Differentiated Gas: Utility Procurement Challenges

Utilities are massive domestic buyers of natural gas¹, and their ability to procure differentiated gas will be meaningful for the development of the U.S. market. Electric and gas utilities are highly regulated and typically operate under a “least cost” mandate that requires them to buy the absolute cheapest fuel available on the market for their customers. The structure and scope of Public Utility Commissions (PUCs) vary across the country, but they often lack the legal authority to let utilities recover those premiums from ratepayers. Even a tiny premium for differentiated gas (according to one industry expert this premium would likely be “a couple of cents per decatherm, two orders of magnitude less than the commodity itself”) will prevent it from being procured under this regime.

Industry Observations & Insights

“... even if there is a small premium on differentiated gas or low-leakage gas and the climate benefits far outweigh that very minor cost, there's no incentive from a regulatory standpoint to actually sell it on to ratepayers or rate base that type of investment. That's a key factor.”

“Utilities are hyper regulated, typically based on a low-cost or “best cost” mandate.They might not even be able to pay the small, incremental cost to get better data and prove that they’re picking a low-carbon pathway. So they're essentially restricted; it’s created an inability statutorily for the PUCs to actually contract this.”

“If the state government says you have to buy it, then the Public Utility Commission may need a change in law or change in direction to purchase it. A lot of them are going to have the pressure of a public policy regulator who buys at the best affordable price. So many states have elected Public Utility Commissioners even separate from the governor, and that's a challenge if you're trying to transact in those markets for a higher price”