Australian regulator warns of gas stranded assets

Australian gas pipeline infrastructure may become stranded assets as the economy moves to lower greenhouse gas (GHG) emissions-intensive energy sources, with the Australian Energy Regulator (AER) suggesting policies and rules to manage this energy transition.

Australia's energy system is transitioning from a centralised, fossil fuel-based system to a decentralised, renewables-based system, the AER said in a discussion paper. This transition is part of a broader, global movement towards GHG emissions reduction, with domestic gas demand expected to fall given the Australian federal government's plan to move to net zero GHG emissions by 2050.

"Australia's transmission and distribution networks, both electricity and gas, need to adapt to facilitate this transition but this will be challenging," the paper said. The Australian government said modelling, which was largely done by external consultants for its 2050 net zero target, suggested domestic gas production will rise until 2040.

Not all gas applications can be substituted by electricity, especially for industrial users. The potential for hydrogen produced from renewable sources and bio-methane to replace natural gas in various applications, including reticulated gas, are currently being explored, the AER said.

"Such uncertainties surrounding the future gas substitution pathways make it extremely challenging to manage growth in the gas market currently, while being mindful to the risk that there may be little remaining customers to pay for gas infrastructures in the future."

The AER has made no decisions on how to manage the energy transition, as it has asked the industry to provide some feedback but it has made some preliminary views on the issue.

"Our preliminary view is that some form of accelerated depreciation would be appropriate if there is sufficient evidence to demonstrate and quantify the pricing risk and stranded asset risk arising from demand uncertainty."

Accelerated depreciation allows the regulator to respond to the forecast change in demand in a pragmatic manner, adjusting tariffs over time to facilitate an equitable and efficient allocation of costs between current and future gas customers, the AER said. Adjusting depreciation offers regulators the greatest flexibility in responding to new information in the future, if the natural gas substitution pathways or actual demand turn out to be different than expected, it said.

Price warning

The AER also warned that gas prices in east Australia are expected to remain at elevated levels in the decades to come, given the region's remaining commercial gas reserves were mainly from unconventional sources with no associated liquids and were often far from demand centres in the southeast of the country.

The Argus Victoria natural gas index was last assessed at A$9.08/GJ ($6.59/GJ) on 12 November, up from A$6.77/GJ at the start of the year. Victorian gas prices averaged A$4.21/GJ in 2013, which was the last full year before LNG exports started at the Queensland port of Gladstone. The start-up of LNG is seen as the main factor driving up east Australia gas prices, as around 75pc of regional production is used as feedstock for the three LNG plants at Gladstone.

East Australia still has significant supplies of gas, although they are typically unconventional coal seam gas that is more expensive to produce than conventional gas. "The higher marginal cost of unconventional gas production means that domestic gas prices are expected to remain higher than pre-2015 levels over coming decades," the AER said.

By Kevin Morrison