take steps to ensure a “safe and equitable transition of the natural gas system” and submit a transition implementation plan every four years in order to reduce emissions linked to gas sales.

The legislation would require utilities to evaluate strategies to achieve those reductions, including energy efficiency, electrification, strategic decommissioning of gas assets, and blending RNG and hydrogen into the gas stream. Utilities would have to identify the combination of strategies with the lowest reasonable cost, though the bill specifies that the lowest reasonable cost must incorporate the social cost of emissions from natural gas use.

State regulators would implement a climate protection surcharge that utilities would apply to natural gas sales. Utilities would use those funds to implement their transition implementation plans, credit low-income ratepayers and develop low-carbon fuels. RNG, zero-emission synthetic gas and renewable hydrogen would be exempt from the tariff.

Each utility would also have to submit an integrated resource plan to ensure that they can meet system demand during the transition.

Bill and budget proposal directly incentivize electrification

HB 1084 would give municipal utilities and public utility districts the authority to establish a plan to accelerate electrification after establishing a finding that electrification would provide net benefits to their service territories. Once a utility made that finding and fulfilled other conditions, it would be allowed to offer ratepayers incentives to electrify their homes and businesses, including through customer education, incentives and rebates.

The legislation would establish a program under the Washington State Department of Commerce to offer incentives to convert to electric heat pumps, as well as to provide coordination and technical assistance to utilities, housing providers and builders.

It would require projects or activities funded by the incentive program and the climate protection surcharge to meet high labor standards rooted in family-sustaining wages. Washington state would have to review contractor proposals for efforts to improve equity and opportunity, including offering employer-paid sick leave, career development and pay based on living wage indicators.

Inslee on Dec. 15 released related capital proposals for Washington’s 2021-2023 budget cycle. They include $55 million for weatherization and energy efficiency investments for 7,000 low-income residents, $66 million to retrofit 200 public buildings, and $20 million to fund conversion from fossil fuel to heat pumps and other electric equipment.