Electrifying moves

This week the ACT Government announced increased support for residents to electrify their homes and move away from gas. More broadly electrification of homes continues to be the subject of much discussion with a new Grattan Institute report recommending ways to encourage households to shift away from gas and the announcement on 14 June of a Senate inquiry into the electrification of homes.

The Senate inquiry will be conducted by the Economics References Committee and has been asked to consider the benefits and constraints on greater electrification of homes. It is due to report by the last sitting day in 2024.

The impetus towards greater electrification has also prompted the Australian Energy Regulator (AER) to review the form of gas distribution regulation, exploring whether a shift from price caps to revenue caps, and from declining block to inclining block network tariffs is justified in their issues paper. Below we take a closer look at the new developments and some of the implications.

The Demand Spiral

The existing price cap mechanism quite sensibly incentivised gas distributors to increase the volume of gas carried on their networks, while existing declining block tariff structures encourage customers to consume larger volumes of gas. This approach increases asset utilisation and results in overall lower costs to consumers consistent with the historical objectives of the National Gas Objective (NGO). The AER review stems, in part, from an announcement by energy ministers that the NGO will be amended to incorporate an emissions reduction objective. And the fact that some states and territories are moving to introduce policies encouraging gas customers to switch to electricity is also at play.

A key issue for the AER is the impact of falling gas demand as electrification gains momentum. In that scenario as the number of gas customers falls those who remain connected to gas networks will be exposed to price increases to support the existing network. That in turn can be expected to encourage more households to shift away from gas, a demand spiral down. The AER is seeking to determine how that is best managed to mitigate consumer impacts as well as the potential stranding of network assets. Its current review is considering whether falling demand could or should be managed through tariff changes. It seems unlikely that there will be extreme changes in consumption that leads to stranded assets in the near term, or that the shift will be unmanageable in the next regulatory period. In these circumstances it seems that accelerated depreciation is likely to be able to manage any stranding risks for now.

Jurisdictional Moves

To date, only the ACT has announced a firm timetable on electrification - it wants to have all gas connections come to an end by 2045, which is also the target date for it to reach net zero emissions. Other jurisdictions, such as Victoria are encouraging a move away with gas through initiatives like its gas substitution roadmap which included changes to planning provisions to remove the need for new residential developments to have gas connections but have no hard target dates.

Gas accounts for more than 20 per cent of the ACT’s carbon emissions, so to support its target, the ACT’s latest budget includes additional funding for the 2045 end date for gas connections with total investment of $280 million. The aim is to support more households to upgrade to electric heating and cooling, install hot water heat pumps and electric cooktops. At the same time the ACT has announced it will invest almost $70 million to electrify government-owned and operated buildings. This will involve the replacement of gas with efficient electric heating and hot water systems across a range of Government buildings such as schools, hospitals, emergency services and government offices.  

Eligible ACT households can get a loan from $2,000 up to $15,000 to install one product or a bundle of products from the following eligible energy efficient options::

• electric heating and cooling systems.
• hot water heat pumps
• electric stove tops.
• electric vehicles.
• electric vehicle chargers.
• rooftop solar panels.
• household battery storage systems.

The ACT is the jurisdiction most advanced in its targets and commitments to electrification. But other states could and should follow, as Grattan recently reported.

“Get off the Gas”

The Grattan Institute’s latest report “Getting off Gas” suggests (amongst a range of recommendations) a six-pronged strategy be adopted to tackle the “big task” of moving to all-electric homes. These were:

• State and territory governments should provide certainty about direction and timing by setting dates for the end of gas.
• Prepare and rollout long-term communications campaigns on the reasons for switching.
• Ban new gas connections to homes and small business, starting now.
• Remove regulatory barriers to electrification.
• Reduce cost hurdles. Given electric cook tops, heating and water heaters can be more expensive than their gas equivalents, Grattan suggests the states pay for upgrades to social, community and indigenous housing, as well as provide low interest loans or similar financing arrangements for homeowners and tax incentives for landlords.
• Phase out the sale of gas appliances at some future date.

Aside from expected greenhouse gas emissions benefits, part of the argument mounted for all-electric homes is that households will save on their energy bills. Grattan argues that the lower running costs of efficient electric appliances will allow households to recover the upfront cost and more over the life of the appliance – savings are highest when heating, water and cooktops are switched. The range of projected savings is shown in figure 1 below.

We should not underestimate this task. Gas supplies an estimated 61 per cent of the energy to heat Australian homes, and  accounts for around 47 per cent of cook tops. Gas also supplies the majority of energy for water heating in households.

Figure 1: Household savings from upgrading to electric appliances over 10 years

Note: Includes upfront cost in savings calculation.

Source: Grattan Institute 2023

Any savings depend on local factors. For example, gas in Western Australia is considered relatively cheap, and homes that do not upgrade to the most efficient electrical appliances may not realise the full potential of savings from electrification. But the overall analysis indicates that electrification in new builds and in appliance replacement at the end of life should benefit households.

A big obstacle to converting to all electric will be the upfront costs of new appliances and economic losses incurred from replacing equipment early. Some of the energy supplied by gas is likely to be electrified through natural attrition – increased penetration of reverse cycle air conditioners, increased installation of solar PV or heat pumps - and this is likely to continue to be augmented by government policies and initiatives. But for many households the capital costs to get off gas will simply be too high if they are required to fund appliance changeovers alone, and so the ACT scheme provides one way of helping customers get off gas.