21 December 2021
The Australian Pipelines and Gas Association (APGA) represents the owners, operators, designers, constructors and service providers of Australia’s pipeline infrastructure, with a focus on high-pressure gas transmission. APGA’s members build, own and operate the gas transmission infrastructure connecting the disparate gas supply basins and demand centres of Australia, offering a wide range of services to gas producers, retailers and users.
APGA welcomes the opportunity to contribute to the Options to advance the East Coast gas market consultation on the Wallumbilla Gas Supply Hub and pipeline capacity trading framework (the Consultation Paper) and appreciates Energy Ministers’ intention to develop an East Coast Gas Market Advancement Roadmap following this consultation. AGPA notes the importance of pipeline investment to the east cost gas markets long term future.
The Consultation Paper contains a handful of no-regrets policy options. These no-regrets reforms and initiatives are likely to advance the East Coast gas market by addressing defined problems with fit for purpose solutions. APGA recommends that the following reforms and initiatives be flagged for early action within the Energy Minister’s roadmap as no-regrets actions which could achieve Energy Minsters’ objectives:
Alongside these, APGA considers an additional opportunity to increase market liquidity in the East Coast gas market is government investment support for renewable gas production development. Increased gas supply is the most effective way to increase supply liquidity in the east coast gas market. The East Coast gas market is on the cusp of the renewable gas production era, providing governments an opportunity to support increased supply side
liquidity beyond that which the natural gas market can provide alone.
Beyond these no-regrets reforms and initiatives, APGA holds concerns about ways in which other options put forward in the consultation paper could impede the further development of the East Coast gas market.
More specifically in relation to the three focus areas of the Consultation Paper:
Undertaking reforms and initiatives which are either highly complex, override customer contracts, or result in much stronger forms of regulation should be analysed carefully. Addressing the lack of secure, long term gas supplies, rather than increasing regulatory intervention, is the key issue currently facing pipeline customers.
APGA stresses the importance of including stop-gate analysis throughout the roadmap. Stop-gate analysis prior to implementation of any reform would ensure that an evidence based problem statement exists, a quantifiable improvement from reform is understood, and the costs and risks of reform don’t outweigh the benefits in terms of the National Gas Objective. Such analysis prior to reform implementation needs to consider the impacts of reforms within the roadmap as well as the impacts of historical and adjacent reform.
Please see APGA’s responses to the options to progress the east coast gas market stakeholder feedback template attached.
To discuss any of the above feedback further, please contact APGA National Policy Manager
Jordan McCollum on +61 422 057 856 or jmccollum@apga.org.au.
Detailed Feedback
1. Existing and additional no-regrets reforms and initiatives
APGA considered the following three reforms and initiatives proposed within the
Consultation Paper, and one additional initiative, as having no-regrets positive impacts on
the east coast gas market in support of Energy Ministers objectives:
• Anonymised delivery within the existing Wallumbilla Hub.
• Streamlining prudential requirements across all facilitated markets.
• Government support for the development of renewable gas production.
1.1. Anonymised delivery within the existing Wallumbilla Hub
There is a direct, tangible connection between providing anonymised delivery within the
Wallumbilla Hub facilitated market and increased participation in the facilitated market by
existing market participants.
As identified within the Consultation Paper, there are more off-market trades occurring at
the Wallumbilla Hub than via the Wallumbilla Hub facilitated market. Customer feedback
confirms that one of the key reasons for this is concern about the disclosure of
commercially sensitive information through the current trading process. If anonymised, it is
possible that off market trades will move towards the facilitated market. The relatively
simple introduction of anonymised delivery has the potential to achieve improvements
without any further actions. APGA recommends that this reform should be pursued as a
priority, noting that consideration must be given to what is required to comply with the ‘Know
Your Counter-party’ and ‘Anti-Money Laundering’ provisions.
APGA agrees with the proposal of an Anonymised Delivery model which emulates the
current CTP centralised delivery model. This would reduce implementation costs and avoid
the need for added complexity through the introduction of a balancing regime. APGA
highlights a preference for implementing Anonymised Delivery through a bilateral agreement
between hub operator and AEMO which governs implementation as this would be the
simpler of the options.
1.2. Streamlining prudential requirements across all facilitated markets
There is a direct, tangible connection between streamlining prudential requirements for
Wallumbilla Hub (and all) facilitated market participants and increased participation in the
(all) facilitated market(s) by existing market participants. This could also potentially lead to
a marginal increase in new participation in the facilitated market. Care will need to be taken
to ensure that the resulting level of prudential cover still appropriately mitigates the risk of
market participant default.
