The Australian Energy Regulator says it will be up to governments to “set clear policy direction” for the gas sector as more households ditch the fossil fuel, and bans on new connections spread from Victoria to other jurisdictions.
The AER in June set a $220 standard fee for Victorian households to disconnect from gas in its 2023-28 access agreement. New South Wales is next up, with a decision on its pricing due before next June, with those for the ACT and South Australia to follow a year later.
Actual costs for permanent gas abolition range between $800 and $1,200 per household, and the regulator noted the $220 covered only about a quarter of the cost of disconnecting in Victoria. Remaining users picked up the difference.
AER chair Clare Savage said “socialising the costs” was needed in part to reduce the safety risk of leaving “live” unused assets in place if gas was merely disconnected at the meter, which is a cheaper option.
An AER spokesperson said the regulator had agreed to “a measured start” to allow gas network operators to accelerate the depreciation of their Victorian and ACT assets to balance the impact on short-term prices on their longer-term outlook.
“As we move towards our next gas access arrangement reviews, we are looking at other measures to support this, including the forms of control that apply to gas pipelines and the structure of tariffs,” the spokesperson said.
In July, Victoria banned gas connections for new homes from January, a move that would result in significant emissions reductions. The ACT and some councils in NSW are among jurisdictions looking to introduce gas bans on new buildings.
Gas accounts for about 18% of Victoria’s emissions, and about 200 households per day would need to abandon gas if the state’s homes were to reach net zero by 2050, a recent Grattan Institute report found.
Nationally, some 5m homes are connected to gas. Tennant Reed, an energy expert at the AiGroup, said gas network assets in eastern Australia were worth $12bn, half of them in Victoria.
Moving the goalposts might not only affect future gas investments by increasing uncertainty but also deter investors eyeing other regulated assets, such as the electricity industry, Reed said.
How to handle the potential decline of gas distribution networks and the allocation of costs was “fundamentally unresolved”.
“And resolving it will take policy decisions by governments,” he said. “Regulators can’t handle this adequately alone.”
Dylan McConnell, an energy specialist at the University of NSW, said the AER’s Victoria decision was a “short-term solution” that could cause “problems down the track” unless resolved.
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Socialising costs would have potentially large regressive effects if poorer residents ended up subsidising people who were able to cut gas, McConnell said. There was also the risk of a “death spiral” as the exodus of gas users raised costs for remaining ones, prompting more to follow, he said.
The AER in June conceded that “[f]urther work is required across the sector to develop a more sustainable solution”.
“It is important to start taking small steps now to manage the equitable recovery of those costs from what will be a declining, and sometimes vulnerable, customer base over time,” it said. “It is clear that [gas] demand will continue to fall in the short, medium and long term.”
The Grattan report noted the European Union had set up a regulatory framework fostering greater integration between gas, electricity, and hydrogen markets and systems.
Distribution networks must plan for decommissioning, while governments and network businesses were required to identify efficient costings that protected consumers over the remaining asset life, it said.
Alan Pears, a senior industry fellow at RMIT University, said costs should be spread across all gas and electricity consumers “to avoid equity impacts and creation of barriers to change for individual consumers”.
Such an approach recognised that there were far fewer gas consumers than electricity ones, particularly in some states.
“We are dealing with a fundamental energy transition, not just a shift from gas,” he said in a submission. Given it may end up costing billions of dollars to complete the gas disconnections, there was also an urgency to identify the “innovative least-cost, safe solutions” to do so.