Duke vs. Duke: Electric and gas utilities at odds over efficiency rebates in N.C.

by Elizabeth Outzs, Energy News Network

Duke Energy’s effort to expand a popular energy-efficiency program to its entire North Carolina service area is drawing stiff opposition from a surprising quarter: Duke Energy. 

For nearly four years, Piedmont Natural Gas — one of Duke’s wholly owned subsidiaries — and the state’s other major gas distribution company have stymied incentives for new high-efficiency homes, claiming with scant evidence that the rebate scheme will lose them customers.

North Carolina utility regulators could issue a decision at any moment. 

The struggle before them is in many ways an extension of the gas industry’s decades-old battle against “fuel switching.” But it also comes as growing numbers of states and local jurisdictions with ambitious climate pledges are moving to require or promote all-electric buildings.

According to literally every stakeholder involved but the gas companies, Duke’s efficiency rebate program won’t have that effect. 

But the nationwide trend appears to have the gas industry on edge: It’s pushing a bill in the state legislature to prevent local governments from banning new gas hookups, even though none are on the horizon. 

And it’s derailing an incentive program lauded by efficiency advocates and builders based largely on field reports that could amount to nothing more than coincidence.

“A couple examples of new developments going all electric,” said Mark Kresowik, a deputy director for Sierra Club’s Beyond Coal campaign in the Mid-Atlantic, is no reason for regulators to reject such an “incredibly important and beneficial program.”

‘Not productive for either industry’

The seeds of the current controversy were planted in the mid-1990s, in an energy landscape almost unrecognizable today. Duke was decades from buying Piedmont Natural Gas or merging with the state’s other major electric utility.  Electricity was produced almost entirely from nuclear and coal; natural gas wouldn’t be used in a power plant until 2000. Gas furnaces and water heaters were markedly more efficient — and generally viewed as more environmentally friendly — than their electric counterparts. Scientists were just beginning to grasp the gravity of climate change.

Electric companies were paying developers to make subdivisions all electric in this period, while gas companies offered rebates for gas heat and hot water installations, said James McLawhorn, head of the energy division at the Public Staff, the state’s ratepayer advocate.

“The programs were much more overtly about fuel switching,” McLawhorn said. While the electric companies were arguably bigger offenders, he said, “there was a lot of finger-pointing and complaints filed with the commission by both parties.”

The controversy set off weeks of hearings before the North Carolina Utilities Commission. Comment periods and rulemakings stretched over years. The gas companies didn’t simply call for the reform or rejection of Duke’s programs: They wanted the commission to deem gas appliances inherently more efficient. 

But in a ruling on a trio of related cases, the panel declined. “The matter of the relative efficiency of electricity versus natural gas under various scenarios,” the commission said, “cannot now be resolved.” Further, it ruled that its evaluation of electricity efficiency programs, “should not include consideration of the impact of an electric program on the sales of natural gas, or vice versa.”

In the gas companies’ favor, the statute that prevented unfair competition endured. Plus, any program that appeared to influence fuel choice would be considered “promotional” and would be paid for by shareholders, not ratepayers.

Thirty years later, these fuel-switching battles still live in infamy. Mary Lynne Grigg — a lawyer for Duke in the 90s who now represents PSNC, a gas distribution company owned by Dominion Energy — told the utilities commission at a hearing last year that the whole process “was not productive for either industry at the end.”

‘We need to get along’ 

Still, in the ensuing decades, electric and gas interests achieved tenuous harmony. Both sectors offered various incentive programs without triggering claims of “destructive competition” that is prohibited by law. Natural gas use skyrocketed, mostly on the backs of electric power companies. Outpacing the rate of population growth, the number of residential gas customers also rose, according to Energy Information Administration data compiled by the Rocky Mountain Institute.

In 2007, when North Carolina passed a law requiring electric companies to help customers reduce their energy use, gas and electric utilities reached an agreement on the contours of those demand-side programs.

“We kind of learned a little lesson … back in the ‘90s,” said Bill McAulay, another lawyer for PSNC/Dominion, at the commission hearing last year: “‘We need to get along.’”

“And since then,” McAulay continued, “there haven’t been any sort of programs that in our view could potentially incentivize fuel choice.”