Streamlining of prudential requirements represents an opportunity to positively impact those
existing or potential market participants for whom facilitated market engagement is a
marginally cost-effective approach energy management. As discussed in Section 2.3 below,
it may simply not be practical or beneficial for some businesses to manage their own
wholesale energy needs via a facilitated market
The low complexity of this reform and its potential to support existing (and potentially some
new) smaller market participants leads to APGA recommending that this reform be pursued.
APGA does not hold a preference for which of the four pathways is taken to achieve this
reform, however, highlights the importance of ensuring that the resulting level of prudential
cover still appropriately mitigates the risk of market participant default.
1.3. Government support for the development of renewable gas production
Building on historical support for increasing gas market liquidity through government
support of new natural gas production, government support of renewable gas production
represents an even greater long-term opportunity to increase gas supply liquidity. Be it
renewable hydrogen or renewable methane, the distributed nature or renewable gas
production represents an opportunity to introduce a multitude of new gas production
proponents into the market.
Renewable gas production achieves more than just emissions reduction. The east coast gas
market has the opportunity to decouple from reliance on limited natural gas production
locations while increasing supply liquidity through production that can be located anywhere
by anyone. While renewable gas costs are currently high, the National Energy Market
demonstrates the ability for a mixture of low and high energy prices to produce an
acceptably low overall wholesale price of energy. This renewable supply opportunity could
also result in the end to the constant pressure to find new gas reserves, as renewable gas
can be produced wherever a source of biomass or renewable electricity can be found.
As discussed in its recent submissions to the extension of the NGRF to enable hydrogen and
renewable gases, APGA has also identified that the distributed nature of renewable gases
will lead to the provision of renewable gas infrastructure likely taking place in a highly
competitive environment2
. As Energy Minsters note their preference for effective
competition over economic regulation in other consultations, such government investment
support could be seen to solve for a range of goals broader than those stated in this
Consultation Paper. Due to the broad positive impact of renewable gas production in the
east coast gas market, APGA proposes that government support for development of
renewable gas production be added to the options being considered in the Other Options
section of the Consultation Paper as a highly effective, no-regrets approach to achieving
Energy Minsters’ objectives both in this and other Consultations.
2. Overarching Concerns
APGA raises several overarching concerns with key focus areas of the Consultation Paper:
• The rapid pace of regulatory change in the east coast gas market
• Pursuit of liquidity for liquidity’s sake
• The paramount importance of small gas users
• Simple solutions are likely to be the best solutions
• Apparent willingness to advance to much stronger forms of regulation
• Apparent willingness to override existing customer contracts
2.1. The rapid pace of regulatory change in the east coast gas market
The recency in which the DAA and CTP reforms were introduced means that the east coast
gas market is yet to see the full impacts of this regulatory change. The addition of draft
legislation for Measures to Improve Transparency in the Gas Market and Improving gas
pipeline regulation yet to pass into law, and consultation into Extending the national gas
regulatory framework to hydrogen blends & renewable gases currently underway, means that
the east coast gas market will be in a state of flux for a number of years. This Consultation
represents the fifth simultaneous gas market reform process driving regulatory change in
the east coast gas market. Each successive reform adds complexity to a market in flux, with
reforms being progressed without the full benefits of previous reforms being realised, or
even fully understood. In addition, there may be unintended consequences yet to be
identified.
Reform processes require sufficient time to deliver outcomes. Without allowing sufficient
time to deliver outcomes, the true state of the east coast gas market is unclear. As such, it is
unclear whether or not there is still a problem which needs to be fixed through further reform
processes, or what that problem truly is. As best, identifying the starting point from which
further reforms can drive change is risky and challenging when starting from a market in
flux. At worst, it is possible that further complex changes to the east coast gas market could
have a detrimental impact counter to Energy Minsters objectives.
As an example, it is reasonable to accept that the full impact of CTP and DAA introduction in
2019 is yet to be seen. The vast majority of firm haulage contracts impacted by the
introduction of the CTP and DAA will only be renegotiated as they come up for renewal in the
years ahead. Changes in shipper firm haulage negotiation strategy and resultant impacts on
the broader market as influenced by the CTP and DAA will not be seen until contracts are
renegotiated.
Indications from shippers is that the impact of the DAA on new firm haulage contracting will
result in less over-purchasing of firm capacity. This was the intent of the DAA. Once this
occurs, indication is that appetite for the CTP is likely to increase where contracting rates
are high. In addition, if this occurs there will also be more capacity available to other
shippers to contract, thereby increasing the liquidity of the market.
This feedback demonstrates that the desired outcomes of these reforms is starting to be
seen. Like many market reforms, the outcomes take many years to materialise. Taking
additional lessons from the lengthy market uptake timeline for the Sydney STTM (which has
been very different in the last 3-4 years compared to its first 8 years), APGA recommends
that the CTP and DAA markets be left to settle for a further 24 – 36 months before
significant change is considered. To interfere in the CTP and DAA markets at this stage risks
shippers taking regulatory uncertainty into account when contemplating their reliance on
these facilitated markets.
