The regulatory noose around Colorado’s natural gas utilities just got a whole lot tighter, and captive ratepayers stand to bear the brunt of the economic pain.

The Colorado Public Utilities Commission (PUC) on Monday issued a formal decision updating the state’s emissions targets under its first-in-the-nation “clean heat plan” law. The decision established, by rule, that Colorado gas utilities must reduce their greenhouse gas (GHG) emissions by 41 percent compared to 2015 levels by 2035, expanding upon the existing 22 percent by 2030 target set in statute.

Furthermore, the commission opted to go beyond what the underlying statute required by flirting with a total phase-out of natural gas. Despite claiming it was not setting any further targets beyond 2035 at this time, the commission nevertheless all but established a de facto 100 percent reduction mandate by 2050.

“Through this Decision, and consistent with the discussion below, we set for gas utility clean heat plans a target for 2035 of 41 percent reduction in greenhouse gas emissions compared to a 2015 baseline,” the decision reads. “We further decline to codify future targets beyond 2035; however, because Colorado has a statewide goal of reducing greenhouse gas pollution by 100 percent by 2050, as compared to a 2005 baseline, we emphasize that clean heat plans submitted by gas utilities must account for that statutorily-established future target.”

The decision goes on that “it is reasonable for the commission to conclude that Colorado’s statutory goal for 2050 corresponds to a 100 percent greenhouse gas reduction target for gas utility clean heat planning.”

How we got here

The legislature in 2021 passed SB21-264, a first-in-the-nation law requiring the state’s gas distribution utilities to reduce their greenhouse gas emissions by four percent by 2025 and by 22 percent by 2030–from a 2015 baseline–by filing “Clean Heat Plans” with the PUC.

Since then, Colorado gas utilities like Xcel Energy, Black Hills, and Atmos have been tangling with the commission over how they suggest meeting those targets and at what cost. Some of the first approved plans have already resulted in hundreds of millions of dollars in new expenses for captive ratepayers.

Before those early plans had even been allowed to play out and their costs and emissions projections evaluated, the Colorado Energy Office in July asked the commission to establish new targets—a 41 percent emissions reduction by 2035.

In response to public comments filed by Independence Institute, the affected utilities, the Office of the Utility Consumer Advocate, labor unions, and others that all highlighted the immense affordability and technical challenges posed by attempting to nearly double existing emissions reductions requirements on an even shorter timeline, the Polis administration eventually returned with a new request for a 31 percent reduction target instead.

It called the updated target request “ambitious but achievable” and reflective of “present concerns about costs.” It also acknowledged that “the uptake rates of customer-driven measures” like transitioning from gas furnaces and appliances to electric alternatives “has so far been low.”

However, despite this concession to reality from the governor that appointed them, the commissioners opted to err on the side of climate policy stringency rather than affordability or feasibility, much to the delight of environmental groups like the Sierra Club and Southwest Energy Efficiency Project.

Why It Matters

So much of the state’s climate policy over the years has been obscured by regulatory jargon and euphemisms— “Clean Energy Plans,” “Clean Heat Plans,” “Beneficial Electrification,” etc. —so allow me to speak frankly about what the PUC just codified and what it means for ratepayers.

A 41 percent reduction in GHG emissions, let alone 100 percent, from the gas distribution network will necessarily require removing customers from the system. There’s simply no other way around it. Utilities like Xcel, Black Hills, and Atmos may be able to nibble around the edges of the target by relying on recovered methane, improved pipeline leak detection and repair, and other non-demand-destroying strategies, but such approaches will not be enough to comply with state law.

This all but guarantees that gas customers around the state will soon face higher utility bills to subsidize households into switching from gas to electric heating and appliances, particularly if the first tranche of Clean Heat Plan proceedings is any guide.

For instance, Black Hills Energy’s “Target Achievement” portfolio, submitted to the PUC to meet the initial 22 percent GHG reduction by 2030 target, was estimated to cost approximately $397 million per year, costs that would inevitably be recouped from captive ratepayers. Similarly, Xcel Energy reported that its modeling found that meeting its 2030 target would cost over $1 billion over five years, a total that well exceeded the 2.5 percent annual cost cap included in the initial clean heat plan statute.

Furthermore, aside from paying more on monthly bills to finance the utility incentive programs designed to encourage electrification, the new 2035 target will inevitably result in significant personal costs for homeowners who agree to make the switch.

“These costs can be in excess of $20,000 per home before incentives for a residential customer retrofitting an existing home to all-electric heating,” Xcel noted in its testimony. “Depending on the scale of the electrification initiatives, total customer personal costs could be additional billions of dollars, even after rebates.”

This, in turn, risks creating a vicious cycle where well-off homeowners able to afford the upfront expense of retrofitting off of the gas system do so, leaving a smaller pool of less well-off gas ratepayers to cover the fixed costs of maintaining the existing gas system, raising their bills once again in the process.

That’s not to say that electrification adopters get off scot-free. According to the most recent annual data available at the US Energy Information Administration (EIA), natural gas remains significantly cheaper than electricity for residential ratepayers on average.

The math doesn’t add up

In 2024, residential electricity customers in Colorado paid 14.92 cents per kilowatt hour (kWh) for electric service on average. Residential natural gas customers, on the other hand, paid an average of $10.56 per Thousand Cubic Feet (Mcf) last year. A simple conversion of those prices to a common unit means that electricity was more than four times more expensive on average per unit of energy delivered to Colorado households last year.

This suggests that even with the general efficiency advantages air-source heat pumps bring over natural gas furnaces, current Colorado gas customers are almost certainly going to be worse off financially by making the switch from gas to electric home heating, particularly when the considerable upfront costs of making the switch are factored in.

Recent empirical studies have also demonstrated that to be the case.

A 2024 study from researchers with Colorado’s own National Renewable Energy Laboratory (NREL) found that only a small minority of Colorado households currently heated by natural gas would see long-term cost savings by switching to even the cheapest and lowest efficiency heat pumps. For gas customers considering making the switch to a high-efficiency cold-climate heat pump (the kind best equipped to handle Colorado’s chilly winters), the researchers found such an investment would pencil out for approximately zero percent of state households.

The finer details will, of course, need to be worked out once the gas utilities file their respective plans demonstrating how they plan to achieve the required emissions reductions.

But with this week’s decision, the PUC has officially set the state further down a course that will inevitably see captive ratepayers pay more on their utility bills to be brow-beaten by their own utility into adopting a more expensive home-heating option. Meanwhile, those that resist will have the privilege of picking up the tab for covering an increasing share of both fixed and new stranded asset costs.

At least the commissioners will be able to pat themselves on the back for taking the fight to climate change.

Jake Fogleman is Director of Policy at Independence Institute, a free market think tank in Denver.