Death spiral of gas networks is the “500lb gorilla” standing in way of energy transition. Here’s a solution

It must be nearly two decades now since we first heard talk about the “death spiral” of energy networks. It first came to be used for the electricity grid, but it seems that the industry has sorted itself out, accepted rooftop solar and consumer energy as a thing, and found a way to move forward.

Now it’s the turn of gas pipeline networks. And given that state and territory governments, and green energy advocates, have decided that the use of fossil gas is no longer acceptable in homes and many businesses, its death spiral looks inevitable. But, unless something is done about managing it properly, it could be costly and ugly.

Ron Ben-David, a long time regulator, former chair of Victoria’s Essential Services Commission, and now at Monash University, has decided to go where current regulators fear to tread, and has come up with a radical proposal that could – underline could – offer a solution to the problem.

So what is the problem? Basically, it is that gas networks are regulated assets, built by transmission companies on a regulatory promise that they will get a guaranteed return over the many decade life of the asset. That cost is shared among all gas customers.

But as households and businesses choose or are encouraged to quit gas, and electrify their homes and businesses, that leaves fewer customers to pay the bill. Prices go up, and more customers want to leave. The issue and costs snowball, developing what is commonly referred to as the “death spiral.”

The only solutions put forward so far are nothing more than bandaids. And, as Ben-David points out in the latest episode of Renew Economy’s weekly Energy Insiders podcast, the regulators admit it.

Requests to allow “faster depreciation” – effectively gas network operators asking for permission to charge higher fees earlier – will likely accelerate that death spiral. But Ben-David says it needs to be solved, or the whole energy transition may be stopped in its tracks.

“I can’t say if that point of failure is 10, 20, or 30 years away, and I can’t even tell you exactly what it will be, but it is inevitable that we will reach a point of failure,” Ben-David says.

“And if the gas networks begin to fail, or even if the community and governments just start fearing this failure, support for the gas transition, and therefore the entire energy transition will falter and potentially evaporate.

“We need to resolve the RAB (regulatory assets base) problem, the death spiral, accelerated depreciation, accelerating prices. But no one is confronting this problem. We’re living in a state of denial. No one is dealing with it, not the AER, not the AEMC, not the ministerial council, no one.”

Ben-David refuses, unlike others, to accept that accelerated depreciation is inevitable, and has produced a unique solution that basically involves re-assessing the value of the reticulated gas networks every five years, for example, and putting the difference into a new asset, that would then be auctioned.

It solves two problems. It compensates the gas networks for their investment, and protects the integrity of the regulated asset base, and regulated investments in general. But who bears the cost?

The interesting part of Ben-David’s idea is to have the electricity distribution network underwrite these new financial assets, and pay the interest on them.

Rules will need to be changed to allow the electricity network networks to pass this cost through to electricity customers, but Ben David is convinced that the cost of this can be managed and contained.

Of course, it does raise a heap of issues, and Ben-David admits it will not be easy. It’s hard to imagine electricity networks jumping at the idea, or even consumers in some parts of the country who have never had a gas connection agreeing to subsidise the cost of gas networks for others.

There are probably around $12 billion of regulated assets in gas networks in the country, a fraction of the $100 billion or so in electricity networks, so it may be that the cost can be amortised.

Inevitably, though, it will involve some cost to someone. Most importantly, Ben-David says the political economy means that politicians will not want to stand by and do nothing and watch gas costs soar more than they already have. And a fossil bailout may not be palatable.

“When all this was set up back in the 90s, we thought we would be on gas forever more. And not only did we think we would be on gas, we thought the gas network would continue to grow indefinitely.

“So it was set up in that in a totally different era when expectations were totally different. And the problem is the world changed, and that’s why the regulators, the AEMC, the AER, AEMO, are all struggling to work out how to modify their frameworks to deal with the reality that we now face rather than the reality that we thought we faced back in the 1990s.

Ben David says he is open to other suggestions. But he insists that something needs to be done, because if it is not, then the issue will remain as one of the most significant barriers to the entire energy transition.

“I don’t say it is an easy solution. I say it is a possible solution,” Ben-David says.

“And like I said, the cost has to go somewhere, and we’ve got to decide where it goes, and we’ve got to put in place now a plan for dealing with it, because it’s a problem that gets worse with each year or each five year regulatory reset period where the regulator faces special pleadings from networks.

“We need certainty, because otherwise we’re going to get stuck in a spiral, and before too long, it will become a hot issue. It’ll become an unsustainable issue.”

You can find a copy of Ron Ben-David’s paper here, and you can listen to his discussion with David Leitch and myself on the latest episode of Renew Economy’s Energy Insiders podcast.