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The massive subsidies in Victoria’s gas expansion plans

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Fossil gas, natural gas, methane; not the nicest stuff when you think about it, but it is still piped into half of the nation’s homes, a legacy of Dickensian era coal gas that used to light homes and cause a lot more house fires than we experience today.

In Victoria, for instance, the government is so desperate to find a future use for brown coal that it wants to turn it into something it’s not (a useful portable fuel) or even a fertilizer or  diesel/oil .

And once our mucky brown coal has been converted into oil, they will hand the fossil fuel sector another huge subsidy by allowing refineries to pump out CO2, sulphur dioxide and other pollutants without paying a cent, for the privilege of treating our atmosphere like an open sewer.

While trying to make an exhaustive list of subsidies for fossil fuels (it’s a difficult job, as there are just so many), I stumbled across this one … it’s an absolute cracker.

Back in 2011 the Victorian Liberals announced the $100 million, Energy For The Regions program (previously named the Natural Gas Extension Project under Labor) which will hook up dozens of towns to the fossil gas network. Take Avoca, in Victoria’s Goldfields region, as a case in point. The town has around 700 households who are being passed with gas under the program at a cost of $8.39 Million or $12,000 per house passed.

But that subsidy is likely to balloon, because it is likely that only one in five households passed will actually connect. Even the National Party minister Peter Ryan claims that just 30 per cent will take up a gas connection, but experience in Tassie shows that only 20 per cent of households connect to gas in the 10 years after a new network is rolled out.

And Tassie is colder than northern Victoria, so if there was an incentive to opt for a supposedly cheaper fuel source (gas) then it would exist in the major centres of the Apple Isle. This means, that a 20 per cent take-up translates into subsidy to the gas industry of $60,000 a household, a massive handout that taxpayers will never get back through  ‘benefits’ from these connections.

What’s more, the price of gas is going up. Based on some old outdated numbers, a media release from Premier Denis Napthine’s website claims that the 140 households (20%) out of 700 who opt for gas will “lower annual household costs by anywhere between $600 and $1200 – “so an average saving of $900.”

However, those numbers fail to take into account recent determinations by the AER allowing the network owners to lift prices along with the upward impact from export price parity, which is going to hike prices even more. So, that $900 will be further reduced as gas bills surge by $160 off the back of gas exports, according to a very conservative estimate from the Grattan Institute.

And the network fee for SP Ausnet West has risen 3 per cent in 2014 alone, adding $40 to average bills – but even more, as a percentage of the total bill, to those who don’t consume much gas, as this is a fixed cost.

So then there is the argument that bringing gas to regions is good for business. Ryan has argued that “the unavailability of natural gas in towns such as Avoca, Lakes Entrance and Heathcote had prevented growth and hindered business.”

“Households and businesses in regional Victoria without access to natural gas are forced to use expensive bottled Liquid Petroleum Gas and electricity,” Ryan said. But the best they could do in Avoca as a business example was a Laundromat that runs off gas fired dryers that “uses between six and 12 bottles of gas a month, depending on the time of the year.”

Fixing up a stinking hot $12,000 annual LPG bill for a small business owner can be achieved much more cheaply than running an $8.39Million pipeline if a proper case benefit analysis had been done and renewable energy options considered.

Five heat pump dryers would have cost around $10,000 ($2000 each) and when connected to Powershop, currently the cheapest electricity provider in Victoria, they would cost just $2,000 a year to run, an immediate saving of $10,000 a year on the Laundromat’s $12,000 annual gas bill.

Show me the numbers commercial:

LPG bottled gas comes in at a net cost of 21 cents a kWh, whereas Powershop charges $0.20/kWh in the Powercor (Western Vic) distribution area. We can therefore efficiently supply the same drying heat with a heat pump (which conservatively will achieve a COP of 6.0 – 1 unit of electrical energy driving the pump to produce 6 units of heat and dehumidification for 600% efficient drying).

The result of crunching the numbers shows that heat pumps would heat for just $0.03385/kWh, a saving of over 84 per cent when compared to the Laundromat’s LPG for the same task. In fact, the shiny new heat pump dryers would have paid themselves off in precisely one year – a dream investment for any sharp business owner or any government wanting to assist Laundromats all over Victoria, not just in a few select locations as they do currently with their regional development aid.

