A vision for natural gas in 2050

The natural gas distribution sector has an exciting opportunity to significantly contribute to meeting Australia’s sustainable energy objectives by expanding beyond traditional uses of gas. This would, in turn, provide a number of benefits to the Australian economy, including:

Enhanced energy security;

Long-term cost competitiveness by delivering an optimum distribution transport tariff;

Structure, resulting in lower delivered gas prices to customers;

Enhanced efficiency in energy delivery;

Lower greenhouse gas emissions.

The Energy Networks Association (ENA) has developed a Gas Leadership Scenario which will see it deliver these benefits progressively through to 2050.

The vision focuses on growth in three key segments:

Appliance usage in the residential and commercial sector;

Road transport; and,

Distributed power generation.

Driving the vision’s development

The belief of policy makers that gas will benefit significantly from government carbon reduction policies, has lead to the view that no adjustments to current energy policies are required.

Indeed, as shown in Figure 1, based on Treasury modelling, total gas demand is projected to increase significantly from 2011 through to 2030 and 2050.

As the chart shows, export market LNG grows significantly under each of the low, reference, and high-LNG scenarios, and will clearly be a big winner.

What concerns the downstream networks sector is that, given that gas for large-scale power generation is supplied from pipelines rather than networks, there is a big risk that network volumes will decrease – or at best increase only marginally over time – and that average volumes-per-customer will decrease.

Even if input costs are held constant in real terms, falling average consumption is likely to lead to rising network tariffs and delivered gas prices in the longer term.

A narrowing of the gap between gas and electricity prices may mean gas becomes less attractive to consumers, leading to lower connection rates. This, combined with lower consumption, is likely to challenge the longer term economic viability of gas network expansions, especially given that gas is a discretionary fuel.

Clearly not all sectors in the natural gas supply chain will be winners in the current environment.

The ENA’s response

In response to these concerns, the ENA initiated a study to both understand the likely implications for the downstream gas sector under various climate change policy settings, and identify potential opportunities to address trends of declining consumption and to enhance
the sector.

The association engaged the Core Energy Group to perform a detailed modelling and scenario analysis, with analysis undertaken based on four scenarios:

1. Business as usual (BAU)

This is a base case scenario using a linear model based on historical trends, with no carbon price.

Under the BAU scenario, average consumption continues to decline and growth in the sector is marginal out to 2050.

2. 450 ppm carbon scenario

Under this scenario, based on the Intergovernmental Panel on Climate Change (IPCC) recommendation to reduce global temperature rise to 20ËšCelsius, gas initially gains a small share of the energy balance through the increased uptake of decentralised gas-fired generation, and then declines by the late 2020s.

However, the decline in the industrial and residential and commercial sectors results in a decline in total volumes over time, leading to increasing network tariffs.

By the mid-2020s there is a risk that the expansion of the gas networks to supply new dwellings could become uneconomical as a result of increasing network prices.

Under a 450 parts per million (ppm) target, the viability of the continued growth of the gas network sector is under threat without the introduction of low or zero emission gas to reduce the average carbon content.

3. 550 ppm carbon scenario

This scenario has been adopted as core policy by the Federal Government and forms the basis of Treasury modelling.

As shown in Figure 2, network volumes under this scenario initially increase, reflecting opportunities for gas to substitute for other more carbon-intensive fuels.

However, network volumes decline by the mid-2030s because of the decline in uptake of decentralised generation. Reducing network volumes may in turn put upward pressure on network pricing.

4. A Gas Leadership Scenario

This scenario demonstrates what can be achieved by the gas distribution sector with a change in industry focus and supportive government policies in place.

A Gas Leadership Scenario model was built on a “˜bottom up’ approach with three separate models:

A new residential and commercial appliance model was developed industry, ABS appliance and population data, and assumptions on the uptake of new appliances and the future appliance mix;

A road transport model based on CSIRO modelling conducted for Treasury and for the Federal Government’s Strategic Framework for Alternative Transport Fuels; and,

A distributed generation model based on analysis by Treasury and CSIRO. Under this scenario, the ENA found that demand in the industrial sector is consistent with the 550 ppm model, but the distributed generation forecast identified opportunities for greater levels of deployment of small scale distributed generation, similar to the BlueGen units currently being deployed in trials as part of the Smart Grid Smart City project, along with the uptake of larger scale cogeneration and trigeneration included in Treasury modelling.

Under the Gas Leadership Scenario, as depicted in Figure 3, gas flow through the networks increases from approximately 400 petajoules (PJ) in 2011 to almost 670 PJ in 2050.

The increase in demand is expected to occur primarily from growth in the distributed generation and transport sectors, but market retention and modest growth in the residential and commercial sector also contribute.

The leadership scenario delivers lower carbon emissions than the 550 ppm core government policy scenario and ensures a strong and vibrant network sector with optimal network pricing outcomes.

It delivers growth in network volumes through emission-intensive electricity and transport fuel substitution and growth in the residential and commercial appliance segment. The Gas Leadership Scenario will deliver sustainable reductions in energy costs to customers while delivering significant reductions in greenhouse gas emissions.

Next steps

The ENA found that the short-term opportunities provided by the carbon price for natural gas could also be short-lived, with the domestic industry eventually reaching a point of decline in the absence of complementary government policies. Policy makers must consider the total role that gas can play in addressing domestic carbon emissions, export market opportunities, and ensuring a reliable and cost effective energy system.

According to the ENA, realisation of the Gas Leadership Scenario will depend on the gas network sector working collectively to support:

Advocacy on energy policies to support emission abatement at the lowest possible cost, based on the concept of a level playing field and not picking individual technologies;