What to do with gas grids?
Sustainability, Strategy and Finance

What to do with gas grids?

The use of gas will decline dramatically as part of the transition to net zero. Modelling at European levels shows that by 2050 about 70% less gaseous fuels will be used. Which raises the question of what happens to our gas grid infrastructure?

The use of gas will decline dramatically as part of the transition to net zero. Modelling at European levels shows that by 2050 about 70% less gaseous fuels will be used. Which raises the question of what happens to our gas grid infrastructure?

Significant regulatory reform is needed to deal with the impacts of this decline on the gas grid.

You might be thinking - hang on, that's decades away. Why worry about it now. And anyway, who cares if gas gets expensive, isn't what we want. More expensive gas will encourage the shift to electrification.

First, gas networks have a really long life, so pipelines etc that we build now will still be 'productive' in 2050. And second, it's about who bears the cost. As less and less people and companies use gas, the costs get spread over fewer and fewer consumers - making gas for those who are 'locked in', including tenants, really expensive.

And of course most gas networks are regulated, so many get paid on the basis of their invested asset base, not on how much gas they transport. Which is why a recent particle in One Earth entitled 'The elephant in the room: How do we regulate gas transportation infrastructure as gas demand declines?' Caught Our Eye.

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The elephant in the room - gas grids

In Europe, there are now over 130,000 km of gas transmission pipelines—a distance of more than three times the circumference of the Earth. At the more local distribution level, there are another 1,800,000 km of pipeline. At the moment, regulation in most European countries treats gas distribution networks broadly as if they are expected to operate in perpetuity. But is this correct ?

A recent impact assessment by the European Commission of the proposed 2040 90% greenhouse gas reduction target (relative to 1990 levels) indicates that total demand for gaseous fuels, including gases such as hydrogen, will fall between 71% and 73% between 2019 and 2050. That's a big decline.

Why is this a problem?

Switching away from gas means that the costs of running gas infrastructure and the amortisation of the sunk network costs will be paid for by fewer and fewer customers. Typically, tightly regulated grid fees for remaining gas customers would rise as more consumers decouple from gas grids, for example by switching to a heat pump or district heating.

For those of a non financial bent, what does the amortisation of the sunk network costs mean in normal English?

Gas networks are really expensive to build, and they are considered to be an essential social service. So they are normally regulated. There is effectively a contract between the regulator and the gas company that says ... if you make the investment, I will 'guarantee' that over the life of the investment you will get back a fair financial return.

This financial return is based on the value of your regulatory assets, and it depends on how long the asset stays in productive use. This financial charge is called amortisation. So in simple English, the amortisation of the sunk cost is about paying the gas utility for the historic investment they have made, regardless of how much gas they actually move. And this makes up a big element of your gas bill.

If we need less gas, and we don't want to load higher and higher gas charges on the low income families and renters who may not be able to switch, then what can we do instead?

Switching our gas network to hydrogen?

Gas network operators have promoted the replacement of fossil gas with hydrogen and other low carbon gases as an alternative to grid decommissioning. At first glance, this may seem like an attractive option to policymakers who want to minimise the impact of the energy transition on customers (and gas industry stakeholders).

However, from a purely technical point of view, our existing natural gas infrastructure cannot simply be switched over to hydrogen. Analysis for the UK government suggested around £22 billion of extra investment would be needed. That is a lot of investment, and so we need to be sure that the hydrogen network idea is a sound one.

Hydrogen supply chain: evidence base
An assessment of evidence relating to the range of infrastructure that would be required for a future delivery chain for hydrogen for heat.

One problem is that green hydrogen is expensive to produce, requiring large amounts of green electricity. This begs the question(s), is this really how we want to spend our scarce investment capital, will it earn a fair rate of financial return, and is it a good use of our green electricity?

Sadly, the use of hydrogen for home and building heating is inefficient and more expensive than alternatives. For example, projected costs to consumers of using hydrogen for heating are almost twice as high compared to electrification and district heating.

What is the alternative?

The alternative is an orderly decline, regulation that anticipates the expected reduction in gas use over the coming decades and that provides a framework for gradual decommissioning of the gas grid in those areas where this is the only viable option.

This has two financial implications, remembering the 'promise' that the regulator makes to the gas utility that the costs of building infrastructure will always be repaid.

The first is 'paying off' the investment faster. Under the current regulatory framework, it is typical to recover the investment cost for the gas grid over very long periods of time, e.g., 45 years. This is paid for through consumer bills. But net-zero targets for 2050 will need to be met much earlier than that. One option to deal with this is to accelerate depreciation of existing assets. But this will mean higher gas bills, probably starting now.

The second is we may need to start preparing for decommissioning. There will be significant costs associated with this. For Germany, recent analyses suggest a decommissioning cost of circa E11.4 bn, rising to E24.6 billion under a high-electrification scenario. Similar analysis in the UK estimates the costs of decommissioning to be up to 25 billion pounds. Currently, there is no funding earmarked to cover these costs and they therefore represent an additional liability to taxpayers.

If decarbonisation is going to happen, then we really need to have a plan for what we are going to do with the gas grid. Part of the answer might be re-purposing the pipeline system for green hydrogen, but the technical and cost implications of this would be material. Plus it's not clear that using hydrogen for building heating makes any sense at all. Which really only leaves industrial applications - and will they need all of the existing grid? So maybe we need to start thinking about closing it down?

And we need to be honest about the cost!

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Please read: important legal stuff.


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