With several forward looking processes being conducted by the Australian Government at the moment– including the development of the Energy White Paper (outlining the Government’s energy policy until 2030), the development of long-term planning scenarios by the Australian Energy Market Operator and the review of energy market frameworks in light of climate change policies by the Australian Energy Market Commission (AEMC) – we are seeing evidence of an assumption by policy makers that the convergence of the gas and electricity markets is inevitable. One could draw the conclusion that the view held in government is not only that the convergence is inevitable, but that it is desirable.

In particular, there seems to be a view among policy makers that, as gas and electricity are both provided to residential dwellings by means of distributed infrastructure, they are fundamentally similar industries and the infrastructure should be subject to identical regulation. There is also a view that the increase of gas-fired power generation expected as a result of the Carbon Pollution Reduction Scheme, and a push to reduce the carbon intensity of the economy will increase the interactions between the gas and electricity markets and drive the convergence further.

Natural gas-fired generation in Australia currently provides approximately 12 per cent of electricity production. This amount is not insignificant, but is not comparable to the 80 per cent of electricity generated from coal production. Yet there is little talk of converging the coal and electricity markets.

Further, only approximately 35 per cent of Australia’s current annual total gas consumption is for electricity generation. The magnitude of the interaction between gas and electricity markets is not sufficient in relation to the total size of either market for there to be inefficiencies of major concern.

The assumption that gas and electricity infrastructure are fundamentally similar industries is incorrect. While the residential retail interface with the gas and electricity industries may be similar to some extent, at other points in the supply chain the differences between the two are very clear.

A simplistic view that favours gas and electricity infrastructure regulatory convergence ignores the reality that the broad energy sector comprises several distinct industries with each component having many unique characteristics and issues.

A push for regulatory convergence will result in inappropriate regulations, and consequently inappropriate and distorted policy outcomes, as a ‘one size fits all’ policy is not appropriate for different industries. Regulation for an industry should be developed and applied on the basis that it will produce the best outcome for the economy and for that particular industry, rather than on the basis that it is currently being used in another ‘similar’ industry.

There is no evidence or analysis that regulatory convergence of the gas and electricity industries will provide benefits to the industry sectors or the economy.

Consider the analogy of regulation and management of the transportation sector. Air, road and rail transport ultimately have the same purpose, moving goods and people from A to B. However, they are entirely different industries and, therefore, have different economic and technical regulatory regimes and markets. There is little talk of convergence in this sector. While electricity and gas are both parts of the energy sector, in the same way that air, road and rail are industries in the transport sector with similar businesses and occasional competition, there is sufficient difference between these markets to indicate that there would be little or no efficiency gains to be made through convergence. Indeed, the imposition of electricity-style regulatory mechanisms on the gas market could result in significant inefficiency being introduced to the sector.

There are early indications that the AEMC holds the view that current gas markets are appropriate for Australia. Considerable work needs to be done to convince other policy making bodies. APIA will be outlining an alternative to convergence for the future of energy markets in Australia, as these forward-looking processes progress and if you have strong views on the subject please let APIA know.