Death spiral: Network blows up renewable gas claims, wants to hit consumers for cost of stranded assets

Energy network company AusNet Services has torpedoed claims “renewable gas” will be able to service households for decades in the future, and is seeking to charge customers an extra $70 million to use its pipelines because it fears the accelerated switch to all-electric homes will leave its assets stranded.

If the claim by AusNet succeeds, and is followed by Victoria’s other gas distribution networks — Multinet Gas Networks and Australian Gas Networks — the state’s gas households would have to pay about $220 million more for pipelines over the five years to 2028 than was agreed with the regulator just two years ago. 

That would lift to more than $550 million the extra charges sought by Victorian pipeline owners for “accelerated depreciation” in the past two years. Pipeline owners say these claims are justified because rapid electrification will shorten their networks’ commercial lifetimes – or the period over which they can recoup their investments.  

The Victorian government has banned gas in new dwellings, and is mulling bans on replacements of end-of-life gas appliances and a push to accelerate electrification in commercial buildings.

“Basically you’re looking at a couple of billion dollar’s worth of assets that are disappearing,” says Gavin Dufty, national director of energy policy and research at St Vincent de Paul Society.

AusNet says in its application to the Australian Energy Regulator (AER) for a variation to its gas access arrangement for 2023-2028 that while its original submission foresaw two possible paths – electrification or  renewable gas – “the renewable gas path is now increasingly unlikely for Victorian households”.

At stake are pipeline networks valued at about $5 billion in Victoria, which has the biggest domestic network, and the equitable treatment of low income and vulnerable households who will have to pay more to access gas networks after richer households and small firms move fully electrify their homes and premises.  

“The issue is that accelerated depreciation right now seems to be the only tool that the AER has, because this is a shit sandwich, right? says Tony Wood, director of The Grattan Institute’s energy program. 

“No one wants to eat it, and you’ve got the government, you’ve got the shareholders and the businesses, and you’ve got the consumers. And we’ve got to decide what we’re going to do about  these assets, which are on the books of these companies for a lot of money.”

Wood says it isn’t fair for either the companies or their customers to bear the full burden, and governments and industry should have started work on solutions two decades ago.

Victoria – the state most dependent on gas for homes, has 2.27 million gas customers, NSW has 1.5 million, South Australia 472,000 and the ACT 157,000. The four jurisdictions’ gas distribution networks are worth a combined $10.4 billion.  

“This thing from AusNet just tells you this is something we’ve got to grapple with, and we’ve got to stop pretending it’s not happening,” Wood says.

AusNet’s pessimistic view of the prospects for renewable gas – including low carbon hydrogen and biomethane – to be part of the clean energy future for Australian households contrasts sharply with industry advocacy. 

Australian Gas Infrastructure Group, which owns Multinet Gas Networks and Australian Gas Networks and is owned by Hong Kong’s Cheung Kong Group, said via a spokesperson: “We continue to advocate for more policy certainty on renewable gases [and] will make future determinations on Access Arrangements on the basis of those policy directions.”

AGIG says on its website it is already delivering a 10 per cent renewable gas mix to 4000 customers in South Australia and targeting 10 per cent renewable gas across its networks by 2030 and 100 per cent renewable gas by 2040 “as a stretch target”. Jemena. With 1.5 million NSW customers, also touts renewable gas on its website.

But AusNet says hydrogen and renewable gases are now “a possible option only for the hard to abate industrial sector”. So-called hard to abate industries such as steel, cement and fertilisers face mounting pressure to decarbonise under the Albanese government’s beefed-up Safeguard mechanism but have limited commercially proven options to do so.  

“Critically, now that a ban on new connections has been implemented, our network must inevitably cease growing and start declining in size. This crystallises that the medium to long term challenge is now managing a declining network,” AusNet’s submission says. 

Victoria’s three gas network owners claimed about half a billion dollars in accelerated depreciation in their original submissions for the 2023-2028 period on the grounds that accelerating household electrification would make it harder for them to recoup their investments.

The AER cut that claim back to $333 million across the three networks, reducing AusNet’s claim from just under $200 million to $105 million.

AusNet’s variation claim would lift the combined accelerated depreciation bill to about $554 million, or more than $100 million a year for the state’s 2.27 million gas households, a sum that could double if the trend spreads to other states. 

States such as NSW and South Australia have baulked at replicating the Victorian government’s aggressive gas substitution roadmap.  

However, subsidies for home and business electrification are in place in several states including NSW, Queensland  and the ACT, and next year’s federal election looks set to feature a major parties’ auction for increased federal subsidies.

AusNet says Victoria’s aggressive electrification push means its previous forecast for growing residential gas customers is no longer credible.

The number of customers  expecting to disconnect from gas within a decade has doubled in two years, and the share of residential development lots expected to be all electric in five years’ time  has quadrupled to 85 per cent as new requirements to charge in full up front for connections come in. (chart)

AusNet said in a statement gas would continue to be use for decades but the company was reopening its access arrangement because “early action helps protect those who remain connected to the gas network in the longer term.

“This includes Victorian industry, for some of whom renewable gas may be the only viable option to decarbonise.”