As the Government looks to phase out fossil gas use, the Commerce Commission has tightened allowances for investment in gas infrastructure to avoid stranded assets, Marc Daalder reports
Gas transmission and distribution businesses will be able to charge more for their services to more quickly recover the cost of their investments, as the Commerce Commission eyes artificially-shortened economic lives for fossil fuel assets.
The regular Commerce Commission review of gas price-quality paths will see the average annual gas bill rise by $48 a year over each of the next four years, from $1246 currently to $1438 in the year ending 2026. The unusually steep rise, which would have equated to a 15 percent increase in real prices if introduced all at once, will be phased in to minimise the pain to consumers.
In its final reasons paper, the commission said the sharp one-off increase was necessary as a result of the changed outlook for fossil gas use in New Zealand. Previous rounds of maximum price setting had assumed that gas assets would reach the end of their economic lives when they reached the end of their physical lives.
"Prior to this [default price-quality pathway], our approach to asset lives assumed that GPBs [gas pipeline businesses] will provide services for decades to come, and their assets will have economic lives approximating their physical lives. But with expectations for declining demand, the Government wanting to phase out the use of natural gas, and the potential for network closure, gas pipeline assets will now have a shorter expected economic life conveying natural gas than previously assumed," the commission explained.
"Accordingly, we have shortened the regulatory asset lives of the network to better match the period during which the network is still expected to convey natural gas."
Such a move would see gas pipeline businesses lose out if price controls were only raised on previous trends. The large price increase will help businesses recover the cost of their assets on the shortened timeframe and retain incentives for appropriate investment in new infrastructure and maintenance.
The commission said it didn't expect future price control reviews to lead to similarly steep increases.
The new controls also set tighter limits on capital expenditure for the next four years, requiring businesses to invest 14 percent less in their networks than planned.
"We do not consider it appropriate to allow more capex than the historical average. This reflects expectations of a future decline in the use of natural gas," the commission wrote in its reasons paper.
"Our decision ... does not guarantee GPBs will recover their investment, only that they will have a reasonable opportunity to do so. GPBs should therefore continue to act and invest prudently, noting the expected move away from the use of natural gas, and use risk-based assessments to prioritise capex to maintain safe and reliable networks."
Associate commissioner Vhari McWha said the decision "balances price rises for gas users with the need for gas pipeline businesses to continue to invest appropriately to maintain safe and reliable supply while there is still demand for natural gas. Demand for natural gas is expected to decline in the long term.
"In setting the default price-path we have considered a range of future scenarios for the sector – including the risk of whole or partial closure of the gas network – alongside the impact on households and other users of natural gas. The final default price-path we have announced today reflects that the remaining life of the natural gas pipelines in New Zealand is likely to be shorter than previously expected."
In its advice last year, the Climate Change Commission recommended the Government ban new connections to the fossil gas network by 2025 to avoid investments by consumers in stranded assets. The Government kicked that can down the road in its Emissions Reduction Plan in May, saying that it would be considered as part of the broader future of the gas industry in a new Gas Transition Plan.
"I've thrown it back on the industry and said to them, come up with a plan and demonstrate to us how you're going to use your infrastructure in a decarbonised New Zealand," Energy Minister Megan Woods told Newsroom after the release of the climate plan.
"Rather than saying no new connections, saying, here's an infrastructure, show how it fits into a decarbonised future. So it's on them. If it's a stranded asset, it's a stranded asset, no one wants to prolong that. But if there's still a useful life for that asset in a decarbonised world and it becomes a transmission network for renewable gases, then why would we throw the baby out with the bathwater?"
A report commissioned by the Government on the potential for green hydrogen to be used in New Zealand found it was "unlikely that 100 percent hydrogen for domestic and commercial combustion uses will be a major use case in New Zealand in 2050 because direct electric alternative options are available".
Gas businesses had written to Energy Minister Megan Woods last year asking her to consider deferring the price control review. They also said that even a steady phase-out of gas use in New Zealand by 2050 would prevent them from fully recovering the costs of their assets under the existing regulatory framework.
However, officials told Woods in a briefing obtained by Newsroom that delaying the review wouldn't help the sector. Officials also recommended any changes to the Commerce Commission's oversight of gas pipeline businesses come after the Energy Strategy and Gas Transition Plan were finalised.
Energy Resources Aotearoa, the oil and gas lobby group, said on Tuesday that the Commerce Commission's price control decision shows the complexity of decarbonisation.
"The decision is a wake-up call for Government that their words and decisions have profound consequences for businesses and households," chief executive John Carnegie said.
"The Government rightly walked back from the Climate Change Commission’s proposed ban on new gas connections, but the spectre of intervention nonetheless persists in the proposed Gas Transition Plan."
GasNZ chief executive Janet Carson said that gas - whether renewably sourced or fossil - wasn't going anywhere.
"New Zealanders who are connected to gas now - or are thinking about connecting - can be sure that natural gas and LPG will keep flowing as we make the shift to renewable gases," she said.
The Commerce Commission will next review price controls in the gas pipeline sector in 2026 - the soonest it can under current legislation. Woods said she would speak with Commerce Minister David Clark about the possibility of bringing the review forward if the Gas Transition Plan raised new issues that needed to be addressed sooner.