That began to change in 2012, when Duke Energy Progress (formerly Progress Energy) began a program to encourage new homes to be more efficient than required by the state code — a new means of complying with the 2007 energy savings requirement. Builders in the territory, covering 1.4 million households and businesses in mostly central and eastern North Carolina, would earn a flat rebate if they achieved 15% to 20% more energy savings by meeting the High-Efficiency Residential Option standard, or HERO. They could earn even more by installing more efficient appliances and buffeting the building envelope to achieve scores of 70, 65 or 55 on a zero-to-100 scale, where zero is an ultra-efficient home that produces its own energy.

‘People are going to do what people are going to do’

The gas companies didn’t object to this iteration of the program — at least not on the record. But its tiered structure limited its impact, said Amy Musser, a green building consultant in Asheville with clients in Duke Energy Progress territory.

“If you ran a model and it was getting a 64, you were definitely not going to pull out all the stops, because nine more points is hard to get. But if you came up with 56, you would figure out what else you can do,” Musser said. “Way fewer houses were pushing themselves to do better because they weren’t right on the bubble.”

Another problem for Duke: The law requires it to conserve electricity, not energy in general. “There were a lot of builders that were getting pretty big rebates because they were putting in really efficient gas appliances,” Musser said. “The electric company was having to pay that rebate, but they weren’t getting any kilowatt-hour savings.”

Indeed, by 2015, Duke Energy Progress was ready to alter the program, telling commissioners it resulted in 75% fewer electricity savings than anticipated. The utility implemented a new version that eliminated the three HERO-plus tiers, instead offering builders 90 cents for every extra kilowatt-hour of electricity saved above minimum conservation requirements.

That change made a difference. Based on Duke’s data, of the 8,000 homes that took advantage of the whole-home incentive between 2016 and 2019, the overwhelming majority — 86% — earned extra rebates by going above and beyond the HERO standard.

Homebuyers – not builders — still made the fuel choices, building professionals say. And many have a preference for gas appliances. The air blasting out of registers from gas furnaces feels warmer, many believe. Gas stovetop cooking is more precise than traditional radiant electric models. Gas water heaters are still popular.

And “fireplaces are still a stalwart feature in most of our homes and are dominated by gas logs,” said Jon Showalter, vice president and chief operating officer of a custom builder in Raleigh, in a letter to the commission,

On the choice of fuel for heat, at least, evidence suggests Duke’s program has made no difference. Gas service isn’t available everywhere in North Carolina, but according to Census data crunched by the Rocky Mountain Institute, the ratio of homes using gas heat — one quarter — has remained constant for the last decade. By contrast, Duke’s figures show that just under half of the HERO-plus homes over a four-year period used gas heat, as did two-thirds of the HERO-only homes. Gas was chosen in just over half of all the homes combined.

“People are going to do what people are going to do,” Musser said. “If the homeowner wants a gas water heater, that’s what they get.” 

‘Destructive or unfair competition’?

Still, in September of 2017, when Duke sought to expand its incentive program into Duke Energy Carolinas territory —  covering about 2 million households and businesses in central and western North Carolina — it set off alarm bells for PSNC and Piedmont. For nearly two years, they protested behind the scenes, insisting the new iteration of the Duke Energy Progress program had lost them customers.

Neither Duke nor Piedmont agreed to an interview for this story. But by June of 2019, Duke asked the commission if it could withdraw its proposal, citing the gas companies’ concerns “regarding potential unintended consequences of the program design.”

Then it was time for alarm among building industry professionals and clean energy advocates, who flooded the commission with comments in protest. 

A form letter from dozens of building professionals in western North Carolina pleaded for the program’s expansion. “I cannot stress enough how much [it] has done to promote efficiency, save money, and reduce greenhouse gases,” the letter read. “The incentive has produced quantifiable savings.”

The commission declined to let Duke withdraw the program, instead asking for a new iteration that might appease the gas utilities. That version, submitted last September, reduces the per-kilowatt-hour incentive to 75 cents. Homes with electric heat pumps earn only 40 cents for every kilowatt-hour saved above the minimum standard.

A three-bedroom, 2,200-square-foot, all-electric home would still earn close to $1,400 in rebates, while an equivalent home equipped with a gas furnace and water heater would earn almost $900. 

“The proposed incentives will not outweigh our customers’ preference for gas,” said Joe Walston from DR Horton’s Raleigh division, in a comment letter, “and we will continue to provide the products that buyers want.”