It is due to this state of flux that APGA appreciate that this Consultation Paper proposes the
development of a Roadmap, rather than immediate implementation. APGA stresses the need
to include robust stop-gate processes within the roadmap ahead of implementing any
reform. These will be needed to ensure that market analysis is undertaken, determining
whether the initial (or a new) problem statement is valid and the cost and complexity of
reform aligns with the anticipated positive gains of undertaking reform.
Further, the rapid pace of regulatory change risks the possibility of regulatory reforms
coming out of step with each other. For example, many reforms found within the
Consultation Paper contemplate increased economic regulation of gas infrastructure – a
known hinderance to investment in gas infrastructure. This is in opposition to the intent of
the National Gas Infrastructure Plan (NGIP) which identifies that coordinated, efficient and
timely investment in gas infrastructure is critical to preserving Australia’s energy security and
to ensure there is internationally competitive gas for all Australians. While the reform
processes identified in Section 2.1 of APGA’s submission are designed to enhance the
coordination and efficiency of investment in gas infrastructure, they negatively impact the
likelihood of timely investment by creating additional regulatory revenue risk for any investor
seeking to achieve FID for gas infrastructure3
.
In proposing a common carriage virtual hub model for the Wallumbilla Hub or entire Roma to
Brisbane Pipeline (RBP) the Consultation Paper risks negatively impacting the gas
infrastructure investment environment which the NGIP seeks to bolster. In the context of the
Victorian Transmission System (VTS), the common carriage regulatory model impedes
investment in gas infrastructure and disincentivises innovative gas infrastructure
investment. As we have seen, this results in VTS gas infrastructure investment not
necessarily occurring in a timely or efficient fashion. Similarly, there is reason to expect that
a virtual hub model would hinder the timely and efficient investment in new infrastructure at
the Wallumbilla hub.
This proposed increase in economic regulation of gas infrastructure came two days after
the release of the Australian Energy Regulator (AER) information paper on Regulating gas
pipelines under uncertainty4
. This AER information paper considers potential changes to
economic regulation practices relative to gas infrastructure, considering whether gas
network businesses [should] be fully regulated on price when there may be effective
competition. The AER notes that the basis for economic regulation of infrastructure is when
there are conditions in the market which severely limit effective competition and that it is
possible that the market for the services of gas network business may evolve in future and
could become effectively competitive.
This contradictory policy and regulatory environment in and of itself is an impediment to the
very gas infrastructure investment which the NGIP seeks to enhance.
2.2. Pursuit of liquidity for liquidity’s sake
Proposed Energy Ministers’ objectives for the two reform workstreams discussed in the
Consultation Paper appear to assume that liquidity is of paramount importance.
Importantly, these objectives are accompanied by the recognition that the issues facing the
current market and potential solutions are likely to be complex and varied in nature, and any
proposed changes will require careful evaluation to understand the costs and benefits of
implementation.
Liquidity is an important market characteristic. That said, there is only so much that can be
achieved by market design. Market participant desire, the number of buyers and sellers, the
amount of commodity available, the duration of market transactions are all factors that
influence the ability of a market to develop liquidity.
The Consultation Paper sets out that customers are taking actions that are in the best
interests of their shareholders. While energy markets are complex, many market participants
want only an understandable, competitive price and a long-term supply contract. This allows
them to focus on their core business, whatever that may be.
Increasing expense and complexity through socialisation of costs in a zonal Wallumbilla
Hub or altering the DAA in search of greater CTP uptake may have a negative impact on
customers. In developing a roadmap, an understanding of customer desire for intended
regulatory outcomes and other factors that influence liquidity should be used as a stop-gate
metric analysis when considering these more complex, more costly regulatory actions.
APGA wishes to finally restate the importance of increased gas supply as the most effective
way to increase supply liquidity in the east coast gas market.
2.3. The paramount importance of small gas users
Justification for pursuing more liquid gas markets can be founded in Energy Ministers’ goal
of small user engagement in the gas market. Uncertain price signals and illiquid markets in
the Wallumbilla Hub, or inconsistencies in fee structure or suboptimal timetables in the CTP
are both specifically detailed as issues preventing small gas user engagement.
