Growing uncertainty raises risk for gas network investors

Gas distribution networks are becoming less attractive investments because of uncertainty over their long term future and because they are ‘marked down’ on ESG scores, it was clear from discussion at rating agency Moody’s annual meeting on European energy utilities. The expectation that there will be fewer gas users to pay for the network and that some parts will close is also presenting a problem for regulators preparing to agree future prices for users.
At the meeting – subtitled ‘The Energy Transition – Further and Faster?’ – Pierre-François Riolacci, Executive Vice President, Finance, Corporate Social Responsibility and Procurement at Engie, said “the gas network will not look the same”. It would be vulnerable to risks of stranded assets and of decommissioning.
Transmission networks, especially international links, would be necessary, albeit with retrofit or conversion to hydrogen. But the future for gas distribution networks is more uncertain. “I believe it would be very difficult to get hydrogen to households. I don’t think it is going to happen,” he said. “At a certain point the volumes will be too low and we will be decommissioning parts of the network”.
Sahar Shamsi, a partner at Oxera, described residential natural gas as having a “residual role in the future energy mix” and picked apart some of the uncertainties around the European networks’future. She said electrification and the progress in providing biomethane or hydrogen as a replacement gas will dictate how quickly natural gas usage, and thereby utilisation of gas networks will change. Patterns of usage differ across geographies and the economic feasibility of using biogas or hydrogen would differ across regions and within countries. In addition, they are less attractive than other investments such as electricity networks – Moody’s applies a negative ESG credit impact score to gas networks, whether or not they are in a jurisdiction with a concrete plan to phase out gas – reducing the pool of likely investors.
Shamsi said “The uncertain outlook for gas networks is beginning to be priced into long-term gas network debt”, while equity investors would be exposed to any asset stranding risks.
All the speakers who discussed the future or gas networks acknowledged the need to fund them from a declining pool of users and where existing financing was over terms reaching into the decades ahead. Policymakers and regulators across Europe had taken different approaches, with most using faster depreciation to pay for the networks more quickly and some setting end-dates for home heating using fossil gas.
Shamsi described Ofgem’s approach as “relatively cautious”, with accelerated depreciation, and potential re-openers in the current regulatory period.
Ofgem is grappling with the issue. In an open letter on gas price controls, its discussion of the upcoming price determination, Ofgem acknowledged the risk for gas consumers, saying “The cost of existing assets being shared across a declining number of consumers in a fair manner, and how decommissioning and/or repurposing of the gas network is carried out efficiently are key challenges for economic regulation of gas networks”.
It suggested that after the Future System Operator (FSO) establishes itself and develops its capabilities “it could play a key role, including in planning the de-energisation of the gas networks and development of hydrogen networks”. But it indicated that its cautious approach would continue, saying “in the period out to 2031/32 any resulting requirements could be handled through re-openers”.

Leave a Reply

Your email address will not be published. Required fields are marked *