Gas network death spiral: Pressure mounts to protect consumers from cost of stranded assets

Pressure is mounting on the energy market rule maker to shield consumers from carrying the cost of an unregulated and mismanaged gas network death spiral, as the fossil fuel is increasingly phased out of homes and businesses and electrification gathers pace.

Energy Consumers Australia is proposing four rule changes, now in the Australian Energy Market Commission (AEMC) queue, to rein in gas networks’ attempts to pump current customers for the future cost of redundant infrastructure.

The proposed new rules would require gas networks to identify areas likely to disconnect from the residential gas network in the near future and to add declining use as a criteria for deciding whether a capital investment should happen.

The suggested reforms also call for a tightening of accelerated depreciation rules so consumers aren’t charged if networks don’t have a plan in place to reduce the risk, and a plan to make users pay up front for new connections so the cost isn’t socialised across existing consumers.

The goal is to prevent small business and consumers across Australia being left carrying the cost of stranded gas networks, says ECA general manager of policy Brian Spak.

“We don’t mean to imply that there shouldn’t be any new spending on gas networks… but we have to be really careful to avoid any expenditure that doesn’t serve those things,” he told Renew Economy.

“The stranded asset risk exists and there’s fairly straightforward steps that should be taken to protect consumers. There are two main things we need to do, we need to be very careful about any new capital spending on gas networks.

“The other thing is we need to plan gas networks, period. It is remarkable that there is a long list of planning processes for electricity networks such as the RIT-D [Regulatory Investment Test for Distribution]… but none of those frameworks exist for gas networks.”

Spak cited the peninsula-like Newcastle East suburb as an example of how gas networks should be planning for the future: as connections fall, it won’t be worth spending large sums to keep one or two houses at the end of the line in gas so networks and governments should have the information to hand to proactively manage that.

In Victoria, network operator AusNet notes that gas is still very much an essential service in the state and will be for decades to come.

“Our priority is to support our customers, including continuing to invest where necessary to maintain a safe and reliable service,” a spokesperson for the company told Renew Economy.

“We look forward to engaging in the consultation with the ECA, the AEMC, and the rest of the industry on these proposed rule changes. Maintaining a safe gas network, supporting price stability, and seeking equitable outcomes for customers through the energy transition will require ongoing dialogue and a coordinated approach.”

Making gas networks justify future risk

Fixing the “inconsistent” approach to capital investment and managing stranded asset risk is key to protecting consumers from being gouged by gas networks, Spak says.

The ECA proposal notes that currently, consumers are exposed to future asset risk while also paying for accelerated depreciation on those assets.

“While the relevant regulators – the Australian Energy Regulator (AER) and the Economic Regulation Authority (ERA) of WA – have used their powers under the Rules to reduce capex claims, we are concerned that this does not result in a significant enough reduction in expenditure,” the ECA says.

Electricity network companies must justify their spending via tests such as the RIT for distribution and transmission, but there is no gas equivalent to share or even develop plans showing how their systems will be used or needed in future. 

“Gas distribution networks do not share maps of their network indicating where many consumers still exist and where only few are left, nor do they make forward looking projections about where they anticipate disconnections to happen most quickly,” the ECA says.

“They also fail to provide insights into gas pipelines that may require replacement beyond the five-year cycle of their existing access arrangement. Such information would be valuable.” 

Declining use

Gas network use is already declining, something AusNet admitted to the Australian Energy Regulator last year.

But despite that risk, the ECA says gas distributors are still using regulatory processes to continue spending on their networks and asking for consumers to pay for the risk that these new assets will also be stranded via accelerated depreciation. 

These allowances are being sought, but without public plans to identify which parts of their infrastructure might be stranded in future, Spak says.

For example, in Western Australia the regulator said in 2024 that households must accept rising costs each year to pay for gas networks’ death spiral.

AusNet’s bid to charge its gas customers an extra $70 million to recover the cost of pipeline assets left stranded by Victoria’s push to household electrification, however, was rejected in February.

But AusNet’s spokesperson says it is using metrics that take into account declining use.

“AusNet uses a range of inputs to inform our investment plans, including forecasts for gas demand on our network. Our recent variation proposal to our GAAR 2023-28 proposed lower connections capex and lower augmentation capex in line with lower expected demand in the coming years,” the spokesperson said.

Shouldn’t be a surprise

The ECA rule changes are likely to ruffle the feathers of gas network companies, but shouldn’t come as a shock. 

The Australian Energy Regulator warned of future rule changes in 2023 – after declining to do anything about the emerging problems itself.

And change is already coming from governments.

Victoria capped disconnection fees in 2023 and requires new connections to be paid for up front. New South Wales (NSW) is planning to have a gas roadmap similar to Victoria’s in place by 2026.

But action is piecemeal and slow and existing gas users are bearing the financial brunt of shrinking networks. 

Australian residential and commercial gas use is expected to decline 72 per cent by 2043 and to be largely non-existent by 2050 as households and businesses electrify and leave the gas network, the ECA says.