In practice, there is a tangible lower limit to the size of a wholesale gas customer. This lower
limit is due to the expense of the in-house expertise required for self-management of energy
supply, as well as the risk and expense of maintaining sufficient contractual rights to gas
and gas transport in order to ensure security of supply. This is evidenced by the ACCC Gas
Enquiry 2017 – 2025 January 2021 Interim Report which notes:
“a number of users report that participation in facilitated markets increases costs for their
business, as they have to take a more active role in managing price risk”5
For a small customer, energy is typically a portion of operational costs – an important potion
but a portion no less. It is possible for a gas customer to optimise a portion of this portion of
costs through the expense of managing their own energy portfolio. Risking the effectiveness
of a business’s energy supply portfolio through self-management to achieve a fraction of a
fraction of operational cost optimisation does not tend to pass risk assessment until energy
costs become substantial.
The growing prominence of third-party traders acting within the Wallumbilla Hub and other
facilitated markets is likely to be evidence of the preference of small gas users to not
actively engage in gas markets. It is also likely that most small gas users want an
understandable, competitive price and a long-term supply contract for their gas needs.
Where a small gas user is interested in engaging in facilitated markets, it is more likely they
will look to the facilitated markets of the STTM and DWGM that provide flexibility at demand
centres without the complexity of managing short-term supply and transportation services.
While the role of small gas users and their ability to participate in facilitated markets is a
useful consideration, designing markets to be specifically accessible to small gas users is
unlikely to deliver optimal outcomes. It is likely that small users are most interested in
seeing an effective reference price established at Wallumbilla rather than a complex market
they are required to participate in on a daily basis.
2.4. Simple solutions are likely to be the best solutions
To repurpose Occam’s Razor, the simplest solution is usually the best one. From the most
basic cost-based principles to the more complex recognition of an east coast gas market in
regulatory flux, APGA recommends that the simplest reform options be considered before
more complex reform options. As detailed under each of APGA’s no-regrets policy options, it
is likely that the greatest shift towards Energy Minsters’ objectives will also be achievable
through the simplest of the proposed reform options.
Compared to the relatively simple anonymous delivery and prudential streamlining solutions,
developing a virtual hub model for the Wallumbilla Hub is a significantly more complex
solution that may not deliver enhanced outcomes proportionate to its increased cost and
complexity. Ensuring that simpler solutions are allowed to demonstrate their relative
success will be necessary to compare the costs of more complex solutions relative to their
achievable market benefits. In considering the more complex virtual hub options, the
consultation process should carefully consider why a customer would wish to trade in a
geographically distant facilitated market when a geographically collocated facilitated market
is available.
This philosophy also rings true in the case of the CTP and DAA. The more complex options
proposed such as reviewing bidirectional pipeline restrictions, reviewing firmness of auction
product, opening access to primary capacity products or introducing dynamic backhaul all
sound simple, but have significant operational complexities and implications for future gas
infrastructure investment. Noting the experience of the Sydney STTM, simply providing
sufficient time for markets to take effect will likely lead to an increase in market liquidity
without the additional cost and complexity of additional reforms – the uncertainty from
which may even serve to dissuade users in the coming years.
2.5. Apparent willingness to advance to much stronger forms of regulation
While not stated specifically, there is little expectation that a Virtual Hub model will be able
to be implemented while maintaining the current Contract Carriage form of regulation found
around the Wallumbilla Hub (and RBP). The willingness to consider a virtual hub model
includes an apparent willingness to endorse the transition to a common carriage regulatory
model for the infrastructure comprising the Virtual Hub. Such step changes in form of
regulation should be considered extremely carefully noting that only one transmission
pipeline system in Australia is currently subject to a similar form of economic regulation –
the much larger and more dynamic Victorian Transmission System – and it is experiencing a
unique set of investment issues in the current environment.
The common carriage regulatory model is likely to impede innovative investments in the gas
industry. Beyond impacts to the ability to finance investments within common carriage
regulatory processes, a lack of market signals impedes the ability for investors to proactively
invest in the infrastructure the market needs.
2.6. Apparent willingness to override existing customer contracts
Regulatory interference with contractual arrangements between private corporations should
not be taken lightly. Several proposals in the Consultation Paper could have this outcome:
• restricting firm shipper renomination rights in the CTP proposals;
• modifying contract interactions with the Wallumbilla Hub in the virtual hub proposal;
or
• nullifying all contracts across the Wallumbilla Hub in the virtual hub proposal.
Energy Ministers should exercise caution with proposals that interfere with existing
customer contracts. Within the gas industry, this apparent willingness to override
contractual arrangements serves to undermine service and price certainty for customers,
and revenue certainty for infrastructure investors. This in turn undermines customer
confidence in contracting services and investor confidence when making final investment
decisions (FID) on gas infrastructure investment. This is directly counter to federal
government intentions as signalled via the National Gas Infrastructure Plan and should be
considered in relation to Energy Minsters’ objectives
3. Feedback on Consultation Paper sections
APGA provides more detailed feedback relating to the following specific sections within the
Consultation Paper:
• Consultation Rationale
• Wallumbilla Gas Supply Hub
• Pipeline capacity trading frameworks
• Other enabling framework reform options
3.1. Consultation Rationale
The articulated rationale for undertaking the Consultation could better recognise adjacent
reform activity. In failing to recognise adjacent reform activity, the Consultation Paper seeks
to solve problems experienced in a market which will be materially different once the two
existing legislation packages and adjacent NGRF extension consultation come to fruition.
