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by Annabelle Powell, Journalist, Energy magazine

The legal framework that underlies the regulation of gas networks was conceptualised with the assumption that future demand for gas would be growing or steady. This assumed paradigm is starting to be challenged as the energy transformation in Australia, including the retirement of fossil fuel generators for electricity and growing investment in renewable energy, gives rise to significant uncertainty in natural gas demand.

Amid this energy transition and the decarbonisation objectives committed by Australian governments, the Australian Energy Regulator (AER) has released a stakeholder information paper on the issues relating to the regulation of gas pipelines.

Regulating gas pipelines under uncertainty examines the factors causing downward pressure on domestic gas demand in Australia’s eastern states, and options to manage the potential pricing risks for current and future gas consumers.

AER Chair, Clare Savage, described the paper as a catalyst for engagement with industry and other stakeholders to understand how regulation can keep up with the pace of change and ultimately protect consumers.

“It’s a timely information paper as the decarbonisation of Australia’s energy market ramps up,” Ms Savage said. “Stranded asset risk is looming as the biggest threat to the gas industry. Gas network businesses invest in assets with fixed costs that last into the next century.

“Maintaining those assets with a potentially smaller consumer base requires new thinking on efficient network investment and how to manage the price impact on consumers and intergenerational equity.

“The purpose of our information paper is to look beyond the horizon to the future and begin asking the tough questions around price stability, affordability and future investment in gas pipelines, and how we might respond to that from a regulation standpoint.”

Key factors decreasing demand for gas

A range of factors are likely to exert downward pressure on natural gas demand in Australia’s eastern states in the medium to long term.

Decarbonization policies

Because of climate change concerns, governments are now progressively making policies to reduce carbon emissions, such as providing incentives for residential customers to install solar photovoltaics and batteries or to increase the energy efficiency of their appliances and homes.

Increasing competitiveness of renewable electricity

Governments’ climate change-related policies have resulted in fast-growing distributed energy resources and renewable energy markets, making renewable electricity more competitive against natural gas at both the retail and wholesale levels.

Energy efficiency improvements

Improving energy efficiency is encouraged as a key measure to reduce natural gas demand and carbon emissions. Technological improvements in the efficiency of electrical appliances may make them cheaper and more environmentally friendly to use, compared with gas appliances.

Uncertainty in future gas prices

Uncertainty in future gas prices, or an expectation of rising gas prices, can influence consumers’ investments in gas appliances and gas consumption.

Consumer sentiment towards gas

As climate change awareness continues to grow and electricity becomes more competitive compared with natural gas, some consumers may consider switching away from gas (or fossil fuels) independent of governments’ climate change policies.

Corporate and investor activism

As the impact of climate change is increasingly felt, there is growing social pressure on corporations to invest and operate in a way that is consistent with environmental sustainability as part of their corporate social responsibilities.

Demand for gas to generate electricity

Gas plays a critical function in electricity generation. As a result, gas-fired generation often impacts the marginal price for wholesale electricity.

Impacts on customers and networks

If renewable gases do not become commercially viable in a timely manner, the AER finds there may be a substantial decline in the demand for gas network services in the period leading up to 2050. The report explores the following impacts on the industry:

Fewer customers to share fixed network costs

As more customers leave the gas network, there will be fewer customers to share the fixed costs of gas networks.

Cost burden of unpaid past investments may shift to future gas customers

Customers who leave the gas networks may not have contributed sufficient incremental revenue to fully pay off the capital investments incurred for their gas connection and network services, and remaining customers in the network will have to shoulder that burden as those costs remain in the regulatory asset base (RAB) until fully depreciated.

Potential economic stranding of gas infrastructure assets

With the prospect of a shrinking customer base and increasing competitiveness of alternative energy sources, regulated gas businesses face a risk that they may not be able to recover the costs of their efficient investments and may become economically stranded.

Price volatility or uncertainty may drive further decline in demand

If future gas demand is expected to fall substantially or is highly uncertain, with corresponding expectations of price increases or price uncertainty, consumers may perceive a higher risk or cost associated with investment in gas appliances.

Potential solutions through regulatory actions

The AER discusses eight potential options of regulatory actions that may be appropriate to promote the efficient investment in, operation and use of gas networks while maintaining reasonably affordable and predictable gas access prices, noting they are not mutually exclusive:

» Adjusting regulatory depreciation

» Compensating for stranded asset risk

» Removing capital base indexation

» Sharing costs under capital redundancy provisions

» Revaluation of asset base

» Introducing exit fees

» Increasing fixed charges

» Maintaining status quo

These options are all different ways of bringing forward the recovery of costs or recognising greater risks in future decisions.

Opportunity for stakeholder engagement

Stakeholders are encouraged to consider the analysis and issues set out in the information paper and provide their views in the AER’s access arrangement review processes, with respect to the specific circumstances of the relevant regulated gas network business.

Ms Savage said, “I commend this information paper as a starting point of a wider ongoing discussion on how we may navigate through the uncertainties and the transformation of the industry to a low carbon future.”

In an access arrangement review, the AER sets the amount of revenue that a gas network business can recover over a five-year period from its customers using its pipelines.

The Victorian gas transmission review commenced in December 2021, while the distribution access arrangement review is set to begin in July 2022.

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