But hang on. Avoca is getting natural gas, right? So, therefore, this piped in fossil gas option should be cheaper than the electric option, right? Actually, wrong. Gas would cost $0.02/MJ or  $0.072kWh (and that’s today’s prices, without taking into account the price hikes we’ll be facing shortly). The gas option, which Peter Ryan and Denis Napthine are bringing to the town of Avoca, is 212 per cent more expensive than using heat pumps to do the town’s clothes drying.

Show me the numbers residential:

With gas, 80 per cent of households won’t even choose to hook up, which is our money wasted! So if we want to waste $12,000 pork barrelling or helping out every regional householder (call it what you will), who has or hasn’t got a gas connection, then with a private householder contribution of $6,000 (What they would have spent on connecting up the gas + appliances purchases anyway) each house could be equipped with an 8kW solar system facing North, East and West to maximize self-consumption, three Daikin Ururu Sarara 3.6kW (5kW peak) humidifying reverse cycle air conditioners for heating (83% renewable), a Sanden hot water heat pump (75% renewable), LED lights and an induction cooktop.

And what would be the result?  They’d be able to heat their homes to the fullest through winter, cool them in summer and be receiving a $500 annual credit on their electricity bill. No gas bill, no daily standing gas charge for ever-rising network costs, no hike in prices just because Japan or China or wherever has a nuclear disaster or is having a growth spurt. Completely hedged energy costs for the next 20 to 30 years.

At $60,000 per household connected to the natural gas network, this ‘energy for the regions’ program is one of the greatest boondoggle’s (As the American right would call it) this nation has ever seen.

It’s time to do a real cost benefit analysis, Green versus Brown, bring it on! Even if the program’s aim was just to buy votes, a politician is going to get much more traction with a community by eliminating their energy bills and giving them a 22 per cent return on investment, versus giving them the opportunity to pay for an ever more expensive and outdated fuel source.

Furthermore the numbers need to be crunched immediately to halt these extreme gas extensions that are an utter waste of taxpayers’ money stopping the giant hole that is being burnt in Victorian taxpayers’ pockets, so that we can start rolling out cost effective high ROI renewables to rural and regional Victoria, saving us all.

And while we are at it I have a question for… Henry Ergas,  Andrew Bolt, Terry McCrann, The IPA, Tony Abbott and Peter Ryan and all their ilk. When will this brown madness stop?

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  • atwork

    The waste of our money is irresponsible. A further alternative is renewable firewood burnt in a high efficiency wood heater, coupled to a hot water service – creating local jobs. Extra work in having a wood heap with dry wood for burning, maintaining a hot low smoke fire and managing the fuel load I in the heater but with a financial reward for those with mettle to engage.. The upfront cost for the heater, plumbing to the hot water would be less than $2,000 with annual firewood costs of $500 to $1000.

    • Matthew Wright

      Hi atwrok,

      We did consider the woodburning option and thought that the economics didn’t stack up. Where someone wants to do the entire collection and processing of the wood themselves then they have a very low cost fuel source. ie a very remote house. However in the towns it is far more economic to use a heatpump such as the Daikin Ururu Sarara reverse cycle air-conditioner. It can product 5kW (peak) heating and is rated at 3.6kW nominal for a C.O.P. of 5.85.

      That means that it can produce the heat of two oil filled heaters. In energy efficiency terms it’s like paying for 1 bar radiators and getting 4.85 bar radiators for free. The heat pump would produce that heating with about 1,100kWh of grid electricity for about $220 a year. Much cheaper than buying the wood and that much energy can easily be produced by a home solar system on the roof.

  • icefest

    A CoP of 6 for an air/air heat pump with a delta-T of 40K is quite an exaggeration, half that is more realistic.

    Even so, that’s a ROI of ~50% PA, so still worthwhile.

    • Matthew Wright

      No it is not an exaggeration. Please take a look at

      http://www.daikin.com.au/ururu-sarara-7

      And the government rating website to verify their claim.

      http://reg.energyrating.gov.au/comparator/product_types/64/search/?wrapper_search=&cycle_type=&installation_type=&output_range=&model_number=FTXZ25N&paginate_by=20

      Also it actually performs better than COP 5.95 for most people as it has humidity control as well and therefore would probably achieve effective COP of 7.0. See a psyhcrohmetric chart to understand how humidity + temperature = comfort. Something like http://capla.arizona.edu/hed/gfx/charts/PsychrometricChart.jpg

      The delta T that we use in Australia to benchmark the performance of a
      heatpump is 7degrees Celcius raising to 20degrees Celcius – this represents most areas (more than 99%) of the country except alpine areas.

