Gas and energy policy

The east Australian gas market fundamentally changed around 2015 with the introduction of the Curtis Island LNG facilities.

Russia’s unjust war in Ukraine and unreliable coal-fired power plants both played roles in creating Australia’s 2022 east coast energy crisis. However, one elephant in the room is yet to be held accountable for the role it has played in the crisis. 

An elephant which regulators and governments alike are reluctant to try to solve – the shortness in supply within the east Australian gas market.

The east Australian gas market fundamentally changed around 2015 with the introduction of the Curtis Island LNG facilities. Within a matter of years, the market went from long in supply to short in supply – from a market in which customers could set prices to a market in which producers could set prices. This change in price setting wasn’t the only change that the shortening of the east Australian gas market introduced, however.

The shortness of the gas market, positioned between the international LNG market and domestic electricity market, risks market price coupling in the event that either of the other two markets became short. Worse still, a short gas market sitting between domestic electricity and international LNG markets creates the risk that the gas market may be drawn upon by shortness in both markets at the same time, coupling prices across all three.

APGA has been highlighting this risk for at least a decade. While governments and regulators have been fixated on economic reform to address every last per cent of return in long term bilateral contracts across the gas market, we have been flagging that the true risk of price coupling remains, and that this risk can only be solved through increased investment in gas supply.

By increasing gas supply, it is possible to close the gap between potential supply and demand, making the east Australian gas market long in supply once more. By being able to produce more than is able to be consumed by domestic and export customers, it would be impossible for all three markets to couple, and the energy crisis which occurred across 2022 would not have happened.

To be clear, the LNG exporters alone are not to blame for the 2022 east Australian energy crisis. While the development of more LNG export capacity than was able to be supplied created the short gas market, governments and regulators have had over a decade since these projects reached FID to identify and mitigate this risk.

Instead of mitigating this risk by incentivising increased gas production, governments and regulators have introduced increasingly stringent economic regulation of gas production and infrastructure, disincentivising investment in the industry. This is despite clear and consistent advice from APGA and other gas industry proponents that this risk exceeds all other and increasingly stringent economic regulation only serves to exacerbate the risk.

Add to this production moratoria in the states that rely on gas the most and we have the perfect conditions for the energy crisis. After almost ten years of inaction addressing this risk, international and domestic conditions aligned to couple all three markets to the detriment of east Australian energy customers.

Unfortunately, despite the clear cause and effect of the past nine months, it appears that no lessons have been learned. Following the August Energy Ministers meeting, the Federal Department of Climate Change, Energy, The Environment and Water (DCCEEW) has commenced pursuit of changes to law to address the risk presented of an east Australian gas shortfall, not by enabling new supply, but by more incremental transparency and control measures which disincentivise investment in new supply.

Incremental transparency and control measures have proven ineffective in protecting east Australian energy customers as they do not address the genuine risk represented by a short gas market. Only a return to a long gas market will protect customers from the types of price coupling experienced earlier this year.

Importantly, it is not only additional natural gas supply that can help solve this problem. As demonstrated by the European REPowerEU policy, the rapid development of hydrogen and biomethane production can play a substantial role in addressing short gas markets in Europe. Over 1,200 PJ of hydrogen and biomethane production are targeted by the EU policy, accounting for over 20 per cent of total European gas demand.

Australia too has this opportunity to use renewable gas uplift to help address its short east coast gas market. By setting similar targets at a federal level, well above the ACCC flagged 56 PJ shortfall could be accounted for by 2030 through renewable gas uptake alone. In this way, Australian energy consumers could see resilience returned to its energy markets while at the same time supporting whole of energy system decarbonisation.

Beyond the opportunity to address natural gas supply shortages with renewable gas development, the circumstances of the past 9 months and the decade that lead up to it can serve as an important lesson to the future renewable gas industry which may face similar risks.

Ensuring that investment in production development is always supported to ensure a long domestic renewable gas market is a low-regulation way to ensure that international renewable gas prices never couple with domestic renewable gas and renewable electricity prices in Australia’s net-zero energy future. 

By Jordan McCollum, National Policy Manager, APGA

For more information, visit APGA.

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This article is featured in the November edition of The Australian Pipeliner.

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