How Australia’s most advanced renewables state has dropped the ball on the gas network death spiral

Demand for gas from households and business in South Australia is forecast to fall by 20 per cent over the coming five years, even despite the state’s bizarre planning rules and complete lack of policy incentives to transition consumers away from the fossil fuel.

The Australian Energy Regulator (AER) on Thursday published its final determination on the revenue the state’s gas network company, Australian Gas Networks AGN, can recover from its customers in the five-year period from 2026 to 2031.

The AER’s final decision for AGN allows for $1,370.3 million in total revenue to be recovered from consumers over the period – slightly less than what AGN was seeking – as the regulator seeks to balance ongoing efficient investment in the network with “uncertainty associated with the energy transition.”

The “uncertainty” refers to the outlook for just how quickly AGN’s roughly 480,000 customers will abandon its SA network of 8,510 km of gas pipelines, as they swap out the 25,542 terajoules (TJ) of gas consumed in 2024 for cheaper and cleaner solar and battery-backed electricity.

In its determination, the AER says that demand is forecast to decline faster than revenue over the 2026-31 period, resulting in AGN’s tariffs increasing by an average of 3.9 per cent each year.

“We estimate this will result in the distribution component of an average annual gas bill increasing by $26 for residential customers and $266 for small business customers,” the regulator says.

Adding to the uncertainty in South Australia is the stark contrast between the state’s ambitious policies for decarbonising its electricity supply – SA is well on track to achieve its target of 100 per cent net renewables by next year – and the complete absence of policies to wean the state from fossil gas.

“South Australia does not have specific policies in place to incentivise customers to transition away from gas,” the AER observes. “Indeed, the South Australian government has initiated legislative support for large-scale hydrogen and renewable gas projects. 

“However, even with this policy support AGN expects both overall gas demand and usage per customer to continue declining across all customer groups over the 2026–31 period. For example, AGN expects residential demand to fall by around one-fifth over the 2026–31 period.”

South Australia’s planning laws are, likewise, running counter to the trend of electrification, with a report last week noting that residential property development rules in the state still make gas the default utility for new homes, rather than offering a choice.

This is a far cry from the policy in Victoria, where new-builds are almost entirely banned from connecting to gas. And yet, even despite the apparent free pass, households and businesses in South Australia are still leaving the gas network quickly enough that it’s creating a headache for the AGN and the regulator.

The AER notes that AGN has also revised down its asset depreciation proposal, based on updated forecasts that its customer base will decline faster than previously assumed. And it is expecting “substantially less growth capex” once new rules kick in, this July, that will see customers foot the bill for new residential or small business gas connections.

It had proposed an increased $70 million in accelerated depreciation, saying this was the minimum amount needed to support the flexibility intended within the regulatory framework, as well as to mitigate risk both to AGN and its consumers.

The AER has wound up approving a much lower $29 million in accelerated depreciation for AGN, but then topped up its forecast opex by an additional $22.8 million to help pay the expected costs of customer connection abolishment.

The AER notes that that while the Australian Energy Market Commission has made a rule requiring customers abolishing their gas connections to pay the cost-reflective charge for this, this requirement will be imposed for the 2031–36 period for AGN.

“For this 2026–31 period, our final decision has accepted AGN’s initial proposal to partially socialise its abolishment tariff.”

Ultimately, the AER says its decision “recognises that future demand for gas in South Australia is uncertain.”

“Ensuring consumers pay no more than necessary for safe, reliable and secure supply is important when faced with the uncertainty of a future network,” says AER board member Lynne Gallagher.  

“Some accelerated depreciation is appropriate to support efficient investment and maintain safe and reliable gas services.

“At the same time, uncertainty about declining demand, cost recovery and future prices means caution is needed in considering additional accelerated depreciation. Retaining flexibility allows us to reassess the role of accelerated depreciation during the transition,” Gallagher says.

Adam Collins, the executive manager of advocacy and policy at Energy Consumers Australia says the AER’s decision on AGN further underlines the urgent need for governments to actively plan for the future of gas networks and to ensure the costs of the transition are shared fairly. 

“While we are disappointed with the decision to require today’s gas consumers to pay more to mitigate network losses in the future without further consumer protections, we welcome the AER’s clear acknowledgement that accelerated depreciation is a limited tool that will need to be reassessed during the transition,” Collins said.  

“Households and small businesses shouldn’t have to bear an unfair burden of the costs and risks associated with gas networks in decline. We endorse the AER’s call for open discussion between consumers, networks and government on how to fairly manage the costs of declining gas networks.  

“Today’s decisions show that governments need to be actively managing the future of gas networks to ensure consumers alone are not left holding the bill.” 

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