While there are some clear no-regrets reforms and initiatives which could be implemented
early within the roadmap as noted in Section 1, APGA recommends analytic steps be
included within the roadmap to ensure that the effects of reforms which are currently
underway are understood before the consideration of further reform. Further, the rationale
must be checked to ensure that it is still valid at each step in the reform roadmap, and
especially before considering more complex reforms.
3.2. Wallumbilla Gas Supply Hub
In comparison with the more liquid STTM and DWGM facilitated markets, the Wallumbilla
Gas Supply Hub has a fundamental difference. While the STTM gas hubs are located central
to gas demand locations, the Wallumbilla Gas Supply Hub is located central to gas supply. It
is reasonable to expect significant liquidity in demand side facilitated markets due to their
proximity to many customers and the ease for these customers to purchase gas straight
from the market. Customer interaction with a supply side hub requires transport
management, making it simpler for gas suppliers but more complex for gas customers. The
consultation process should carefully consider why a customer would trade in a
geographically distant facilitated market when a geographically co-located facilitated market
is available.
Tangible recommendations for the Wallumbilla Gas Supply Hub portion of the Consultation
Paper include:
• Targeting no-regrets reforms early in the Roadmap:
o Anonymised Delivery
o Streamlined Prudentials
• Use of stop-gate analysis throughout the roadmap prior to implementation of any
reform to ensure an evidence-based problem statement exists, a quantifiable
improvement from reform is understood, and the costs and risks of reform don’t
outweigh the benefits in terms of the NGO.; and
• Careful consideration of the impacts of much stronger forms of regulation required
to deliver the virtual hub model relative to market needs and other market influences
3.2.1. No-regrets reforms
As identified in Section 1.1 and 1.2 above, the Anonymised Delivery and Streamlined
Prudentials reforms identified within the Consultation Paper represent no-regrets reforms
which can have no regrets outcomes. As tangible solutions to problems, these reforms have
a direct connection to significant and achievable uplifts in market liquidity in the Wallumbilla
Gas Supply Hub. APGA anticipates that the majority of current off-market trades identified in
Figure 2 of the Consultation Paper would pass through the facilitated market following
implementation of these no-regrets reforms.
3.2.2. Wallumbilla Gas Supply Hub Virtual Hub Model
The proposed implementation of a virtual hub model for the Wallumbilla Gas Supply Hub
should be carefully considered relative to Energy Ministers’ objectives. The implementation
of a virtual hub model displays apparent willingness to override customer contracts and
advance much stronger forms of regulation. Further, this willingness and the complexity of
this proposal likely only targets a minimal marginal increase in market liquidity following
greater understanding of small gas customers and the implementation of no-regrets
reforms.
Once the current round of economic regulatory reforms (Section 2.1) and no-regrets
initiatives (Section 3.2.1) have been allowed time to properly embed, APGA anticipates that
the vast majority of potential participation in the facilitated market will have transitioned to
market utilisation. After this, careful consideration should be given to the relative benefit of
the complex, invasive and complex handed changes required to implement a virtual hub
model. Not only should the economic reality of small gas users be taken into account
(Section 2.3), but the impediment to innovative investment in and around the virtual hub
should also be weighed up, especially considering the opportunity of supply liquidity driven
by renewable gas production across the coming years (Section 1.4).
3.3. Pipeline capacity trading frameworks
APGA considers there are a number of fundamental issues that need to be considered when
assessing the need for DAA and CTP reforms. As such, APGA’s recommendations for the
Pipeline Capacity Trading portion of the Consultation Paper include:
• Targeting no-regrets initiatives early in the roadmap identified in Section 3 of the
Consultation Paper:
o Anonymised Delivery
o Streamlined Prudentials
• Not implementing further reforms around the CTP and DAA until:
o Sufficient time has passed to allow for the cadence of firm contracting to
reveal the impact of these past reforms on market behaviour; and
o Consideration for the impacts of parallel regulatory reforms are able to be
factored into whether further action is necessary.
