Fuel-Switching: We Just Did This in 1990, So Why Are We Doing It Again?


RAP senior advisor Jim Lazar tells a story about doing a cost and environmental analysis on behalf of the Association of Northwest Gas Utilities in 1990, in which he compared space and water heating run on natural-gas-generated electricity to those same end uses fueled directly by gas. Jim’s analysis at that time found that the electric options were not only twice as expensive to run as direct-gas-fueled space and water heat, but the direct-gas options used 20 percent less gas and produced 20 percent less carbon emissions.

But things have changed in three decades. Jim now admits that “the same analysis that showed natural gas was the right choice in 1990 would conclude that electricity is probably the right choice today.”

What Has Changed Exactly?

A lot. Gas appliances have become more efficient since Jim did his study—but those gains have been far outpaced by innovation in electrical devices. In 1990, for example, gas combustion turbines were about 40 percent efficient; today’s best models are about 60 percent efficient.  Back then the best heat pumps had coefficients of performance, or “COPs,” of around 2.0, and heat pump water heaters were an emerging technology. Today both are available with COPs of 3.0, and can deliver one-and-a-half to three times more heat energy to a home than the electrical energy they consume.

And today, wind and solar generation can be expected to meet much of new electrical load, further reducing both costs and emissions. As Michael Liebreich of Bloomberg New Energy Finance noted in describing the “world record prices” (i.e., the best projects with the lowest risk) for unsubsidized renewable energy occurring around the world: “If you are not planning for two-cent solar, you are not on the money.”

Even with the production tax credit for renewables beginning to phase out, last summer American Electric Power filed a $4.5 billion proposal in Oklahoma, the heart of gas and oil country, for the Wind Catcher Energy Connection project, which the utility says can deliver energy at a levelized cost of 1.09 cents per kilowatt-hour (with no risk of fuel-cost escalation) over the life of the project. Further, the cost of battery electric storage—a key technology supporting electric vehicles (EVs), solar, and grid services—has declined by about 80 percent since 2010.

What’s the Right Analysis?

The shorthand term for the options Jim analyzed in 1990 is “fuel switching.” At the same time that Jim was doing this in the West, Steve Nadel and the American Council for an Energy-Efficient Economy (ACEEE) were investigating gas demand-side management and fuel-switching potential in New York State, and Vermont’s utility commission was directing utilities to develop programs to capture all cost-effective demand-side resources, including fuel-switching.

A fuel-switching analysis asks a deceptively simple question: What are the most efficient investments irrespective of fuel? In other words, what are the least-cost and highest-value investments for consumers that utilities ought to be planning for and making, and regulators ought to be approving?

In 1990, replacing electric resistance space-heating equipment with onsite fossil fuel space-heating and water heating technology offered efficiency savings and reduced emissions. Today, the exact opposite is true; fuel-switching from fossil-powered end uses to electrified ones now produces those results.

Jim’s story reminds us that the answer to that question has changed not only because generation and other technologies have changed, but also because gas prices are not expected to go down. In 1990, replacing electric resistance space-heating equipment with onsite fossil fuel space-heating and water heating technology offered efficiency savings and reduced emissions. Today, the exact opposite is true; fuel-switching from fossil-powered end uses to electrified ones now produces those results.

So while the inputs may have changed since the 1990s, the purpose of fuel-switching, and the basic rule about reducing net energy costs, have not: Efficiency is cost-effective when the net cost of installing and maintaining measures that improve the efficiency of overall energy usage is less than the total cost of alternatives to achieve the same end use over the same lifetime.

State programs are beginning to recognize this and to see that electrification, as the efficient fuel-switching option available today, opens up opportunities for consumers to better control their overall energy costs (even if their electricity consumption increases).  Connecticut’s 2018 Comprehensive Energy Strategy supports this transition and encourages investment in air source heat pumps that can “cost-effectively displace heating supplied by oil, propane, or electric resistance units.” Vermont has also adopted an electrification policy designed to result in a net reduction in fossil fuel consumption by a utility’s customers.

Grid Flexibility is the Key

This new era of fuel-switching offers an advantage that the earlier transition couldn’t: flexibility. Unlike virtually all other electric end uses, water heaters and EVs don’t have to immediately use the power they draw from the grid. When you take a shower, it doesn’t matter whether the water was heated five minutes or five hours earlier. The same goes for your EV. This flexibility produces an array of benefits for consumers, utilities, and our economy.

The big news for utilities and consumers is that the flexible load associated with these end uses can serve as grid resources and be managed through appropriate rate designs and smart-charging programs. These electrified loads can be shifted:

  • Away from more expensive peak times, often served by dirtier fossil-generated electricity,
  • To times when there is less demand for electricity and it is cheaper and frequently cleaner, and
  • When variable renewable energy resources are being curtailed, ensuring that less clean generation investment is wasted and that the grid can get even cleaner as it accommodates even more variable resources.

Flexible loads can also help utilities to defer or avoid costly distribution system upgrades that could be required if this demand were left uncontrolled.

Despite consuming additional kilowatt-hours of electricity, this flexible load enables consumers to be more “emissions efficient” by using less energy overall per vehicle mile traveled or gallon of hot water produced, producing fewer pounds of pollution.

So, What Makes Electrification Beneficial?

Some may think that electrification is simply about increasing load and sustaining utility revenues. We don’t agree, but nor will beneficial electrification happen automatically.

From RAP’s perspective, for electrification to be considered beneficial, it needs to meet one or more of the following conditions, without adversely affecting the other two:

  1. Saves consumers money over the long run;
  2. Enables better grid management; and
  3. Reduces negative environmental impacts.

These three conditions guide our discussion of beneficial electrification and inform the articulation of principles for regulators to consider in developing and evaluating electrification strategies. This is the first of a series of blog posts exploring these ideas, and as future posts will explore, observing such principles will help ensure that electrification develops in a manner that serves the public good.

Fuel-switching worked in 1990, but a lot has changed since then. It’s time to do it again.