      So the delta-T is 13K for the benchmark. I have seen the performance curve for 0C – 20C and it is still close to 5.85.

      • juxx0r

        You’re proposing to use a household air conditioner to replace a gas fired drier that probably runs north of 80 degrees C? I’d look at your chart, but it doesn’t go that high. Nor does the COP with that sort of delta T.

      • icefest

        That document doesn’t even state the testing parameters. It is more than useless. It also uses seasonal COP, which has varying reservoir temps and no output temp over 30°C.

        Here is another document stating that with a delta T of 7°C/20°F it has a max COP of 5.8. That’s hardly a comparison.
        http://www.grijanje-klima.com/wp-content/uploads/2013/12/Ururu-Sarara_prospekt_en.pdf

        How the hell will you get a higher COP with a delta T of three times that? Just for comparison, the maximum carnot efficiency possible is a COP of 7.3 (Delta t of 40°C, input 20°C)

        If you can find/make any air/air heat pump with a COP of 6 with a delta T of 40°C, input 20°C. I will be surprised.
        Keep in mind that this requires nominal COP not seasonal, and that the full testing parameters need to be published too.

        Once more, the claim you make is unfounded.

        • Matthew Wright

          Ok we’re talking about different things. You’re talking about the dryer and I’m talking about the space heater – both were mentioned in the article. I’ll have to address this in the morning.

        • Farmer Dave

          Icefest, I also have the feeling that some of Matthew’s figures may be optimistic, but his basic points are still well made in my opinion. In the drying scenario, the delta T does not need to be so high if the humidity of the air doing the drying is low, and in a refrigeration cycle dryer I expect that air is taken out of the dryer, past the cold end, where most of the water it contains is taken out, and then past the hot end and back into the dryer. In effect, such a device is more of a water pump than a heat pump; very dry air does not need to be so hot to achieve a drying effect.

          Matthew’s basic point about the competitiveness of high COP heat pumps is absolutely correct.

  • Chris Fraser

    I have to admit this number crunch is compelling. I doubt that the gas industry will ever have answers to COPs of 5 and above.

  • Craig Memery

    Couldn’t agree more Matthew,

    It probably seemed like a good idea at the time (economically), but this policy needs to be urgently reexamined in light of the impacts of more expensive gas and more efficient electric appliances.

    We’re doing extensive research and modelling at the moment to understand the cost impacts on consumers of buying gas appliances and connection to gas (and going the other way of course) today and in the future in all parts of the NEM, with particular attention to the gas extension zones in Vic under this program.

    One thing that is interesting in relation to the expansion zones is that gas network businesses take different approaches to the cost recovery for the residual cost (that not met by the state funded grant), and retailers also have varying approaches to passing through distribution costs. It’s quite unlike how electricity markets work in a number of ways.

    Some networks socialise the cost across a broader customer base, so the customers in those zones are less exposed to the risk of extra high prices, and everyone else pays a bit more (on top of the a lot more they will soon pay due to higher wholesale prices). Others recover more costs directly from customers in the expansion zone, meaning those customers may pay a premium in the next few years which, if the uptake in that zone is lower than forecast (which as you note seems very likely).

    But what really makes it hard to forecast the exact price impacts is if and how the retailers pass through network costs in those areas. Some gas retailers take a loss on customers in extension zones, while in others, competition is limited and retail prices are higher.

    There a heaps of other factors at play (lack of transparency in gas wholesale market, tendency towards fuel bundling, retailer customer acquisition and retention strategies) that make it impossible to forecast what will happen to future gas retail prices when the death spiral occurs in the gas network extensions, but on balance it seems likely the retailers might absorb some of the costs and these customers wont directly face the full cost of stranded assets.

    But from our analysis, even if retailers soften the cost impact, it doesn’t alter the conclusion: households that connect to gas today, especially in the gas extension zones, will spend much more over the longer term than those who choose efficient electric appliances.

    As people migrate from gas to electricity the consumers who are least able to afford it will be left footing the bill for stranded gas assets, and if the Victorian government is serious about helping consumers access more affordable energy (which is doubtful given that they are committed to dropping the energy efficiency target) they will direct funds to subsidising high efficiency appliances instead.

    Thanks for picking up on this issue.

  • Alan Baird

    Seems like gas could just be a little short term. What does this do for the economics?