• Use of stop-gate analysis throughout the roadmap prior to implementation of any
reform to ensure an evidence-based problem statement exists, a quantifiable
improvement from reform is understood, and the costs and risks of reform don’t
outweigh the benefits in terms of the NGO.; and Careful consideration of the impacts of all proposed reforms in this section
3.3.1. Premise
In a market which contracts on a 3- 5- 10-year basis, the impacts of market reform are not
felt overnight. If the DAA was to have an impact on market behaviour, it would likely
manifest in two main ways:
• Customers purchasing firm haulage to block competitors would find that this was no
longer an effective strategy, hence would be less likely to purchase historically high
volumes of firm haulage; and
• Customers who valued transport service firmness above as available service levels,
but only use transport services on a sporadic basis and don’t require fully firm
services, would now see less reason to secure firm haulage services, making them
less likely to purchase historically high volumes of firm haulage.
In both cases, any changes in market behaviour will only occur at the cadence of contract
renewal. The CTP and DAA have been operational for around two and a half years. Factoring
a delay in participant reaction to the newly forming market conditions, it is reasonable to
expect that evidence of market reaction to CTP and DAA introduction would only begin to
occur across the coming years.
This is an important point, as the impact of the DAA is expected to both free up firm capacity
for other shippers, and to drive an uplift in CTP uptake once market participants reduce firm
haulage purchases. From here, the attractiveness of accessing short to medium term
secondary capacity is expected to rise, taking the place of previous high firm haulage rights
in the instances where these are needed. To base the need for further CTP and DAA market
reforms on the lack of evidence of CTP uptake despite the fact that such supply liquidity is
only expected to arise in coming years should be carefully considered.
Similarly, APGA questions the approach of basing regulatory change upon a lack of
incentives when not all existing regulatory powers have been utilised to facilitate market
uptake. Existing regulatory provisions surrounding the disclosure of secondary trades
appear to be neither adhered to nor enforced. Prior to proposing more reform and/or
regulation to drive market uptake, existing provisions should be more consistently applied to
consider their potential effectiveness in market facilitation.
Beyond these points, APGA questions three aspects of the premise upon which the CTP
requires reform – the lack of incentives to trade capacity on the CTP, the paramount
importance of small gas users, and the market power of pipeline operators for short-term
capacity.
3.3.1.1. Lack of incentives to trade capacity on the CTP
Identifying aspects found in Section 4.1.1 of the Consultation Paper as potential problems
leading to a lack of incentive to trade which need to be addressed is concerning. The need
and benefits of CTP appears to be taken as a given. It is appropriate to consider:
• In a market with firm, contract services, flexible services and a low cost DAA, the
value of any CTP may be very low In a market that already has a low number of participants, there are unlikely to be
many market participants that will see value in capacity access that is measured in
weeks or months.
Not only is there no incentive to trade capacity on the CTP but doing so may be inferior to
current practices. The issues raised in Section 4.1.1 of the Consultation Paper should not be
seen as problem to be addressed. Rather, these are realities of the east coast gas market
that should be taken into account.
Market participants make decisions that have proven to be effective in ensuring security of
supply to themselves and retail gas and electricity customers over many years in many
challenging circumstances. As noted above, as contracting behaviour changes over time,
the CTP may become a useful tool for some market participants. It is not clear that there is
reason to materially alter it now.
3.3.1.2. The paramount importance of small gas users
The paramount importance of small gas users is seen here again in the suggestion that
inconsistencies in fee structure and suboptimal timetables are impeding small shippers
from participating in the CTP. These impediments pale in comparison to the economic
impost of developing sufficient operational capability and contracts to effectively manage
the risk and optimisation of a business’s energy needs. It will not be the removal of these
small hurdles that result in small user engagement in the CTP, when it is likely small users
are simply not interested in interacting with the supply hub.
3.3.1.3. Market power of pipeline operators for short-term capacity
This Consultation Paper does not appear to have considered pending legislation following
the Improving gas pipeline regulation consultation6
. Following the completion of the
legislative changes to the NGRF to strengthen pipeline regulation, all pipelines will be
covered by one of two economic regulatory frameworks once legislation is enacted.
APGA notes that the purpose of legislation arising from the Improving gas pipeline
regulation consultation will address the concerns raised in Section 4.1.5 of the Consultation
Paper. As such, the consultation should not seek to address this aspect of the Section 4
premise as legislation already exists to achieve this end.
3.3.2. Proposed reforms
Each reform proposed in Section 4 of the Consultation Paper requires careful consideration.
3.3.2.1. Reviewing fee structures and levels
Reviewing fee structures and levels must maintain the right of service providers to recover
the costs of implementing changes to regulation. Simplification must not result in service
providers incurring costs for enabling market reforms that lower costs and provide value to market participants. APGA considers that the current cost recovery mechanism in s634 of
the NGR and oversight by the AER in s635 are appropriate and no further regulation is
required.
