Natural gas utilities seen as attractive investments for returns, role in energy transition

Natural gas utilities seen as attractive investments for returns, role in energy transition

As natural gas is considered a low-cost and hard-to-replace energy resource, natural gas utilities remain an attractive investment in the energy transition, according to a study commissioned by two gas associations.

The study, conducted by global consulting firm Guidehouse Inc. for the American Gas Association (AGA) and the Canadian Gas Association (CGA), found that investors value natural gas utilities for consistency of their return on investment and their return on equity (ROE). Investors also see natural gas utilities as having a strong foundation in North America’s low-emissions economy of the future that will continue to value affordability, resilience and energy security.

“Investors receive stability and consistency in their portfolios from natural gas utilities,” said AGA’s director of energy analysis, Juan Alvarado. “Investing in natural gas utilities allows investors to earn a reliable return while managing the level of risk in their portfolios, and this study proves it.”

In the short term, investors believe gas utilities are attractive investments because natural gas contributes the largest share of electricity generation in the United States, according to the study. Management is a key metric for investors, Guidehouse said, because investors want to ensure a utility’s management team can safely and reliably oversee assets while managing relationships with regulators.

“The health of a utility’s financial metrics, such as earnings growth versus rate-based expenses, amount of bad debt, ROE, and credit profile, can influence an investor’s decision to ‘invest,” the Guidehouse researchers said.

All six survey respondents indicated that they preferred gas utilities in jurisdictions where boards were transparent and consistent in their rate-setting methodologies. This reduces the long-term risk of potential allowed ROE volatility, according to Guidehouse. The consultancy had targeted 70 unique investment companies for the study. He conducted interviews between October and November 2021.

Investment decisions are also influenced by local environmental policies, population growth projections and climatic conditions, according to Guidehouse findings. These factors are similar when investors evaluate investments in other types of utilities, such as water and electricity. However, the focus is more on bad debts and working capital fluctuations in natural gas prices.

True, gasoline prices have fluctuated wildly over the past two years, Daily NGI Gas Price Index data exposure. After falling below $2.00 for the first time in over 20 years in 2020 amid the Covid-19 demand destruction, benchmark Henry Hub gas prices have soared to over 8 $.00 in May before pulling back a bit in June.

[Decision Maker: A real-time news service focused on the North American natural gas and LNG markets, NGI’s All News Access is the industry’s go-to resource for need-to-know information. Learn more.]

Investing in a low-carbon future

At the same time, the Guidehouse study found that decarbonization is affecting investor sentiment on gas utility investments due to increased public, political and regulatory pressure. Based on some of the investor responses, the consultancy said gas utilities that plan to use a diverse range of fuels, including renewable natural gas (RNG) and hydrogen, are more likely to position itself successfully in the future energy supply.

“Investors expect higher ROE for utilities that invest in low-carbon fuels such as RNG because they are taking technology and operational risks because technology and supply have not achieves commercial viability over conventional natural gas,” the Guidehouse researchers said. “However, investors are still unsure whether regulatory support would translate into higher ROEs.”

According to Guidehouse, utilities should be proactive in communicating to regulators their efforts to reduce emissions, decarbonize and diversify assets by expanding into clean energy alternatives. Investments associated with regulators that support gas utilities in decarbonization and energy transition are seen more positively as a safer investment, according to the study.

“This report shows that investors positively view utilities that are proactive in addressing decarbonization and are also aware of states where regulatory mechanisms are in place that provide utilities with 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) have “aggressive investments” in renewable power generation and proposed alternative regulatory and business models to legislators.

SJI has partnered with Rev LNG LCL on RNG facilities at four Michigan dairy farms that would together produce 3 million therms/year (approximately 300 MMcf/year) of RNG. SoCalGas aims to make RNG 20% of supply by 2030. NJR, meanwhile, has completed Howell’s green hydrogen project on the US East Coast. The hydrogen is produced on site using 100% renewable energy from an on-site solar installation.

In Canada, Calgary-based Enbridge Inc. is joining an RNG project development partnership with waste management company Walker Industries and renewable energy specialist Comcor Environmental. The Canadian government’s goal of net zero greenhouse gas (GHG) emissions by 2050 has increased industry interest in RNG.

“Canada’s natural gas utilities provide affordable, reliable and clean power to customers across the country to meet everyday energy needs,” said Paul Cheliak, CGA’s Vice President of Strategy and Delivery. “Natural gas utilities are advancing several low-emission fuel streams and technologies that position them for long-term success.”

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