Jun 08 2023

Gas: Living in interesting times

It’s an interesting period for the gas market. Upstream, price caps remain, and have been extended for another 12 months. As is often the case with price regulations, the question will sit with the Government of the day as to how it can seek to wean consumers off a regulatory mechanism that is no doubt impeding the ability of the market to operate effectively.

While the market realities have evolved slightly since the start of the year, the price caps are continuing to affect the ability of retailers to engage with the large customers that utilise their expertise to manage their gas loads. While there has been plenty of commentary about the cap benefiting very large customers who contract directly with producers and its success in pushing down the wholesale price of electricity, for the most part, gas users buy their gas from retailers. This gas is priced to include the wholesale ‘capped’ price, but also a range of other factors that see the actual price paid looking materially higher than $12. To give some public context to what are confidential negotiations, the Australian Energy Regulator (AER) recently changed their assumptions when they set the final Default Market Offer (DMO), shifting their assumed ‘actual’ cost of gas from $12 to $18 per GJ. Ideally, these issues will be resolved in the new financial year, reinvigorating the market for large users.

At the retail end of the market, there are changes afoot. While the issues that will continue to put pressure on the gas networks and  ‘utility death spirals’ are not new, in recent years, challenges have arisen as a consequence of the broader decarbonisation agenda that weren’t immediately obvious.

A salient example is the process customers can undertake to fully exit the market when they decide it’s time to electrify. Controversies surrounding this process have been discussed publicly, particularly in Victoria, with reports of distribution networks charging customers thousands of dollars to disconnect. It is an often misunderstood fact that when a gas customer is disconnected, gas continues to flow to the property. To stop the physical flow, the pipe from the main line must be capped, and the meter removed to avoid the obvious safety risk that comes from gas being within a property despite it not being used.

Unfortunately, when the gas distribution networks were built, they weren’t exactly planning on people wanting to disconnect en masse, and the process is costly – requiring a truck roll. For a single consumer looking to disconnect from the network they end up faced with a choice; ‘disconnect’ at the meter for a nominal fee but with ongoing connection costs, or actually disconnect by shutting off all flow to their property for thousands of dollars. Not surprisingly, many customers have opted for the former, and many of those who have ended up seeking full disconnection have complained to the media about the exorbitant cost of disconnection forming a material barrier to net zero objectives.

The AER has made a draft decision seeking to solve this challenge, with a short-term solution seeing the costs socialised under the rationale of needing to ensure the network remains safe. This  reduction in costs from current levels to around $220 for a gas service abolishment will be less of a deterrent to degasification. While that might seem a pragmatic solution, the costs involved here are material, and placing any additional burden on customers during a cost of living crisis must be balanced out with the benefits of the policy objective sought.  The AER also provided some acknowledgement that there is a role for government to ensure the gas transition remains affordable.

Almost in contrast to the AER’s draft decision, Jemena Gas Networks in NSW is now offering incentives for customers to buy more gas appliances. This move was dubbed by electrification advocate Saul Griffith as being “like propping up the tobacco industry by giving out free cigarettes”. Jemena says the move will reduce emissions in the short term given gas has a lower footprint than coal. In the near term that may be valid, but given the rapid shift of the grid to renewables and the expectation that it will only increase, it is hard to gauge how much environmental benefit would be realised when an expected gas appliance life might be 25 years.

Energy ministers have announced their intention to amend the National Gas Objective by adding an emissions objective, and how Jemena’s proposal fits with that is therefore still speculative.  How the regulator sees this move in future revenue determinations should Jemena propose approaches to mitigate their stranded asset risks will also be interesting.

On those stranded asset risks, the AER is seeking feedback from stakeholders as to how it should be managed. While moves away from declining block tariffs are slated, the AER is unsure as to how this might impact any network death spiral – highlighting that current cheaper tariffs for high consumers might incentivise consumption and allow for better cost sharing, and  noting that a change to this approach would see large users pay more (to allow smaller users to pay less) that may drive them even more quickly to electrify – exacerbating the spiral.  Similarly, moving from price caps to revenue caps would de-risk the networks from declining loads for the coming 5-year period, but might result in greater jumps in prices year on year.

We can be certain of one thing – gas will continue to find itself being pulled in many different directions in the coming years as Governments, Policy Makers, Industry, and Consumers all work towards an outcome that inevitably will see winners and losers. The challenge will be finding an outcome that doesn’t see consumers overpaying, but also, that allows gas networks acting rationally to be reasonably able to recover the costs of their investments from the likely diminishing pool of consumption and customers.

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