3.3.2.2. Reviewing bidirectional pipeline restrictions
The introduction of a backhaul product in the DAA for bidirectional pipelines will lead to the
introduction of products which are not physically possible to deliver. Backhaul products are
more complex than contemplated within the DAA, and further increases to availability of
backhaul products in the DAA, especially for bidirectional pipelines, will likely require a step
change increase in pipeline management capability. This increase in CAPEX and OPEX in
order to accommodate regulatory change is not expected to be proportionate to the value
which would be obtained through expansion of the DAA market in this way. This increase in
costs will need to be recovered from customers as is the case for previous cost of DAA
implementation.
As a complex topic, APGA invites DISER and Energy Ministers to further engage with APGA
on this topic in particular so to gain a better understanding of what is required to facilitate
this regulatory change.
3.3.2.3. Alleviating issues around auction timing
Altering auction timing by 1 hour is unlikely to result in any impact beyond increasing system
costs through the requirement to modify existing systems and processes. What this will
achieve however is additional cost and complexity for service providers. Additional pressure
will also be added to service providers who already undertake complex operational
assurance activities within the already tight timeframes. Making these timeframes tighter
also risks an increase in service provider error in setting Auction Quantity Limits (AQLs) – a
task which is difficult enough to do accurately within current required timeframes.
APGA is aware there are smaller shippers who source gas after their DAA bids are
accepted/won. If nominations are automated there is a risk that these smaller shippers may
not have gas sourced for use. Energy Ministers need to understand how these market
participants would manage this risk.
3.3.2.4. Reviewing firmness of auction product
This reform displays an apparent willingness to override customer contracts. Not only will
this negatively impact market certainty for customers and their willingness to enter long
term Gas Transportation Agreements (GTAs) (leading to flow on negative impacts on
foundation contracts for infrastructure investment), but this reform risks also undermining
the security of supply for retail gas and electricity customers throughout short-term demand
peaks. The proposed amendments to firmness of the auction production would impede the
ability of primary capacity holders to renominate in response to short-term demand peaks or
other security of supply scenarios.
The Consultation must not lose sight of the fact that gas and electricity (produced via Gas
Power Generation (GPG)) are critical resources. In the case of gas for GPG, this importance
is recognised by the Gas Supply Guarantee7
. Referring to either a retail or GPG shippers’
choice to not trade pipeline capacity or the DAA firm renomination rights as problems to be
addressed should be closely considered in light of Energy Ministers’ objectives.
This is a critical issue, given that interference in customer contracts and in the ability of
infrastructure service providers to meet contractual commitments represents significant
sovereign risk to investors. The potential implications of this proposal need to be fully
understood.
3.3.2.5. Opening access to primary capacity products
This proposed reform duplicates the ability for gas customers to access capacity in a
standardised way, hence appears to provide no additional value for increased cost and
complexity. This reform also indicates that implementation would include standardised
services which may be priced under some form of pricing mechanism. Pipeline service
providers engagement with customers indicates that customers are far more interested in
products customised to their requirements than in standardised products. Further, the
approach of utilising some form of pricing mechanism risks distortion in the contracted firm
haulage market which, in the case of both scheme and non-scheme pipelines, is intended to
still operate under a negotiated price model.
3.3.2.6. Other options considered
APGA recognises that the Consultation Paper does not propose to further progress a
number of other options based on preliminary issues identified. In particular, we highlight
that the proposed dynamic backhaul approach does not recognise the complex relationship
between forward haul and backhaul capacity. While the concept proposed in the
Consultation Paper may work for a simple bidirectional pipeline which is bidirectional end to
end, it does not consider pipelines where the pipeline may flow towards a middle point. In
these circumstances, pipelines require significant reconfiguration to transition from a
central delivery point to a delivery point at either end, leading to the potential for failure to
deliver nominated quantities if backhaul quantities are dynamically calculated without
operator intervention to ensure operational practicalities are considered.
Additionally, implementation of dynamic backhaul in the DAA would require a significant
uplift in operational capability in order to provide operational assurance to dynamic backhaul
outcomes. This would require additional CAPEX and OPEX deployment by service providers
for which service providers would need to be able to recover their costs. This proposition
must be considered alongside the review of fee structures and levels in ensuring that service
providers are reasonably able to recover all costs associated with CTP and DAA, including
the cost of implementing new, more complex operational assurance activities to enable
dynamic backhaul DAA products.
3.3.3. Alternate reform – Anonymity and Streamlined Prudential Requirements
Notwithstanding the above positions and recommendation to take no action on the CTP and
DAA, if any no-regrets reforms have merit in increasing CTP liquidity it would be the
anonymity and prudential provisions raised with respect to the Wallumbilla Gas Supply Hub
It is uncertain whether these would have any greater chance of success compared to other
proposed reforms, however these proposed reforms are at least simple enough to
implement.
