Gas companies are making a risky bet.

Cascadia’s gas utilities know their prospects are rapidly dimming. Decarbonization, now official state and provincial policy in much of the region, is an existential threat to businesses chartered by law to distribute carbon-based fuels. The companies are hoping hydrogen will save them, forestalling bankruptcy as the region leaves fossil fuels behind. NW Natural, Puget Sound Energy (PSE), Cascade Natural Gas, Avista, and FortisBC, the region’s biggest gas utilities, are all developing plans for pumping green hydrogen through their pipes. NW Natural plans to produce green hydrogen that it will blend with natural gas and deliver to around 2,400 customers in Eugene, Oregon. PSE has budgeted $6.3 million through 2026 for pipeline modernization for “alternative fuels,” including hydrogen. And FortisBC plans to invest nearly Can$5 million annually to pursue low-carbon fuels like hydrogen.

Policymakers throughout Cascadia have, perhaps unwittingly, dangled the hydrogen lifeline in front of the gas industry, passing laws that allow utilities to recoup the costs of green hydrogen investments. Oregon and Washington passed policies in 2019 encouraging gas utilities to procure and invest in hydrogen on behalf of their customers. That same year, under British Columbia’s Clean Energy Act, BC regulators added hydrogen to a list of prescribed undertakings for gas utilities to lower greenhouse gas emissions.

But hydrogen is unlikely to save gas utilities from their impending irrelevance. Future hydrogen customers are few and far between, and the competitive hydrogen market will leave currently regulated monopoly utilities in unfamiliar waters. In this context, green hydrogen looks more like a leaky raft than the sturdy rescue boat gas utilities make it out to be.

TOMORROW’S FEW INDUSTRIAL HYDROGEN CUSTOMERS WON’T BE ENOUGH TO SUSTAIN GAS UTILITIES

Green hydrogen’s best role in decarbonization is to clean up a handful of industrial sectors, like steelmaking, international shipping, and long-haul aviation, that do not have suitable alternatives. Hydrogen makes little sense for decarbonizing homes and businesses. Electrification is a much more efficient, cheaper, and safer option, and one that state, local, and federal policies increasingly incentivize.

But if utilities focus just on selling hydrogen to industrial customers, their balance sheets will show a big hole. That’s because under the eccentricities of utility regulation, utilities profit by expanding their vast web of gas pipelines, not by the volume of gas they sell. Even if utilities can make up the lost volume of gas from residential and commercial customers with a few large industrial customers, they won’t be able to earn the same profit from the much smaller pipeline footprint these new customers will need. Today, NW Natural’s industrial gas consumers, for example, make up 41 percent of the company’s gas volume sold and just 7 percent of profits, while its residential customers make up 38 percent of gas volume sold and 65 percent of profits.

Although Northwest utilities don’t all publish data on the profit breakdowns by customer segment, the chart below shows the next best thing: the customer breakdowns by revenue and volume of gas sold by utility. For all the companies, the volume of gas sold to industrial customers far exceeds the revenues earned from them. The opposite is true for residential and commercial customers: utilities earn more of their revenue from this group relative to the share of gas sold to them because of the investments in the vast web of pipelines required to serve millions of smaller customers.

To be fair, gas utilities’ current customer list doesn’t include all potential future hydrogen customers. For example, industries that produce their own hydrogen from natural gas today, like fertilizer manufacturers, could start to source from gas utilities, as could long-haul transportation industries that need to transition off ...