A combination of planned increases in the carbon tax and the use of renewable natural gas will test the minister of energy’s ability to meet his new energy affordability mandate.
Introduction
At the start of the year, Fortis, BC’s largest gas distribution utility, announced that gas bills for the majority of its residential customers will rise a startling 17.5 percent. In an earlier analysis, I expressed concern about an innocuous-looking charge on the bill, the renewable natural gas (RNG) rate rider. Although it only accounts for $27 a year for the average customer today, it increased considerably on January 1.
In addition, the BC government has scheduled increases in the carbon tax rate every year to 2030. These two charges on Fortis customers’ bills are the clearest examples of government climate policies to reduce the greenhouse gas (GHG) emissions from gas utilities.
Let’s look at what these two policies will cost gas consumers by 2030. I’ve relegated the maths to appendices at the end of the article.
Not-so-free rider
RNG and conventional natural gas do the same job – we burn them to produce heat. However, unlike conventional natural gas, RNG is considered to emit few or no GHG emissions.
However, RNG is considerably pricier than conventional natural gas – more than 10 times as expensive, in fact ($23.647 / gigajoule (GJ) versus $2.23 / GJ). Fortis recovers any additional cost related to RNG through a charge on the bill called the RNG rate rider, approved by the BC Utilities Commission (BCUC).
Fortis uses RNG in two main ways, each of which will cause the rate rider to increase.
First, it buys RNG for customers who voluntarily choose to pay extra for it. Unlike most regulated services, however, voluntary RNG customers don’t pay the full “cost of service.” Instead, the BCUC has allowed Fortis to subsidize the cost – voluntary customers pay only $13.216 per GJ, a discount of 44 percent on what Fortis pays to buy the RNG. Who pays the difference? All Fortis gas customers, through the RNG rate rider. This subsidy works out to be $21 million in 2025, based on Fortis’s forecast voluntary RNG sales of 2,013 terajoules (TJ).
Second, Fortis blends RNG into the conventional natural gas it provides to all its customers. Fortis started out on July 1 last year with a one percent blend, which rose to two percent on January 1. Unlike the voluntary RNG service, customers have no choice but to accept this blend. The extra cost of the RNG is also collected from all customers through the RNG rate rider. Fortis forecasts the two percent blend will shift 3,383 TJ of RNG in 2025, costing around $79 million.
Finally, the RNG rate rider pays for any spare RNG that Fortis buys and doesn’t sell to voluntary customers or blend into its natural gas supply, and various administrative costs.
Where is all this going?
Fortis plans to gradually increase the blend of RNG in its supply to ten percent by 2030. As a result, the RNG rate rider on the average residential customer bill will increase from $27 to $253. This change alone will increase total pre-tax bills by 18.4 percent by 2030.
In addition, customers pay carbon tax on the conventional natural gas they receive, but not on the RNG. The carbon tax rate is also scheduled to increase every year to 2030. Together, the RNG rate rider and the carbon tax will increase the average residential post-tax gas bill by 30.3 percent by 2030.
To put that in perspective, in the years 2019 to 2024, a period of relatively high inflation, costs in Canada rose by 18.18 percent.
We’re not done yet
While Fortis has planned to increase its RNG blend to ten percent by 2030, this won’t be enough to meet the CleanBC plan. The BC government plans to introduce a GHG emissions cap for gas utilities, set at 47 percent below 2007 emissions.
Fortis has estimated this would mean displacing approximately half of the natural gas it supplies. We can do a quick back-of-the-envelope calculation to see what it would mean if this were achieved by increasing the RNG blend from 10 to 50 percent.
Each residential customer would have to pay for an extra 40 percent of their 90 GJ annual consumption to be substituted with RNG. The RNG would cost more than the conventional natural gas, but the carbon tax would apply to a lower percentage of the total gas consumption. The net effect is that by 2030, customers would pay an additional $553 per year, and the total bill increase from 2025 would be 65.6 percent.
It’s not obvious that Fortis could find enough RNG to achieve a 50 percent blend, or what the cost would be. But if it had to find an alternative solution, we have no assurance that would be any cheaper.
It’s decision time
As I noted recently, the BC minister of energy has new marching orders for 2025, including the expectation that he will “develop ways to ensure costs for energy remain low for people.” This is all part of the government’s efforts to “reduce cost for families.”
As I’ve demonstrated, on the current trajectory the carbon tax and the use of RNG will increase Fortis residential gas bills by 30 percent in 2030; or, if we want to meet the CleanBC goal, by 66 percent.
It’s worth noting that the political winds appear to be shifting with respect to the carbon tax. Politicians of both major federal parties have recently withdrawn their support, despite modelling showing that carbon taxes are one of the most cost-efficient ways to reduce GHG emissions.
Removing this unloved tax would certainly go some way to “reduce cost for families”, but we shouldn’t forget it is just one example of a climate policy cost imposed on consumers.
The carbon tax and the use of RNG are the most visible effects of climate policies on the Fortis gas bill, but there are others. To add just one more example, the company plans to spend $626.7 million over the next four years on energy efficiency programs. This will reduce GHG emissions, but the cost of these programs is added to customers’ bills in the delivery charge.
Even if the government were to abandon its climate programs entirely, Fortis customers’ bills will continue to rise – natural gas prices are coming off historic lows in 2024, and the utility’s annual delivery cost increases have averaged 7.6 percent over the last five years and show no sign of slowing.
The minister is going to have to decide between energy affordability and the speed with which he pursues the province’s climate goals. He can’t have both.
Appendix 1
The following calculation shows how the bill for an average Fortis residential gas customer will increase by 2030 as a result of increasing the RNG blend percentage from 2 to 10 percent and the BC carbon tax rising as scheduled in the Carbon Tax Act, other things remaining equal.
The bill elements are described in a previous article. To estimate the 2030 bill, I made the following assumptions:
- The average residential consumption of 90 GJ of gas per year remains unchanged.
- The Fortis basic charge, delivery charge and storage and transport charge remain unchanged.
- The cost of gas per GJ remains the same, although the amount on the bill reduces as the blend percentage of conventional natural gas declines from 98 to 90 percent.
- The midstream cost reconciliation and rate stabilization adjustment rate riders, which should net out to zero over time, are zero.
The RNG rate rider (rider 8) on the average bill was calculated as follows, using the forecast from Fortis:
The carbon tax on the average bill was calculated as follows:
- The carbon tax rate uses the forecast from Fortis.
- The carbon tax only applies to the conventional natural gas consumed, not the RNG.
Appendix 2
The following calculation estimates the effect of increasing the blend of RNG in Fortis gas from 10 to 50 percent in 2030.
I made the following assumptions:
- The cost of RNG is forecast by Fortis.
- The cost of conventional natural gas is the Fortis figure for 2025, and doesn’t change by 2030.
Appendix 3
Fortis gas delivery rates have increased an average of 7.62 percent between 2021 and 2025. The following data are from various BCUC decisions.
