Gas agreement a small but important step on long road to energy security – October 2017

Filed under: Politics, Australian Politics, Trade and industry, Energy,

By general consensus the Government’s meeting with the major gas producers last week has averted an immediate crisis of a major gas shortage in 2018 and 2019.

The agreement is still to be finalised at a further meeting between the Government and the gas industry on Tuesday 3 October but if, as is generally agreed, the deal stands up, it will be no inconsequential achievement for Malcolm Turnbull and his energy minister Josh Frydenberg.

Using the threat to use gas export controls which the Government gave itself in July, the Government was able to achieve the agreement without their use.

The meeting with gas industry chiefs came after separate reports by the energy regulator and the Australian Competition and Consumer Commission warned of a shortfall of between 54 petajoules and 107 petajoules along the east coast over the next two years.

During the meeting in Sydney on Wednesday, Origin Energy, Santos and Shell agreed to sell 54 extra petajoules into the domestic market via contract for 2018, and more if needed.

There will be another meeting next Tuesday to settle the details for 2019, all of which will be enshrined in a heads of agreement. The government would keep the export restriction trigger as a threat should the gas companies not follow through.

Mr Turnbull said beyond 2019 the gas companies had also agreed to offer domestic customers any uncontracted gas as a priority, before it was sold into the international spot market.

Importantly, he said, the companies also agreed to report regularly to the ACCC to ensure greater transparency. They will have to report on sales, offers to sell gas and bids to buy gas from customers that they have declined. “We will shine a light on what has been a very opaque industry and that sunlight will ensure more gas at better prices for Australians,” he said.

It was an investigation by the ACCC that helped reveal the size of the shortfall and force a solution.

“They have given us a guarantee that they will offer to the domestic market the gas that was identified as the expected demand shortfall by AEMO in 2018,” he said. “They stated that they will provide a similar guarantee over two years, that’s their intention, and will respond further in more detail on 2019 when we meet again next week,” Mr Turnbull said.

“They’ve stated that they will offer first, as a first priority, domestic customers any un-contracted gas in the future as a priority.

The agreement is a short term solution to one – important – element of the immediate crisis, but amounts to much less than an enduring solution to Australia’s rolling energy crisis.

For one thing, while the agreement appears to have solved the supply issue which was a major concern for industrial energy users (and, of course, consumers) it has done nothing to deal with the other major concern of price. Despite the relief of the supply agreement, users appear likely to face steep price increases.

The Prime Minister said, “An extra $2 a gigajoule, which is around the cost of shipping gas from Queensland, is about 11 per cent on the gas bill of a typical household in Melbourne.

“The failure of the states of Victoria and NSW to get their gas resources, onshore gas resources, developed means residents of NSW and Victoria and businesses in those states are going to continue to pay more for gas than they otherwise would.”

The industry also expects guarantees – which will involve a cost – that gas not sold on international markets will be taken by domestic users. Ian Macfarlane, a former federal resources minister turned Queensland gas lobbyist, said Queensland’s gas exporters would offer to sell it back to Australia’s domestic market for the LNG netback price – under $10 per gigajoule – but domestic buyers had to guarantee they would buy it by signing contracts.

“If people say they need gas, and gas is set aside for them, then they need to take it. That is a normal commercial arrangement,” Mr Macfarlane told the ABC. “If a company says, ‘We need this many petajoules this year’ and Shell ... or Santos set that gas aside and don’t export it, and then the company doesn’t take it, obviously the exporters are left in the lurch.

“It’s only fair to say if companies want to take gas, if they need gas, fair enough, sign up, sign the contract ... That way the export company knows that it’s not going to be left with a bundle of gas if a domestic customer may have inadvertently overestimated their own demand.”

Tony Wood and David Blowers of the Grattan Institute also argued last week that the cost of guaranteeing supply in the longer term will be higher energy prices. They argued for a ‘capacity supply mechanism’ to guarantee supply. “But the cost of such peace of mind would ultimately fall on consumers in the form of higher electricity prices, so a capacity mechanism should be introduced only if all other market reforms have been exhausted and supply is still under threat,” they wrote.

“Through a capacity mechanism, generators would be paid not only for the electricity they produce to meet current demand, but for committing to provide power for years into the future. The market operator or retailers could contract for sufficient electricity to meet future demand, to ensure new generation and storage is built in time.”

Part of the solution is to secure local gas supplies which do not entail high transportation costs and in addressing this issue the Government has turned its guns on the states.

To ramp up the pressure Finance Minister Mathias Cormann, with help from a discussion paper from the Commonwealth Grants Commission, has also raised the possibility that states and territories which hold back gas development will be penalised through the distribution of GST and other tax revenue from the Commonwealth.

In its paper the Commission said, “The Commission will also aim to strengthen application of the policy neutrality principle in two further ways. It will aim to ensure that assessments do not unduly penalise or reward States which, in similar circumstances, adopt very different policies towards potential mineral and energy developments (for example, coal seam gas production). For revenue assessments generally, the Commission will aim to minimise, to the extent practicable, tax reform disincentives arising from the effects on tax bases (elasticity effects) of tax policy choices.”

The issue of the immediate gas shortages is of course only a small – if somewhat pressing – component of the broader issue of lack of investment in energy supply and distribution because of the energy policy vacuum and lack of clear investment direction which the industry requires and which the Finkel review was designed to advise the Government on how to address. The battle is still being fought over how to address Finkel’s key recommendation for a Clean Energy Target even as the Government appears to be undermining its own supposed endorsement of Finkel’s other 49 recommendations, one of which was to require energy producers to give five years notice of the closure of major generating capacity to allow adequate energy planning. Yet when AGL gave seven years notice of its plan to close the Liddell power station it came under sustained pressure from the Government, which has forced it to devote considerable resources to defending its position while continuing to plan Liddell’s future.

As Kate Griffiths of the Grattan Institute argued in The Conversation last week, some Government actions supposedly designed to solve energy problems may be misdirected and worsen them.

She wrote, “Some interventions help, but others could make matters worse. We have seen a lot of policy on the run in the past year, yet state and federal governments continue to ignore the policy changes that would make the biggest difference.”

She said, “New generation and storage will be needed to bring down electricity prices, reduce emissions, and avoid supply shortfalls as older power stations are closed. Governments are jumping in to build that generation. But this could force existing generation out of the market, making the problem worse.

“Industry has made it clear that policy stability, including a credible emissions reduction mechanism, is needed to enable appropriate investments to be made. Yet stability and predictability in energy and climate change policy have been sorely lacking over the past decade.

“If governments can collectively agree to implement Finkel’s plan in full, this would give the market more certainty on how emissions will be cut over time, and how the entry of new technologies and the exit of old power stations will be managed.’

She also said, “We should be able to avoid blackouts this summer, but longer-term solutions are still needed.

“If all goes to plan, we should be able to avoid problems this summer. But we shouldn’t be relying on emergency measures every year. Longer-term solutions are needed, and these will require continued action, building on the momentum of the past year.”

Further Reading