Climate goals could make gas heating obsolete. So why do gas companies keep adding customers?

Every day, new gas pipes are being installed and connected to homes and businesses across Canada.

That's a bad idea forachieving theenergy transition to tackle climate change, according to Jason Dion, senior research director at the Canadian Climate Institute, who says it'salso a bad deal for gas customers.

"Expanding gas infrastructure to heat buildings today would be like investing heavily in a chain of video rental stores 15 years ago," he said in a statement accompanyingthe release of a new report, which looks at the policies influencing Canada's transition away from carbon-emitting fossil fuel heating.

And yet, based on regulatory filings by the gas industry, Dion and his colleagues found that investment in gas infrastructure is growing and new customers are being added in every province or territory with a gas network (so, everywhereexcept Newfoundland and Labrador, P.E.I., Nunavut and Yukon).

That's consistent with reports from thegas industry, whichhas doubled its customers in the last 10 to 15 years, according to Paul Cheliak, vice president of strategy and delivery with the Canadian Gas Association. "The market is telling us that it really wants the product," he said.

But Canada has a commitment to net-zero emissions by 2050, and that requires eliminating any emissions it can from major sources including those from burning fossil fuels to heat building.Given the long lifespanof buildings and their heating systems, the report says action needs to be taken sooner rather than later.

So why is the gas network still expanding and why are more buildings being heated with gas?

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Incentives to keep expanding gas network

In 2022, buildings accounted for 13 per cent of the country's emissions, making them the third biggest source of greenhouse gases by sector, after oil and gas and transportation. Most of those emissions come from burning fossil fuels for heating, and they've been going up, not down.

Currently, gas provides 53 per cent of home heating and 82 per cent of commercial heating across Canada, with the highest share in Ontario, Saskatchewan and Alberta.

The gas industry was set up as an industry of monopolies many decades ago, when the world was transitioning from dirtier heating fuels like coal and heating oil. It was overseen by provincial and territorial regulatorswhose key goal was to ensure safe and reliable energy at fair rates for customers.

Gas companies are not allowed to turn a profit on the gas they sell, so they make money by constructing new gas pipes and infrastructure. The costs are spread out across the customer base over decades, lowering the cost per customer over time as more customers are added. If utilities want to grow, they need to build more, said Cheliak.

Dion said that model incentivizesgas companies to keep growing the gas network, even when its long-term use is uncertain.

But the Canadian Climate Institute's modelling suggests that to meet net-zero targets by 2050, most buildings will switch to heat pumps to meet most of their heating needs, causing gas use to fall drastically more than 80 per cent in all provinces. That's notfar off from the Canada Energy Regulator's projection of a73 per cent reduction in natural gas demand in Canada'sresidential sector due to a transition to heat pumps under a 2050 net-zero scenario.

The 'last grandma' problem

That could be bad for remaining customers, said Dion. They will end up paying a larger and larger share for these "stranded assets."

Low-income renters and other vulnerable people who don't have the money or authority to change their heating system are expected to be the last customers on the gas network,according toAudrey Schulman, co-founder of HEET, a U.S.-based group that helps companies transition their business from supplying gas to providing heating through thermal networks or district heating.

By continuing to expand the gas network, "you're exacerbating what the Germans call that 'last grandma problem,' where they imagine one last low-income grandma on an entire gas system struggling to pay for all of it," said Schulman, who's originally from Montreal.

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Some regulators are trying to avoid this outcome. The Ontario Energy Board recently rejected Enbridge's application to connect a new development to gas, and spread the costs over the next 40 years because it would pose too large a financial risk to the small number of customers that would remain after others gave up natural gas.

Instead, it told thedeveloper to pay the cost to connect each new home, about $4,400. It aimed to incentivize developers "to choose the most cost-effective, energy-efficient choice," but the board was overruled by the Ontario government, so the original plan will go ahead.

Some jurisdictions give gas companies more flexibility

Gas companies are also bound at the provincial level by an "obligation to serve" customers within a certain distance of a gas line. That means they may need to build more infrastructure and expand their network to do so, and are obliged to keep replacing and repairing infrastructure even if the number of customers in a neighbourhood declines sharply (with electrification, for example).

Meanwhile, provincial legislation usually also bars them from doing anything other than building and operating gas infrastructure.

Cheliak said gas companies have considered hydrogen, renewable natural gas, thermal networks and carbon capture, but most provinces haven't moved to allow most of those, except B.C.

Canada's westernmost province now allows gas companies to build infrastructure for natural gas powered vehicles, such as ferries and trucks, andhydrogen, but not other technologies.

Kate Harland, lead author of the Canadian Climate Institute report, said utility regulators' mandates should be changed to include climate targets, as has been done in the U.K. And they could change "obligation to serve rules" in order to consider alternative technologies, such as electrification, energy efficiency measures or thermal networks to provideheating to customers.

In the U.S., many states are passing laws to allow gas utilities to operate thermal networks pipes that carry heating and cooling in water rather than gas, says Schulman. Those include Colorado, Maryland, Minnesota, New York and Washington.

It is the perfect method to allow gas utilities to transition and keep or increase their annual profit, while at the same time reducing the customer's energy bills, according toSchulman.

The gas association's Cheliak said while the gas industry has been through transitions before and is "happy to go through them again," he is skeptical that Canada will see the decline in gas that the Canadian Climate Institute predicts."If there's a transition happening, it's a transition to gas, not away from it," he said.

Harlandsayscurrent incentives alone won't drive down customer demand for gas quickly enough and energy policies need to change. "Stop treating gas system expansion as the default option," she said.