Hydrogen won’t protect pensions from gas utilities' death spiral

Pension funds are gambling with Canadians’ retirement savings by placing multi-billion dollar bets on hydrogen's ability to rescue old, polluting gas pipelines from terminal decline, according to a climate finance advocacy organization. 

Shift: Action for Pension Wealth and Planet Health tracked nine Canadian pension funds’ portfolios and identified significant ownership stakes in 22 companies that collectively own and operate nearly 350,000 kilometres of gas pipelines. Funds like the Canada Pension Plan Investment Board (CPPIB), Ontario Teachers Pension Plan (OTTP), Caisse de dépôt et placement du Québec (CDPQ) and others have invested billions of dollars in gas networks across Europe like Scotia Gas Network in the U.K., Società Gasdotti Italia in Italy, and Exolum in Spain, according to the research.

According to Shift’s report, many of the Canadian pension fund-owned gas utilities say they intend to use the gas grid to transport hydrogen to heat homes and power vehicles. The theory is that if gas can be swapped with hydrogen, emissions can be slashed and business can continue as usual. 

But experts warn the hydrogen hype is a dead end, outside of niche industrial applications, because of severe infrastructure challenges and renewable energy being cheaper.

“It very much appears to us that they've bought into gas industry propaganda that is clearly designed to prolong and extend the use of that type of fossil fuel,” said Patrick DeRochie, Shift’s senior manager, on a phone call with Canada’s National Observer.

Hydrogen is sometimes characterized as a Swiss Army knife of decarbonization, because it could be used in a wide range of sectors, from hydrogen-powered transportation to cleaning up dirty steel production. But electric vehicles have all but been declared the winner in their category, and electric arc furnaces, combined with recycled steel, appear to be more cost-effective ways to decarbonize the steel sector. 

The notion of flowing hydrogen through pipelines built for gas to heat homes is practically a non-starter, because the pipes are simply not designed to do that, Shift notes. Hydrogen accelerates cracking of gas pipelines, current materials and seals are incompatible with hydrogen, and hydrogen has a significantly higher rate of leakage than methane gas. 

“A hydrogen network comprising entirely new pipelines of the correct size and materials would take decades to come into operation and cost hundreds of billions of dollars,” the report found.

Theoretically, gas companies could blend hydrogen up to 20 per cent in their methane gas network without triggering expensive retrofits, but that only leads to a six to seven per cent emission reductions, according to a peer-reviewed study published in Energy Science & Engineering in August. 

Those dwindling uses for hydrogen are a major reason why market expectations have crashed in recent years. In 2020, the federal government said the global market for hydrogen could be worth up to $11.7 trillion by mid-century. Last year it said the figure had fallen to $1.9 trillion — a staggering 84 per cent drop. 

Gaslighting

The business case for Canadian pension funds to invest in gas companies was once sound for a variety of reasons. As long-term investors, pension funds look for predictable returns on their investments, and gas infrastructure is typically stable over many years due to regulatory certainty. However, the climate crisis caused by the burning of fossil fuels like gas demands that fossil fuels be phased out rapidly in favour of renewable energy. 

“We've seen pension executives over the last couple of years saying that they believe that gas is a transition fuel, or that gas is a bridge fuel, and we know that's not true,” DeRochie said. “We know gas is a very dangerous fossil fuel that's mostly composed of methane that needs to be phased out, just like coal and oil do, in order for us to reach our climate targets and achieve net zero emissions.”

The authoritative International Energy Agency predicted in an October report that demand for gas will peak by 2030 under all scenarios it considered. That means gas utilities are under mounting pressure to decarbonize — an essential step, experts say, to avoid a “death spiral.” 

A death spiral refers to customers increasingly leaving the gas system (swapping their gas furnace for a heat pump for example) as the cost of clean electricity becomes cheaper than burning gas. As more customers ditch gas, the company has a shrinking pool of customers and revenue to maintain the infrastructure, meaning costs go up for the remaining customers. That in turn pushes even more to leave. For the pension funds who own gas infrastructure, this could mean not being able to recoup their investment.

“There's real risk of these gas networks becoming stranded,” DeRochie said. “It requires a really hard think on the parts of the gas utilities, and their pension fund owners, on what they're going to do with these hundreds of thousands of kilometres of gas pipelines that are going to have to become obsolete if we're going to achieve our climate targets.”

Instead of pivoting to hydrogen to continue using the gas grid, DeRochie said pension funds should use their influence to push gas utilities to diversify their business. By becoming energy providers instead of solely gas providers, utilities can responsibly grow their business, he said, pointing to Washington State-based Puget Sound Energy as an example.

“They have programs to put heat pumps into their customers' homes so they can phase out gas,” he said. “So there're ways to do this for utilities, to think ahead and plan for the incremental decommissioning of their gas network, to become an energy provider, not just a gas provider.”

Requests for comment were not immediately received by the Canada Pension Plan Investment Board, Ontario Teachers’ Pension Plan, Caisse de dépôt et placement du Québec, British Columbia Investment Management Corporation, Alberta Investment Management Corporation, or the Investment Management Corporation of Ontario. A representative from the Ontario Municipal Employees Retirement System declined to comment.