Flexibility the key to tackling uncertainty
By AER Deputy Chair Jim Cox PSM
Good morning ladies and gentlemen
Thank you for the opportunity to speak with you today at the Australian Domestic Gas Outlook.
It will be in fact one of the last times I make a public address as a representative of the Australian Energy Regulator.
This year marks the end of my journey as a Board Member at the AER.
I’ve been on the Board since 2013 and served the last four years as Deputy Chair.
But after more than 30 years working in economic regulation, retirement now beckons, and I will be finishing up in the middle of the year.
So I come here today not only with my thoughts on the future of gas, but also with some reflections for you.
And I do so knowing that the gas industry is a key piece in Australia’s energy transformation puzzle – a transformation that is grappling with the role of natural gas in our country’s energy future.
When I joined the AER’s Board in 2013, Australia’s climate change debate was in full swing.
The controversial and short-lived carbon pricing scheme was slated to be abolished.
Investment in natural gas transportation and storage capacity was expanding, especially in Queensland in response to international demand.
The AER’s State of the Energy Market report that year warned of pressures in the eastern gas markets with potential large shortfalls in domestic supply based on what was described as exponential growth in LNG export demand.
Since 2013 I’ve seen an evolution of the gas markets in how they are operated and regulated.
In 2016 we had the introduction of the first stage of major reforms to make gas trading and access to pipeline transportation along the east coast faster and more efficient.
Key to these reforms was the introduction of short-term pipeline capacity trading markets, including the day ahead auction which began operation in 2019.
These reforms brought forward a new role for the AER in the compliance and enforcement of the trading and auction rules, in particular around record-keeping and applications for exemptions to the trading platforms.
Move ahead to 2023 and new laws were passed on a second-stage package of reforms focusing on:
- improving access to pipelines,
- providing greater support for commercial negotiations,
- and constraining any exercise of market power by pipeline service providers that would disadvantage consumers.
These reforms have again given the AER new responsibilities in undertaking pipeline form of regulation reviews and introducing a new dispute resolution mechanism.
I will touch on both these items a little later…
But let’s turn to here and now – March 2024 - and the challenges that lay before us.
We now have a legislated carbon emissions target of net-zero by 2050 and a National Gas Objective that includes achievement of emissions reductions targets.
Countries across the world are aggressively pursuing their own net-zero targets.
Pressure is mounting on gas companies to bolster their climate action plans and give shareholders a clear indication of how they are going to reduce their carbon footprint.
Victoria and ACT have both now banned new gas connections in residential developments.
And there is a growing focus on the role that renewable gases and hydrogen can play in Australia achieving its climate goals.
I’ve been watching with interest the advances being made in South Australia to establish itself as a world-leading provider of hydrogen.
Its Hydrogen and Renewable Energy Act, brought in last year, brings large scale hydrogen and renewable energy projects under one single regulatory process and its Hydrogen Jobs Plan already has significant private sector investment in production, supply, storage and export of this greener gas alternative.
All this plays into the narrative that demand for liquified natural gas is expected to decline… but the uncertainty as to how quickly this is going to happen is felt right across the energy system.
We all know that gas underpins the security and reliability of our electricity network and for many thousands of household consumers, it has just always been there…. part of Australian life with images of lounge room heaters or bustling commercial kitchens crackling with the sound of food being cooked over large gas burners… not to mention its critical role in Australia’s industrial base.
How this all happens - the kilometres of pipelines and infrastructure involved – not to mention how old those pipelines might be - is far from consumers’ minds.
But it’s firmly front of mind at the AER.
As a Board we’ve been discussing the future of gas for some time.
In 2021 we released a discussion paper to delve into factors that are likely to decrease local demand for natural gas in the medium to long term.
The purpose of our information paper was to look beyond the horizon to the future and begin asking the tough questions around price stability, affordability and future investment in gas pipelines, and how we might respond to that from a regulation standpoint.
And we wanted to open the door for industry discussions on ideas such as adjusting depreciation, revaluing assets, and sharing costs.
But protecting the long-term interest of consumers is at the core of what we do at the AER.
If I think back to that first year as an AER Board Member in 2013, we made gas access arrangement decisions in that year that supported network investment and expansion while minimising bill impacts to consumers.
So how do we protect the long-term interests of consumer in an increasingly uncertain future for gas?
Given our remit in the Australian community to ensure consumers are better off now and in the future, this is one of the biggest challenges facing the AER.
Gas network businesses invest in assets with fixed costs that could in some cases last into the next century.
If, over time, there are fewer customers to share the fixed costs of the network, there may be some customers who simply cannot afford to electrify all of their energy supply and therefore may face the very real possibility of higher gas bills.
Continuing investment to maintain the safety, security and reliability of the pipelines will add to prices.
Some assets may become stranded if costs are high enough and demand is low enough.
The AER’s role in determining five-year access arrangements for regulated gas pipelines have become a whole lot more challenging.
Thankfully the economic regulatory framework has some flexibility and allows us to take certain steps to manage the risks of uncertainty in the future of gas.
My key message to you today through all of this is that the AER is willing to listen, innovate, and move quickly on finding solutions.
Our one constant is that it is done in the long-term interest of consumers.
We did just that with our access arrangement decisions for three Victorian gas distribution businesses last year.
We address the possible future decline of natural gas demand and potential safety concerns if unused gas assets remain in place.
The final decisions allowed for a small start to accelerated depreciation of the networks to balance recovery of asset costs between current customers, while the customer base is still relatively high before potentially reducing.
