Natural Gas and the Concept of Electrification October 2017 Chris McGill, Vice President Energy Analysis and Standards American Gas Association

2016 – Among Other Things a Strong Year for Natural Gas Record year in 2016 for natural gas consumption, storage, & power generation. US energy exports are on the rise. Record year for US solar installations. Carbon dioxide emissions down to a 25-year low. Consumers are spending less of their incomes on energy than ever.

The rest of the world is looking to the US for new supplies of hydrocarbons, especially natural gas (LNG). Sabine Pass, Image from Bechtel

Natural gas prices exhibiting little variance this summer; current prices in line with prior years.

Higher drilling activity is beginning to have an effect; dry gas production is up.

LNG Exports

New border-crossing pipelines are increasing US exports to Mexico. 22% rise in exports to Mexico in November year over year. US became a net exporter of natural gas during times in November

US Natural Gas Resource Estimates from the Potential Gas Committee

Horizontal Drilling

Multi-Lateral Drilling Micro Seismic Technology

Inflation-Adjusted Prices to Commercial Customers the Lowest since the Ford Administration An average commercial natural gas customer’s utility bill was $400 in 2015 – the lowest since records began in 2003. Source: Energy Information Administration, Short-Term Energy Outlook (Dec. 2016)

Numerous solar and wind generation projects added in 2017. According to EIA data, ~5.5 GW of new solar capacity will have come online between November 2016 and September 2017. Most of the new solar capacity will be in California, North Carolina, Texas, Arizona, Florida and Nevada. These states will contain 75% of the expected new solar capacity. To estimate the gas displacement figure from solar new-builds, we: 1) analyzed recent monthly solar generation and capacity factors in these states (from EIA-923 and EIA-860M); and 2) applied estimated forward heat rates from CFVL <GO> on the terminal. We expect the increase in new solar output alone will displace an average of 409Mmcfd of gas during the 2017 injections season. On a monthly basis, the forward heat-rates indicate that incremental solar capacity will displace an average of 553Mmcfd of gas-based generation in July and August across the Lower-48. According to EIA data, ~5GW of new wind capacity will have come online between November 2016 and September 2017. We excluded some of the states where gas generation is a small percentage of overall generation so little or no gas displacement is expected Most of the new wind capacity will be located in the Texas panhandle and in Oklahoma. Texas will increase new wind capacity by ~2.3GW (45.3%) of total new wind projects’ capacity, while Oklahoma will have 573MW (11.4%). We expect that the increase in new wind generation alone will displace an average of 414Mmcfd of gas during the 2017 injection season. Using CFVL <GO>’s forward heat-rates, we estimate the new wind capacity alone will displace an average of 506Mmcfd of gas-based generation from July-August across the Lower-48. Source: Energy Information Administration and Bloomberg New Energy Finance.

Energy-related CO2 emissions fall below 5 Energy-related CO2 emissions fall below 5.2 billion metric tons in 2016 year, lowest since 1992. EIA estimates that energy-related emissions of carbon dioxide decreased by 2.7% in 2015. Emissions are decreased by 1.6% in 2016. These forecasts are sensitive to assumptions about weather and economic growth.

However, there are different visions for domestic energy policy? “It is very clear that we cannot afford to expand infrastructure and reliance on fossil fuels, including gas.” “At the same time, we do need to ensure that coal energy is not backfilled with gas.” SNL Interview, Daily Gas Report, Lena Moffitt, Beyond Dirty Fuels Campaign Director, Sierra Club, August 19, 2016.

Introducing, once again, Electrification Introducing, once again, Electrification. Decarbonization of power generation in the US and the elimination of fossil fuel appliances in homes and businesses. “Beneficial Electrification” “Strategic Electrification” “Policy-Forced Electrification?” “Wide-spread utilization of Dilithium crystals (23rd century)” – Gene Roddenberry

What is electrification? Proposals for mandatory, widespread/total electrification of residential home heating and water heating. Primarily justified as a GHG reduction and enabled by increasingly clean, renewable power grid. Not the historical gas/electric market competition.

Where is it being explored? Ontario Residential electrification was promoted by NGOs and then aggressively pursued by environmental agency. Concerns from generators and ISO and strong analytical pushback from gas industry have significantly stalled the activity. Vancouver, BC Plan to position Vancouver as the greenest city in the world. 100% renewable energy goal before 2050 Establishes a phased approached to achieve zero emissions in all new buildings by 2030. Some policies that effectively exclude gas have been initiated but may be delayed due to pushback from industry. Denver City task force this month recommended “Shift commercial buildings and 200,000 households off natural gas to heat sources that do not lead to carbon pollution.” California, Alberta, Washington, Oregon, Others Active discussion and analysis of electrification

Key Questions Will electrification actually reduce emissions? What is required on electricity infrastructure? Is electrification cost-effective compared to other alternatives? What are the implications to natural gas LDC’s

Examining the Cost of Electrification Quantify incremental generation capacity required to meet peak home and business space heating and water heating loads. Examine and quantify transmission infrastructure requirements. Identify the cost per unit of greenhouse gas emissions achieved through electrification. Compare to direct use of natural gas. Executive summary to identify key results.

Gas Peak Demand Can be Much Higher than Electric Ontario Case Study* Gas Peak Demand Can be Much Higher than Electric Ontario Gas and Electric Demand* The cost of reducing carbon emissions in the residential sector can by much higher than in other sectors* C$280/ton CO2 reduced without new infrastructure. C$380/ton CO2 reduced including infrastructure. Requiring C$1,600 in incremental costs per year per household.* * ICF December 16, 2016 Study on Ontario Markets for Union Gas and Enbridge Gas

Final Thoughts The abundance of North American natural gas is lowering energy costs to consumers and reducing emissions. Advances in renewables *and* natural gas are taking place simultaneously. We should want to see cooperation, as well as competition. Market forces may dictate outcomes, but industry must engage with and educate communities.

Christopher McGill VP, Energy Analysis & Standards cmcgill@aga.org 202.824.7132