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Understanding Australia’s gas-led recovery plan

On 15 September 2020, the Prime Minister, Scott Morrison, announced a series of measures aimed at preventing forecast shortfalls in dispatchable power and addressing price equity in the East Coast gas market.

The key drivers behind the Federal Government’s new policies include a lack of private sector investment in energy production, the imbalance between domestic and export gas prices, and the potential for gas to aid in Australia’s economic recovery.

Private sector investment in dispatchable energy has slowed since 2010 and the Prime Minister noted that current plans do not address an impending shortfall in dispatchable energy across the National Electricity Market (NEM). For example, since it was announced that the Liddell coal-fired power station would close in 2023, no new power stations have been committed from the private sector, with the closure itself estimated to increase grid electricity prices by 30% over two years.  

Australian domestic industry has been paying a higher price for gas than that being offered in LNG exports over the past several years (after calculating for parity). This has been a focus of an ACCC inquiry into the East Coast gas market since 2017, with the current price gap being noted as being at its highest since that inquiry started.

The Prime Minister also identified the potential for cheap, available gas to aid in Australia’s economic recovery at both a primary level, such as through use in manufacturing and industry, and a secondary level, by driving gas prices down for consumers. Boosting production and creating a competitive and transparent gas market is considered a necessary step in achieving this aim.  

What are the proposed measures?

The announced measures include:

  • government investment in pipeline and infrastructure development and export agreements to prevent shortfalls in dispatchable power and promote competitive and transparent gas pricing;

  • the development of a National Gas Infrastructure Plan (NGIP) which will identify priority pipelines and critical infrastructure where the government will step in if the private sector does not invest;

  • five Strategic Basin Plans at a cost of A$28.3 million to accelerate gas exploration and development in priority areas including the Beetaloo Basin in the Northern Territory and Queensland’s Northern Bowen and Galilee Basins;

  • the creation of an ‘Australian Gas Hub’ at Wallumbilla in Queensland, based on the ‘Henry Hub’ system;

  • the potential implementation of a gas reservation scheme to address domestic gas price-equity against LNG exports;

  • setting new gas supply targets with state and territory governments and encouraging those governments to include and enforce ‘use it or lose it’ requirements on gas exploration and production licences;

  • reforming regulations on pipeline infrastructure to promote competition and transparency;

  • improving pipeline access and competition through a secondary pipeline capacity market; and

  • implementing a voluntary industry-led code for negotiation of gas supply contracts which will equalise the negotiating position for gas consumers.

Government investment

Ensuring strong linking infrastructure and affordable, consistent dispatchable energy has always been a concern to the NEM in a post-thermal coal world. The Federal Government is committing to invest public money in major infrastructure which is designed to ensure both of these aims. This investment is set to come in three forms.

  1. The Federal Government will engage with State Governments to accelerate the Marinus Link, Project Energy Connect and VNI West interconnectors through a A$250 million program. These three high-voltage transmission lines will provide additional interconnectivity within NEM states to ensure additional capacity will be accessible where it is most needed.  

  2. It will avoid gas supply shortfalls in the domestic market by renegotiating the Australian Domestic Gas Security Mechanism or entering into new agreements with the three Queensland LNG exporters. As an immediate measure the Federal Government intends to extend the existing heads of agreement with those exporters concerning making gas available for domestic supply at competitive prices.

  3. If by April 2021, the private sector has not committed to investment to provide 1000 MW of new dispatchable energy for generation in time for summer 2023-24, the Federal Government will fund a gas-fired replacement for the Liddell power station. To this end, the Prime Minister announced that Snowy Hydro Ltd has been tasked with drawing up plans for a gas generator based at Kurri Kurri in NSW’s Hunter Valley.

Australian Gas Hub

The long-term goal is for a new ‘Australian Gas Hub’ to be established in Wallumbilla, Queensland, which will form the basis of a transparent gas-trading market based on the American Henry Hub system.  Aside from the benefits to consumers in both transparency and competition, it will also incorporate futures-based derivative trading. The aim is to incorporate future projects, such as Santos’ Narrabri Gas Project, into ‘the hub’ as a single East Coast market.

While it is unclear whether the Australian Gas Hub will use a similar spot-price system to the NEM, an increase in price transparency and available data will provide greater certainty in pricing for consumers, retailers and the private sector alike.

NGIP and Strategic Basin Plans

The Federal Government has started work on a set of plans to provide guidance to the market through the NGIP and a Strategic Basin Plan for each of the five major gas basins across Australia.

The NGIP is intended to be a gas sector analogue to AEMO’s 2020 Integrated System Plan. It will provide the market with the Federal Government’s priorities and expectations surrounding the connection and maintenance of pipelines and other critical infrastructure for the supply of gas to major consumer hubs.

The Federal Government will use the new Strategic Basin Plans to accelerate the pre-competitive stage of gas exploration and development in each area, by funding economic, engineering and scientific studies. This is intended to front-end this work and better unlock each area to the private sector. The first Strategic Basin Plans will be for the Beetaloo Basin in the NT and Queensland’s Northern Bowen and Galilee Basins.

Gas Reservation Scheme

The Prime Minister has also foreshadowed that the Federal Government is considering implementing a gas reservation scheme, which would regulate the domestic supply and export of gas. While circumspect on detail, it was noted that any reservation scheme would continue to support gas exports, the primary aim being to ensure that Australian gas users obtained the energy they require at a reasonable price.

Companies with ongoing LNG export arrangements should watch this space closely, as its implementation may have significant effects on ongoing supply arrangements, however we note that a similar gas reservation scheme was floated last year with no significant traction.

State and Territory interactions

The Federal Government intends to work with the various State and Territory Governments to set new gas supply targets using bilateral energy agreements and to implement and enforce ‘use it or lose it’ requirements on gas exploration and production licences across the country.

Where to next?

We await the release of further information on the NGIP and the announcement of the consultation phase on the potential gas reservation scheme. At this stage, no further details or dates have been provided at a departmental level.

The relevant Prime Ministerial releases can be found here, here and here.


Authors

CARELESS paul highres SMALL
Paul Careless

Special Counsel

Tobias Hill

Law Graduate


Tags

Energy and Natural Resources

This publication is introductory in nature. Its content is current at the date of publication. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice based on your specific circumstances before taking any action relating to matters covered by this publication. Some information may have been obtained from external sources, and we cannot guarantee the accuracy or currency of any such information.