Switching California from gas to electricity, one neighborhood at a time

Over the next few years, residents of select California neighborhoods may start getting phone calls and mailers from gas utilities and community organizers offering an unexpected proposition: Would you like to ditch gas and switch to all-electric appliances instead?

That’s the future envisioned by the environmental groups backing SB 1221, a bill passed in the final days of California’s legislative session and aimed at giving utilities permission to launch up to 30 ​“zonal decarbonization” projects.

If signed by Governor Gavin Newsom (D) this month, SB 1221 would order state regulators to create a path for utilities to propose pilot projects that could offer entire neighborhoods the option of switching from gas-fired furnaces, water heaters, dryers, and stoves to all-electric appliances.

Even if SB 1221 is signed into law, a lot needs to happen in the next two years for its zonal decarbonization projects to materialize, said Beckie Menten, senior regulatory and policy specialist at the Building Decarbonization Coalition, one of the nonprofits backing SB 1221. But given the tight timeline the state faces for cutting carbon emissions from its buildings, the bill is one of the best options available, she said.

“We see this as a really important affordability measure going forward, because it helps stop the gas-rate spiral we see happening,” Menten said, referring to the challenge facing gas utilities in not only California but also New York, Illinois, Massachusetts, and other states that have aggressive carbon-emissions reduction targets.

Simply put, gas utilities spend billions of dollars per year repairing and replacing gas lines. Gas customers bear the cost of repaying those investments in the form of charges on their monthly bills; sometimes those costs are spread over as many as 50 years. But the volume of fossil gas that utilities sell must decline dramatically over the next two and a half decades in states with strong decarbonization targets — well before much of the cost of current pipeline investments is due to be paid off.

A 2021 report from consultancy Brattle Group found that the cost of these ​“unrecovered” investments could add up to $150 billion to $180 billion for U.S. gas utilities over the coming decade.

That puts pressure on policymakers to find ways to reduce gas pipeline investment today, without endangering the safety of the network or denying customers access to energy. Zonal decarbonization accomplishes both those goals by shifting the money utilities would have spent on pipelines into helping customers leave the gas system and electrify instead, Menten said.

“It helps decrease investment in the gas system and helps customers who might have trouble affording electric appliances on their own,” she said.

A variety of approaches to gas system decarbonization are being tested in states including Colorado, Illinois, Massachusetts, New York, and Washington. In the U.S. Northeast, utilities are building thermal energy networks — pipelines that circulate liquid from deep underground to near the surface to improve the efficiency of heat pumps in homes and businesses. Colorado utility Xcel Energy’s Clean Heat Plan will direct $440 million over the next three years toward reducing emissions from fossil gas delivery, primarily via electrification and energy-efficiency measures.

In California, utility Pacific Gas & Electric is already engaged in smaller-scale​“targeted electrification” projects, in which select numbers of customers served by gas lines that would be costly to repair agree to switch to all-electric heating and appliances. But PG&E’s work has been limited to date by its obligation to get 100 percent customer buy-in for making this switch.

SB 1221, by contrast, would allow zonal decarbonization projects to proceed if 67 percent or more of all affected customers agree to it, said Kiki Velez, an equitable gas transition advocate for the Natural Resources Defense Council, one of the bill’s primary backers. That can allow utilities like PG&E to avoid the risk of their projects being stymied by one or two holdouts — although utilities must also be cautious about alienating customers who prefer using gas, she noted.

SB 1221 also requires that zonal decarbonization projects be cost-effective, she said: Whatever the utility spends on the project must be less than the cost of the pipeline investments they’re avoiding.

At the same time, the customers being asked to commit to switching to all-electric heating and appliances have to be compensated for the extra cost of making that switch and paying the electric bills that will result, she said. And the law requires utilities to target communities that are most likely to face economic harm from being stuck paying for increasingly expensive gas service.

Under the bill, the California Public Utilities Commission has until July 2026 to establish the program. That gives some time to work through these details, Velez said. But the first step in identifying the likely targets of the program will come in mid-2025, when California’s major gas utilities — PG&E, Southern California Gas, and San Diego Gas & Electric — must provide maps to the CPUC with the location and cost of planned gas-distribution investments overlaid with information on ​“disadvantaged communities, tribes, and other priority decarbonization zones,” she said.

Southern California Gas and SDG&E, which are both owned by Sempra, haven’t yet developed those maps, she noted. But PG&E has created one as part of its ongoing work on gas-to-electric switching, which includes its first ​“zonal electrification” pilot that will electrify about 1,200 state university–owned housing units.

“In theory, then, PG&E can hit the ground running with proposing larger-scale pilots,” Velez said. Menten agreed that PG&E has ​“literally hundreds of projects they could move forward that hit that cost-effectiveness criteria.”

But Menten cited one provision of SB 1221 that she fears might dissuade utilities from bringing pilot projects forward: the way it treats the cost of heat pumps and other electric-powered equipment that utilities will likely need to subsidize for participants. Under the bill, utilities are barred from treating these costs as a capital expenditure on which they earn guaranteed rates of profit.

An early version of the bill would have authorized the CPUC to use its discretion in determining ​“where capitalization makes sense and where it doesn’t,” Menten said. But in a legislative session dominated by attempts to pass regulations to contain rising utility rates, that language was stripped from the bill before its passage.

“Ultimately it’s better for ratepayers to not have that capitalization,” she said. But by asking a utility to forgo the profits it would have earned from pipeline investments in exchange for a zonal electrification alternative, ​“you’re asking the utility to choose to not make money.”

Menten noted that these pilot projects are small in scope — SB 1221 limits them to no more than 1 percent of a utility’s customers — and that any larger-scale policies that emerge from them would be able to revisit the question of how gas utilities might recover foregone profits.

On the other hand, SB 1221 makes it possible for utilities to propose pilot projects but doesn’t require them to do so, she noted. The absence of a capital-recovery structure for the equipment going into homes and businesses could be ​“a disincentive under the current regulations for utilities to bring this forward.”

Another challenge lies in working with residents of targeted neighborhoods to make sure they’re willing partners in electrification, she said. At her previous job with community energy provider Ava Community Energy, Menten worked on a California Energy Commission–funded project that engaged with communities in the San Francisco Bay Area to gauge their interest in and capacity for switching from gas to electric.

The final report from that project noted that ​“residents have concerns regarding home electrification including upfront costs, lack of familiarity with electric equipment, and increases in electricity costs. Significant outreach and education, along with upfront funding and potentially bill guarantees, will be key to project success.” Only one project ended up going forward as part of that program.

Menten highlighted other issues, ranging from how to handle ​“ghost homes” — homes that are either vacant or occupied by people who decline to engage in the process — to forming partnerships with ​“trusted messengers” like community and faith groups.

“These are block-by-block projects,” she said. ​“You really need to understand the dynamics of each block.”