Piped gas network heading for ‘death spiral’ when prices rise, report warns

By Eloise Gibson of RNZ

A report for the Government says connections to the piped gas network could enter a “death spiral” during the final years of moving away from fossil fuels.

It is one of two recent reports suggesting gas prices will rise significantly in the next decade and beyond.

Almost 300,000 homes use gas from fossil fuel fields for heating, hot water or cooktops. Only some regions receive gas by pipes, while others rely on gas bottles.

Two different reports completed in the second half of 2023 looked at the outlook for gas, while the Government and the gas industry worked together on a plan to manage a transition out of the fossil fuel.

Almost 300,000 homes use gas from fossil fuel fields for heating, hot water or cooktops. Photo / 123RF

A December report by Ernst and Young’s Angela Ogier looked at four possible futures and estimated prices could go up 20-40 per cent by 2035, due to rising production costs and carbon prices. Gas prices rose in all four scenarios.

A June report by energy analyst Simon Coates, of Concept Consulting, for the Ministry of Business Innovation and Employment, modelled the impact of rising prices, and warned of a possible “death spiral” during the last five to 10 years of customers leaving the piped gas network.

The Concept report was not included in a proactive release of documents about the gas transition published by the ministry, however, it was referenced in one of those documents and later released under the Official Information Act.

Coates said electric space and water heating was already cheaper than gas for new homes, even without taking into account rising prices for carbon emissions. Heat pumps cool as well as heat homes, which might be important as average temperatures climb, he said.

“Faced with increasing gas prices, we’re likely to see an increasing number of residential, commercial and industrial consumers users switch away to alternatives; however, this has the effect of making the price of gas even higher for those consumers who remain gas users, as the largely fixed cost of maintaining and running the pipelines will be spread over an increasingly small number of customers.”

That “death spiral” could leave pipe companies out of pocket, but Coates said the Commerce Commission was reducing this risk by allowing gas companies to front-load recovering their pipeline costs from customers.

While gas pipe owners are keen on replacing fossil gas with green gas in pipes, his modelling suggested there will not be enough affordable biomethane to replace even current household use, which is about 7 per cent of piped gas demand - unless customers are willing to pay a large premium to keep using gas.

Ogier said her December report did not estimate at what price customers might switch to electricity, and the factors were complex. She said green gas from landfills, plant matter and other sources would give options to customers who wanted to keep using gas, though prices would be “idiosyncratic” depending on the source and production costs.

“Each consumer is going to be in their own space in terms of the importance of gas for them. Have you just gone out and bought a new hot water heater? Have you just got a new cooktop?”

Having access to alternative gases might mean “...a residential customer can keep using a hot water heater for another 10, 15 years”, she said, without having to pay for remedial work on their home.

Ogier said the green gas industry was new, making it harder to gauge how it would develop.

BusinessNZ Energy Council executive director Tina Schirr said it was an “interesting” question who would secure supplies of green gas, because some industries did not have electric options.

“I wouldn’t say they should be prioritised, but I feel like they have the more challenging future ahead, whereas for residential and commercial there are technology options which are already here.”

Climate consultant Christina Hood said people would not have to give up their barbecues or gas hot water cylinders, because bottled gas would be available for many years yet, for those willing to pay.

However, she said landlords or new subdivision developers who were still building in new gas pipes may be locking future inhabitants into an expensive choice given “electric heating and cooking are already cheaper and better solutions for most households”.

Hood said the conundrum of managing the transition without experiencing a “death spiral” was one being faced by many governments, including in Australia.

In 2021, the Climate Change Commission floated the idea of banning new connections to the gas pipeline network after 2025, in a draft advice document, prompting an outcry from gasfitters and pipeline owners. A version of the recommendation made it into the commission’s final advice to the government, but with no deadline and including exceptions for when there is no realistic alternative.

From this year, new gas connections are banned in new homes and government buildings built in the Australian state of Victoria, with the state’s environment chief telling media it made no sense to keep connecting homes to gas when prices would keep rising, while renewable electricity got cheaper. Australian doctors welcomed the move, because of the link between gas stoves and asthma, but opposition politicians said it would drive up energy prices.

The Australian state of ACT had already passed a ban, last year.

Schirr said the Government should try to forge a bipartisan plan for the gas transition, to give businesses and households more certainty. She said “flip-flopping” on gas policy between governments was not helping people plan.

Globally, she said, people were racing to find green alternatives and advance them.

“The writing is on the wall that we have to have a more serious conversation about the alternatives to gas and even more so about how people are actually transitioning away from gas.”