We also worked with the network businesses to narrow the price gap between temporary and permanent gas disconnection services.
We set a network charge of $220 for the disconnecting consumer, with the remaining network costs of the permanent gas disconnection service being recovered through the haulage tariffs which are spread across all gas consumers in their network.
Spreading costs in this way helps to address the safety risk of leaving live, but unused, assets in place.
I was pleased that through our approach, we minimised the impact to consumers over the next five years of the revenue period.
But we know this is only an interim measure and further work is required across the sector to develop a more sustainable solution to permanent disconnection and declining demand.
And this was also related to Victoria where – from January the 1st this year, new residential gas connections are being phased out.
In that respect we intend to take a flexible approach to the way we allow gas network service providers to consider form of control and a tariff structure based on the policy settings and what their consumers are telling them in their community engagement.
It means we can get different proposals from networks on the form of control and tariff structures based on their circumstances and customer base.
We will take this approach to the review of New South Wales-based Jemena’s access arrangement, which commences this year.
In the longer term, it may be that five-year gas access arrangement reviews are not enough, or not the best avenue, to deal with the safety and equity issues as more people disconnect from the system.
However, the five-year gap between access arrangements promotes efficiency - which is in the best interests of consumers.
As said – there are challenges ahead – but flexibility and a willingness to innovate is the key.
The policy directions set by government must continue to develop in response to changes in technology and costs – as well as community needs and preferences.
Clear policy direction is key to ensuring we have a safe, reliable and affordable transition to net-zero by 2050.
Market bodies, like the AER, should contribute to these discussions.
One of the key contributions the AER makes in this is through our extensive performance reporting of gas markets.
Quarterly reports of wholesale and retail markets, annual network performance reports, and our flagship State of the Energy Market report offer up in-depth data and expert analysis that contribute to increased understanding and informed decision making.
And – just as a little plug for my colleagues at the AER here… I would recommend anyone new to working in the energy sector to download the AER’s latest State of the Energy Market report.
Every year our team goes to great lengths to make the analysis and explanations of the data in this report accessible to anyone interested in Australia’s energy markets.
A new addition to our gas performance reporting has been in relation to the gas market transparency measures implemented in March last year to address information gaps across the east coast gas industry.
We published our first ‘Short Term Transactions Special Report’ in December 2023 which discusses the observations of the first six months operation of these transparency measures as they relate to the gas short-term trading markets.
And the AER’s new contract market monitoring powers, due to be legislated this year, are set to further bolster the transparency of both the wholesale gas and electricity markets.
A key element of our new powers will be to look at how gas contract markets impact operations of the spot wholesale markets and the implications they have for the final costs consumers face.
Without understanding these contract positions, the AER can only speculate on what may be driving participant behaviour.
Last week the AER released an Issues Paper to seek input from across the sector on how we apply these new contract market monitoring powers to ensure there is clear intention and benefits, without unnecessary regulatory burden.
I urge interested market participants to get involved in this conversation, to set the right foundation for information requests and balanced reporting that will contribute to everyone meeting the challenges of an uncertain gas future head on.
As I touched on earlier, reforms introduced in 2023 have the given the AER the new responsibility of conducting form of regulation reviews.
Gas pipelines are either fully regulated scheme pipelines or lightly regulated non-scheme pipelines and - as a response to concerns about the possibility of excessive profits being made at the expense of consumers - the AER has been asked to conduct form of regulation reviews.
Earlier this month we announced that our first form of regulation review would be of the South West Queensland Pipeline which is owned by the APA Group. It is currently a lightly regulated non-scheme pipeline.
This announcement has been met with concerns that it will slow the transition, with an underlying sentiment that suggests we “don’t fix what isn’t broken”.
It may indeed be the outcome of the review that this pipeline is not subject to stronger regulation at this point. The AER certainly has not made up its mind up either way.
But this is a strategic pipeline of critical importance to the east coast gas system in transporting gas between northern and southern states.
Its form of regulation has never been reviewed, so it is only right that the checks and balances to be made to ensure consumers are getting the best from this pipeline.
We will do that on behalf of all energy consumers.
The gas reform package also required the AER to introduce a new dispute resolution mechanism that includes mediation as an option for small gas shippers to use in pipeline access disputes.
We know that disputes can arise in areas such as the terms of a new contract or pipeline access points.
Mediation over arbitration in any situation is typically less costly and quicker when resolving a dispute.
The AER welcomed this dispute mechanism reform as a way to ensure that all parties, including smaller transporters of gas, have cost-effective avenues they can go down to reach fair and reasonable agreements.
So much has changed and continues to change in the economic regulation of Australia’s energy markets.
It’s been an honour to serve as Deputy Chair of the Australian Energy Regulator during this transformational time.
I have felt very privileged to be inside the tent making decisions on behalf of all energy consumers.
I’ve had more than one sleepless night wrestling with the challenges of how we ensure consumer fairness and equity across every part of what is the largest connected energy system in the world.
I have many people to thank for their operational advice and assistance over my 11 years at the AER, including many in the energy industry.
The environment is now very different from when I first started but I leave knowing that the Australian Energy Regulator is a flexible, innovative economic regulator, with an ear to ground, an eye to the future, and the long-term interests of consumers at its core.
To you in this room today, I wish you all the best for the future. I will be watching on with great interest as to what role gas will play in the transition and beyond.
Thank you.