California law to establish neighbourhood-scale electrification projects

A new California law will establish pilot projects for utilities to transition entire neighbourhoods off of gas all at once, electrifying blocks of homes in large chunks rather than the current piecemeal approach. The programme expects to save money, and participating customers will receive electric appliances for free. Notably, the policy is backed by the nation’s largest investor-owned utility.

Signed by California Governor Gavin Newsom in late September, the new law, SB 1221, establishes 30 pilot projects over four years beginning in 2026. Each pilot project would identify areas where the utility would normally repair and replace ageing gas pipelines, and instead of swapping in brand new gas infrastructure, the utility would transition all participating homes to fully electric service.

“The idea is that when there is a gas pipeline repair that’s been identified, instead of investing that money into the gas system, you take what would have been spent to repair a replacement pipeline, and instead use that to depart customers from the system,” said Beckie Menten, a senior regulatory and policy specialist at the Building Decarbonization Coalition, a national network of stakeholders working on slashing emissions from the buildings sector.

Menten said that California utilities typically spend around $2.5 billion annually simply to maintain, repair, and replace gas pipelines and distribution lines. That comes out to about $3 million per mile of pipeline. Not spending to make those replacements frees up money to be used on overhauling buildings with clean, zero-emissions appliances.

Under the pilot projects, customers won’t have to pay anything to have their gas lines shut off, and to have their houses retrofitted and equipped with electric heat pumps and other all-electric appliances. All of that will be provided to the customer for free, covered by the utility and billed across the entire utility system.   

“The beauty of this approach, if you can build it out and routinize it, is that the money you’re spending for this, is money that otherwise would have had to be spent to replace the pipeline,” said Matt Vespa, a senior attorney at Earthjustice, an environmental legal NGO.

In other states facing budgetary pressure, this approach offers a way forward. “Where money is hard to come by, this is a great source because it’s all money that you would have needed to spend on the gas system anyway.”

He added: “It’s a good use of money. Everybody saves. The gas ratepayers save. You don’t have the stranded asset risk. The air gets cleaner. And the beneficiaries of the project get new appliances.”

“It’s win-win.”

Indeed, Pacific Gas & Electric, the largest investor-owned utility in both California and the country, backed the legislation. PG&E has already been doing smaller-scale electrification efforts at homes where it was cheaper than repairing and replacing gas infrastructure. But the pilot projects that will come from SB 1221 will be more comprehensive.

“SB 1221 enables cost-effective, targeted electrification projects which will help avoid more expensive gas pipeline replacements, reducing gas system operating costs, and support the state’s and PG&E’s decarbonization goals,” a PG&E spokesperson told Gas Outlook in an email. “Projects like those envisioned in the bill are a key focus of our decarbonization efforts and we’ve already completed over 100 smaller projects of this type to date.”

PG&E has both a gas business and an electricity business. Any loss of gas customers in theory could be offset by an increase in their electric service.

But that calculus would be completely different for utilities that only have a gas portfolio. For them, electrification is an existential threat. SoCalGas, a gas-only utility in southern California, did not oppose the bill, for unclear reasons. But the legislation only consists of a series of pilot projects. Larger-scale neighbourhood electrification efforts in the future would present a much bigger threat to the utility’s business. SoCal Gas did not respond to a request for comment from Gas Outlook.

The law does not say that all-electric must be the only solution. SB 1221 would also allow the utility to switch neighbourhood blocks over to “thermal networks,” or a network of underground geothermal pipes that would heat and cool buildings. Menten said that air-source heat pumps are more attractive in California, so all-electric will likely be the favoured approach. But other states, such as Massachusetts, are moving forward on thermal networks. The Building Decarbonization Coalition has a state-by-state tracker, with more than a dozen states passing some version of a bill aimed at decarbonizing buildings.

The upside to thermal networks is that they offer a very clear transition pathway for gas utility workers, who could put their skills to use building out geothermal infrastructure, which would have similarities to gas systems.

“That’s a really attractive concept for a lot of labour unions, utilities, and environmental advocates because it’s a way to transition workers who are working on gas pipelines into a new sector,” Menten said.

Utility death spiral

SB 1221 also contained a few other elements that should help push electrification along. It will require utilities to map out their gas distribution systems, depicting where they intend to repair and replace ageing gas lines. That information would need to be disclosed to regulators. This provision alone is a noteworthy development, and it will help the public and utility regulators to understand and plan for the future.

In addition, the law will make neighbourhood-scale electrification easier to implement. Up until now, if PG&E or some other utility wanted to electrify a neighbourhood, it would need 100 percent of participating households to consent. For the pilot projects authorized in the law, utilities will only need the approval of two-thirds of households in a given area, eliminating the ability of a lone dissenting house to veto the entire project. 

Vespa said that the California Public Utilities Commission (CPUC), which regulates utilities in the state, likely already had the power to authorise projects that didn’t have unanimous consent, but the new law clarifies that and provides more specific direction to the utility regulator. The law also provides more resources to CPUC, which Vespa said is often strained and stretched thin.

California has already seen a decline in gas consumption, and that decline is expected to continue for the foreseeable future as both state policy and the economics of electric buildings favour all-electric construction.

That raises the prospects of a utility “death spiral” — a scenario in which customers abandon the dirty gas system, resulting in soaring costs for a shrinking customer base. Everyone has known about that risk for many years, but policymakers have been reluctant to confront it, Vespa said.

“If you’re building a pipeline, those are capitalised expenses that get paid off over 60 years. So, now we’re into the 2080s. Who’s paying for that when we should have shifted almost everyone over to electric by that point?” Vespa said.

While the transition is happening far too slowly, early signs of the death spiral are visible. A decline in demand has already led PG&E to raise its rates by $5.78 per month, with the utility’s fixed costs covered by a shrinking customer base.

Stranded asset risk 

If utilities continued to replace ageing gas lines with new gas infrastructure, the financial risk would build up in the system. SB 1221 could help reduce that stranded asset risk by demonstrating a way forward, heading off construction of new gas pipes and electrifying neighbourhoods all at once.

A study by a San Francisco-based economic consultancy called E3 found that gas decommissioning coupled with building electrification could avoid $20 billion in gas pipeline replacement costs in California through 2045.

Vespa said he would have favoured the California legislature take more sweeping action to speed up the transition of the state’s buildings, but the 30 pilot projects will provide a “proof of concept” that will give lawmakers confidence to scale up the approach in the years ahead.

“It’s a pilot, it’s a modest start. But it’s an important start.”