With natural gas viewed as a low-cost energy resource that is not easily replaced, natural gas utilities remain an attractive investment amid the energy transition, according to a study commissioned by a pair of gas associations.
The study, conducted by global consultancy Guidehouse Inc. for the American Gas Association (AGA) and the Canadian Gas Association (CGA), found that investors value natural gas utilities for the consistency of their return on investment and return on equity (ROE). Investors also viewed natural gas utilities as having a solid foundation in North America’s low-emissions economy of the future that will continue to value affordability, resiliency and energy security.
“Investors receive stability and consistency in their portfolios from natural gas utilities,” said AGA Director of Energy Analysis Juan Alvarado. “Investment in natural gas utilities allows investors to earn a dependable return while managing the risk level of their portfolios, and this study proves it.”
In the near term, investors believe gas utilities are appealing investments because natural gas contributions to the largest share of electric power generation in the United States, according to the study. Management is a key metric for investors, Guidehouse said, as investors want to ensure a utility’s management team that can oversee assets safely and reliably while managing regulator relationships.
“The health of a utility’s financial metrics such as growth to rate based spend, earnings of bad debt, ROE and credit profile can influence an investor’s decision to invest,” said Guidehouse researchers.
The six respondents to the study indicated that they preferred gas utilities in jurisdictions with commissions that were transparent and consistent in their rate-setting methodologies. This reduces the long-term risk of potential volatility in the allowed ROE, according to Guidehouse. The consultancy had targeted 70 unique investment companies for the study. It conducted interviews between October and November 2021.
Investment decisions are also influenced by local environmental policies, population growth projections and climate conditions, according to Guidehouse’s findings. These factors are similar when investors assess investments in other types of utilities, such as water and electric. However, there is more emphasis on bad debt expense and working capital fluctuations in natural gas prices.
To be sure, gas prices have fluctuated wildly over the past couple of years, NGI Daily Gas Price Index data show. After falling below $2.00 for the first time in more than 20 years in 2020 amid Covid-19 demand destruction, benchmark Henry Hub gas prices skyrocketed to more than $8.00 in May before retreating a bit in June.
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Investing in a Low-Carbon Future
Meanwhile, the Guidehouse study found that decarbonization affects investors’ views toward gas utility investments because of increased public, political and regulatory pressure. Based on some of the investor responses, the consultancy said gas utilities with plans to utilize a diverse array of fuels, including renewable natural gas (RNG) and hydrogen, are more likely to position themselves successfully in the future energy supply.
“Investors expect higher ROE for utilities investing in low-carbon fuels such as RNG, as they are taking on a technology and operational risks as the technology and supply have not reached commercial viability as compared to conventional natural gas,” Guidehouse researchers said. “However, investors are still unsure whether the regulatory support would translate to higher ROEs.”
Utilities should be proactive in communicating to regulators their efforts to reduce emissions, decarbonize and diversify assets by expanding into clean energy alternatives, according to Guidehouse. Investments associated with regulators who support gas utilities as part of the decarbonization and energy transition are viewed more positively as a safer investment, the study found.
“This report shows that investors positively view utilities that are proactive in addressing decarbonization and also are aware of states where regulatory mechanisms are in place allowing utilities a reasonable opportunity to earn their allowed return,” Alvarado said.
For example, Guidehouse said natural gas utilities like South Jersey Industries Inc. (SJI), Southern California Gas (SoCalGas) and New Jersey Resources (NJR) had “aggressive investments” in renewable generation and proposed alternative regulatory and business models to legislators.
SJI teamed up with Rev LNG LCL on RNG facilities at four Michigan dairy farms that would produce a combined 3 million therms/year (about 300 MMcf/year) of RNG. SoCalGas has a goal to make RNG 20% of supply by 2030. NJR, meanwhile, has completed the Howell green hydrogen project on the US East Coast. The hydrogen is produced at the facility using 100% renewable energy from an on-site solar installation.
In Canada, Calgary-based Enbridge Inc. is partnering on an RNG project development partnership with waste management firm Walker Industries and renewable energy specialist Comcor Environmental. The Canadian government’s target of net-zero greenhouse gas (GHG) emissions by 2050 has heightened industry interest in RNG.
“Canada’s natural gas utilities deliver affordable, reliable and clean energy to customers across the country to meet daily energy needs,” said CGA’s Paul Cheliak, vice president of strategy and delivery. “Natural gas utilities are advancing several low-emission fuels streams and technologies that position them for long-term success.”