The household exodus from gas

Rising prices, stagnant technology and fixed charges mean gas appliances are no longer the most economic option for an increasing portion of households. A death spiral could await for gas suppliers.

Conventional wisdom tells us that having access to mains gas equates to a more affordable energy supply, particularly in cool climates with higher space heating requirements. Many householders cook and heat their water and homes with gas, and historically have enjoyed lower energy cost than if they used electric appliances for the same purpose.

However, groundbreaking research being undertaken by the Alternative Technology Association confirms what some of us have suspected for some time – buying a new gas appliance today is no longer the most cost-effective choice a householder can make in the long term.

While the ATA’s research continues – particularly, to clarify which existing dual-fuel households should move away from gas altogether and which are best served by retaining their gas connection – it has become clear that connecting a new or existing home to the mains gas network today is now the most expensive long-term energy supply option.

One reason for the changing economics of gas is the imminent impact of LNG exports on residential natural gas prices. At the same time, electricity prices are beginning to plateau and may even fall.

Gas prices rising, electricity prices may fall

While price forecasts differ, it is clear that the days are over for cheap household gas. NSW utility regulator IPART’s decision last week to approve gas price increases of over 17 per cent for NSW consumers heralds permanently higher prices for gas consumers in eastern states. Estimates suggest many residential gas consumers will face real gas price increases of up to 50 per cent within the next few years.

Conversely, the Australian Energy Regulator’s recent draft price determination for NSW and ACT electricity distribution businesses highlights the stabilisation, and possible reduction, in electricity tariffs across Eastern Australia over the next few years. Further, the Australian Energy Market Commission is considering changes to the National Energy Rules that would lead to reductions in energy volume-based charges in favour of fixed or kW demand-based charges. Even if these decreases are tempered by the electricity market 'death spiral', or other external forces, it is highly unlikely that energy volume-based charges will increase materially in the longer term.

While permanence has proven not to be a feature of the energy system, these relative price changes of gas and electricity in eastern Australia are unmistakably long-term. With appliances for heating and cooking often lasting 10 to 15 years, long-term running costs need to be factored in when people buy household appliances today. 

Changes to fuel costs alone aren’t sufficient for tipping the scales in favour of electricity in the areas currently served by gas networks (particularly those in southern and inland Australia which have high space heating needs). Innovation and efficiency improvements to electric appliances are also part of the equation.

Electric appliances getting better, gas appliances at their limit

When the only electric appliances available for cooking and heating were resistance-based (heating an element), gas was the clear winner. Today, though, the scales are tipped in favour of newer electric products which are efficient and cheaper to buy while offering comparable performance, acceptable reliability and greater versatility.

The efficiency of heat pumps used in hot water systems and split-system reverse cycle air-conditioners has been steadily improving, and today some can exceed a Coefficient of Performance (CoP) of 5.0 – for every kWh of energy input to the system, more that 5kWh is transferred to heat air or water. Compared with the equivalent gas appliance with a CoP of around 0.8, an efficient air-conditioner or electric water heater now uses 70-85 per cent less energy than the equivalent gas system to the same end. And while CoPs for electric appliances will continue to improve, gas appliances are forever limited to about 0.9 at best.

Reliability is an issue that can’t be ignored: with many moving parts and sealed-in fluids, heat pump hot water systems come with higher maintenance costs and shorter asset lives than gas water heaters. This has improved as the industry matures: while the quality still varies between manufacturers, better systems have acceptable reliability, and this is reflected in better warranties.

In the absence of major technical innovations or improvements to manufacturing, the purchase price of gas appliances has changed little in recent decades while electric equivalents have dropped markedly.

Electric appliances are also coming out on top in versatility and value-add. Efficient air-conditioners can improve zoning (heating only the spaces that need it) which further reduces running cost and, in providing cooling, eliminates the need for a separate cooling appliance.
While space and water heating with electricity is a no-brainer, the gas fuel cost of cooking is likely to remain similar to the electric equivalent, induction cooktops. What does this mean for consumers?

Ditching the fixed charge: now we’re cooking without gas

In a new home, an induction cooktop can be installed at a comparable upfront cost to a gas cooktop when taking into account piping/wiring costs. So the electric option is cost-competitive in the longer term regardless of other considerations.

But for a home that uses gas today, installing an induction cooktop incurs additional wiring costs and, sometimes, further electrical costs in older homes as well as an upgrade of cooking utensils.

The ATA’s analysis has found that where a customer has only one (or one remaining) appliance on gas, by swapping it with an electric appliance they avoid $200-$300 each year in fixed charges to access the gas network. So for many homes, any additional cost associated with replacing a gas cooktop with an induction one still pays for itself in the longer term.

So all this points to one thing: consumers moving away from gas, using less of it and even leaving the gas network altogether.

Where does this leave gas networks and other consumers?

Surprisingly, today’s residential gas price forecasts fail to consider the impact on bills in the likely event that infrastructure costs are recovered from a diminishing customer base using less gas in response to higher prices.

A seemingly realistic 10 per cent shortfall in gas use below that forecast for the residential sector in the next five years could add a further 10 per cent to the network charges for remaining household gas consumers, following a similar trend to what we have seen already in the electricity sector in recent years.

As gas becomes increasingly a discretionary fuel, will the gas networks go into a ‘death spiral’ causing asset writedowns and leaving more costs to be recovered from disadvantaged consumers? 

We’ll explore this in a later article.

*In this five-part series Craig will explore how technical and economic changes may shape the way households source their energy in the coming decade, and consider the broader implications for the energy market as a whole.

Craig Memery is an energy market specialist and consumer advocate at the Alternative Technology Association.