Gas network decommissioning

How to balance costs, security of supply and fairness

Should the UK decommission its gas network? If so, how? These questions form one of the central debates within UK energy policy. Before we explore these questions further, let’s do a quick recap of gas infrastructure in the UK.

The underground pipes connecting over 23 million homes and businesses to gas supplies is vast, in total there is 292,000 km of pipework forming a complex and interconnected network. Put another way, the end-to-end length of the UK gas network could circumnavigate the Earth seven times! The business model of these assets is one of regulated monopolies – where every five years the network operators agree with the energy regulator (Ofgem) their expenditure profile for maintenance, repair, investment etc. These costs are then passed through the gas supply chain and are ultimately recovered through gas bills – appearing in gas bills as ‘Network Charges’. At present, network charges account for 23% of gas bills¹. We will return to this business model later on – but now let’s focus on the debate.

The pursuit of Net Zero is the driving force of this discussion, where current policy trajectory is one of ever-increasing adoption of electrified technologies. Within the home, this would mean replacing our gas ovens and boilers with their electric alternatives. The explicit objective of this policy is to reduce consumption of natural gas, and an implicit consequence is a reduced need for the existing gas network – hence why potential decommissioning is a topic of discussion.

Let’s assume for simplicity’s sake that there is negligible economic value in the conversion of the existing gas network to an alternative model, such as the transportation of biomethane, hydrogen or carbon dioxide. Under this assumption, gas network decommissioning is a fait accompli of electrification, where decommissioning could cost up to £74 billion according to the engineering firm ARUP².

Fundamentally there are two ways in which the gas network could be decommissioned. The first is a market-led approach, where the adoption of electrified technologies is driven by consumer behaviour. The second is a policy-led approach, where the adoption of electrified technologies is mandated and centrally co-ordinated via a regional schedule.

We live in a market economy, so let’s explore the market-led approach first. In this scenario the electrification of gas demands would be regionally sporadic and uncoordinated. Therefore, it is unlikely that decommissioning activities could track with underlying gas demand, given that the relevant network to a road of houses could only be decommissioned once the final house has elected to electrify. This creates an immediate and uncomfortable trade-off between costs and security of supply:

Gas bills could rise significantly for the remaining gas users as the costs of maintaining the asset base fall on an ever-decreasing user base. Due to the capital-intensive nature of electrification (e.g., a typical conversion from a gas boiler to an air source heat pump is up to £15,000 per household³, these elevated costs would likely fall to those least able to pay them.
Alternatively, decommissioning could be accelerated by removing redundancy in the network – this would reduce the cost of maintaining the asset base, but could put at risk the security of supply to remaining users

There is a precedent for resolving this trade-off elsewhere in the energy sector, which is in the CCUS market, given that the problem of seeking to maintain economic fairness whilst requiring oversized assets exists equally at the start of a market’s lifecycle as it does at the end. The solution in the CCUS market is for the Government to provide a direct subsidy to the network operators, which allows security of supply obligations to be maintained whilst also avoiding undue economic burden being placed on the small user base of the assets. Applying this precedent to the problem at hand, this structure would be one of taxpayers subsidising dwindling gas users, an alternative structure would be for exiting gas users to subsidise the remaining gas users by paying a ‘disconnection charge’ during the conversion process.

How could the need to subsidise a potential dwindling gas user base be avoided? Pursuing the second decommissioning option (policy-led) could be the answer. In this scenario, electrification is centrally planned, where conversion is achieved region by region. For reference, this was the approach used in the early 1970’s during the conversion from towns gas to natural gas. This approach could avoid the need to maintain an oversized gas network; however, it would require government to take a much more active role in both the market and in people’s homes. Given the mandatory nature of such a process, there would likely need to be central funding made available to support the home conversions, as well as new legal powers to ensure consumer compliance.

In all scenarios regarding gas network decommissioning there remain difficult trade-offs around cost ownership, societal fairness and energy security. By pursuing a market-led approach, it seems inevitable that a form of subsidy would be required to fairly manage the transition. Alternatively, a policy-led approach could be pursued, however this would also likely require subsidy of a different kind, as well as being politically and legally complex to implement.

Within this uncertain landscape, the only conclusion we can currently state for certain is that the existing business model of gas networks is not fit for purpose to equitably facilitate the potential decommissioning of the asset base. To untangle this web, the first order-questions to be considered relate to: the role of the state, the rights of consumer groups, and the structure and magnitude of available funding. It is through these questions that this tangled web of trade-offs must be explored, if we are to achieve a just and affordable transition.