A new study has found that it no longer makes economic sense for new houses or existing houses without a gas connection to bother with connecting to the gas pipeline network. It also found that even houses already connected to gas should steadily withdraw from using gas for space heating in favour of using reverse-cycle air conditioners.
The study, entitled Are We Still Cooking with Gas? was prepared by the Alternative Technology Association supported by the energy market’s Consumer Advocacy Panel.
It looked at a range of different household situations to evaluate the economics of using gas relative to electricity for the purposes of space heating, water heating and cooking. This included taking into account household size, a range of location across the National Electricity Market including gas prices relative to electricity prices in these locations and climatic conditions, as well as whether the home was already connected to the gas network and whether replacement also involved completely avoiding fixed gas network connection charges.
The report busts pre-existing entrenched views that gas is a cheaper and more convenient option than electricity once you take into account the availability of highly efficient reverse-cycle air conditioners as well as affordable electric induction cooktops.
The report findings are ominous for owners of gas pipeline infrastructure serving the residential sector. It essentially finds that gas is finished in terms of expanding connections beyond existing customers, stating:
Installing new gas appliances and connections can no longer compete with installing efficient electric alternatives in any case.
The report also concluded that:
It is significantly more cost effective to replace gas heaters with multiple reverse cycle air conditioners (RCACs) for space heating, in any case.
The report found that in each of the 26 gas zone locations modelled, there were positive net present values over 10 years for switching space heating from gas to RCAC, where the existing gas heater is within five years of end of asset life (based on home mortgage rates of interest on finance). It also found some of these geographic zones achieved less than five-year payback and particularly in warmer climates, switching space heating from gas to RCAC achieved positive economic returns regardless of the age and condition of the gas heater.
Given that space heating is probably the biggest driver of gas consumption in most homes connected to the gas pipeline network, the results suggest a death spiral is imminent for gas utilities. A very large proportion of the cost of gas supply to residential consumers is the fixed cost of the pipeline infrastructure. As homes switch over to air conditioners for heating, there will be a large loss of gas volume meaning significant prices hikes will be required to recover the fixed costs of the pipeline infrastructure. This is likely to only encourage further switching away from gas to electricity leading to a downward spiral for residential gas utilities’ revenue.
Thankfully for many of them they also own electricity businesses, so they should see some growth in electricity offsetting losses in gas. SP Ausnet, Jemena and Actew AGL for example all have electricity businesses. How this switch from gas to electricity will play out for their bottom line however is likely to be far more complicated than a simple one dollar of gain in electricity for every dollar lost from gas. Hopefully some enterprising equity stock analysts will soon have this worked out.