Plus, the builders — not the buyers — usually receive the rebate directly. “In almost every case,” Musser said, “the person making the decision isn’t the person getting the incentive.”

A pandemic-induced shortage of homes, even as demand remains high, means now is the time for regulators to greenlight the expansion of the incentives, the North Carolina Sustainable Energy Association pointed out in comments about the revised program. 

“As home builders try to meet this surge in demand for housing,” general counsel Peter Ledford wrote, “it is critical that they have viable opportunities to provide home buyers with high quality, affordable, and energy efficient housing.”

Echoing builders who said the program did not and would not influence fuel choice, the Public Staff also commented in support. “The Public Staff does not believe that approval of the Program would result in destructive or unfair competition,” its comments from January of this year read. 

‘What we were hearing from the field’

But over the course of the years-long dispute, gas utilities have doubled down on their claim that the incentives hurt them. 

As for data showing half of the homes in the existing Duke incentive program installed gas heat, “there’s no way to know, ‘would have it been more gas?’” Bruce Barkley, a vice president at Piedmont, said at last year’s hearing. “We certainly would like to get more than 50/50.”

The gas utilities take issue with Duke’s sample calculations, arguing that a 2,200-square-foot gas-heated home would likely receive close to $900 less in rebates than one with electric heat. 

And at the commission’s request, they offered a list of some dozen instances — some single houses, some entire developments — in which they believe they lost customers because of the existing incentive program.

“What we were hearing from the field,” Dominion/PSNC lawyer McAulay said at last year’s hearing, “was that it, in fact, was influencing fuel choice.” He added, “not to a great degree, okay? Our house isn’t burning down and I’m not whining or crying, but we were hearing that it influenced fuel choice.”

If those field anecdotes do reflect a trend, other factors may be driving it.

Unlike the 1990s, today’s electric appliances tend to be more efficient and cost-effective than gas-powered ones. Electric air-source heat pumps — which can be used for space heating and hot water — are now 300% efficient, since they use a small number of kilowatt-hours to transfer warm air to cold locations.

Developers can cut costs by going all electric: They avoid a gas hook-up fee, a new gas line from the curb to the house, and additional exhaust vents. All-electric homes — especially those on the small side — can also be cheaper to operate for the homeowner. 

“Once your utility bills are small, why pay a $15-a-month service charge to two different companies?” Musser questioned. “That’s why people make that decision.”

Amid heightened concern about climate change, the natural gas industry also doesn’t have the veneer of sustainability it enjoyed in the ’90s. Fossil fuels burned directly in buildings account for more than 8% of the state’s greenhouse gas emissions and one-tenth of the country’s overall. 

Going all electric holds an inherent logic for the climate-conscious homeowner. “You can’t offset gas with solar,” Musser said. “For people who are building a really green home and who want to be net-zero energy, those people are choosing to go all electric.”

Plus, there’s growing evidence that gas appliances cause dangerous indoor emissions. “When you’re talking about burning gas inside a home,” said the Sierra Club’s Kresowik, “you’re talking about significant health-damaging air pollution.”

‘That is not what this is’

While those considerations could be driving individual fuel choices in North Carolina, they’re influencing broad policy elsewhere around the country. Regulators in the District of Columbia and a growing number of states — including Virginia, New York, Colorado and California — are working to figure out how to wind down the local gas distribution industry equitably and cost-effectively, Kresowik said. “That is what the gas industry is freaking out about.”

Related: The gas industry is trying to halt building electrification — let’s not let them succeed

Ultimately, North Carolina should do the same, including amending policies from the ’90s and earlier that codify fuel agnosticism and adopting programs that require new buildings to be all electric, he said. But as for the Duke incentive program on the table right now: “That is not what this is.”

But that doesn’t mean it’s not worth doing – far from it. “No matter the source of energy,” said Ryan Miller, director of the North Carolina Building Performance Association, “we support using less of it.”

About the Author

Based in Raleigh, North Carolina, Elizabeth Ouzts has reported on the state’s clean energy transition for the Energy News Network since 2016. Her work on the state’s hog industry and its pursuit of renewable natural gas has also appeared in Environmental Health News. A former director of communications for the nonprofit Environment America, Elizabeth brings nearly two decades of experience in environmental and energy policy to her reporting.

This article was first published by the Energy News Network and was reprinted with permission.

Source: Renewable Energy