Pipeline capacity trading is occurring – just not on the CTP. As all parties are familiar with
one another, there is no incentive to pay additional CTP costs in order to undertake
transactions. With the proposed reduction in costs and the addition of streamlined
prudential requirements and anonymity, it may be possible to entice some users onto the
CTP side of the CTP. These are not expected to address the core facts outlined in 3.3.1
above, however there is no reform or initiative beyond the least reasonable regulatory
approaches which could change businesses making value-based decisions which achieve
the best outcomes for their shareholders.
3.4. Other enabling framework reform options
The other enabling framework reform options proposed within the Consultation Paper
appear somewhat unexpectedly within this consultation process. Considering some display
an apparent willingness to override customer contracts and move to much stronger forms of
regulation, it should be carefully considered whether sufficient evidentiary basis exists for
undertaking such intrusive reforms or initiatives.
Tangible recommendations for the Other Enabling Framework Reform Options portion of the
Consultation Paper include:
• Enabling government investment support in specific circumstances, including
Investment in renewable gas production
• Use of stop-gate analysis throughout the roadmap prior to implementation of any
reform to ensure an evidence-based problem statement exists, a quantifiable
improvement from reform is understood, and the costs and risks of reform don’t
outweigh the benefits in terms of the NGO; and
• Careful consideration prior to any application of economic regulation to gas
processing facilities, in particular considering the potential negative impact on
combined processing and transport contracts and renewable gas production.
3.4.1. Third-party access to gas infrastructure
APGA has long maintained that the gas infrastructure industry will deliver a pathway to
market for any commercially viable gas production opportunity. While we have largely
maintained this position on gas pipeline infrastructure, the same logic applies for gas
production infrastructure – where commercially viable supply exists, the gas infrastructure
industry will provide a production and processing pathway to the east coast gas market.
This was demonstrated across past years by both Jemena and APA Group with their
respective gas production infrastructure investments8,9
As identified by APPEA in its submission to the ACCC Gas inquiry 2017-2025 Review of
upstream competition and the timeliness of supply, this is not the first time that this concept
has been considered, with a significant number of inquiries touching on the potential
economic regulation of gas processing since 201410
. APGA notes that in each instance,
inquiries have not resulted in economic regulation of gas processing infrastructure, and that
there is no discernible new information provided within the premise of the Consultation
Paper beyond that included in any prior inquiry considering this option.
APGA recommends any further consideration of this reform option alongside recently
drafted legislation following the Improving gas pipeline regulation reform process. Under
these reforms it was proposed to extend the ringfencing requirements in Part 2 of the NGL
to all pipelines. This risks the unintended consequence of requiring processing facilities to
be ringfenced from the respective pipeline businesses in instances where innovative
contracting practices have led to the development of integrated processing-plus-transport
services. As these services have been sought out by customers and lead to better outcomes
for customers, this process and adjacent processes need to ensure customer interests are
not risked through seemingly simple reform options.
In response to the proposed extension of the NGL ringfencing requirements to all pipelines,
APGA considers that the definition of ‘related business’ should be changed to avoid the
unintended consequences referred to above. If this definition is not clarified to address this
issue, transitional arrangements would need to be included in the package to ensure
relevant facilities are exempt from ringfencing obligations in Part 2 of the NGL, reflecting
that these commercial and contractual arrangements were made prior to the reforms being
proposed. Similar measures would need to be implemented if the third-party access to gas
processing facilities proposal in this Consultation Paper was acted upon. APGA note that a
standing exemption would be more appropriate for prospective processing facilities which
would be unintendedly captured by the ringfencing rules.
Furthermore, considering the simultaneous process undertaken to extend the NGRF to cover
hydrogen and other renewable gases, care will also need to be taken to ensure that
similarities and differences between natural gas processing facilities and renewable gas
processing and blending facilities are taken into account. In the event that the NGRF
extension process decides that the economic regulation of Constituent Gas processing and
blending facilities shall not be subject to economic regulation, there is the possibility of this
process to overrule this position and apply economic regulation through the current
definition used to identify gas processing in the NGL. Alternately, if different approaches are
maintained between natural gas and renewable gas, there is the risk for market distortion
between natural gas and renewable gas processing facilities.
It is hoped that through exploring these points above, the relative necessity and complexity
of this proposed reform become a point of focus if considered at all in the roadmap to be
developed following this consultation.
3.4.2. Improving contracting practices to support greater on-screen trading and
liquidity
It is not clear to APGA how this could be achieved without restricting innovative contracting
practices available to customers to reduce overall energy costs. Regulatory interference in
contracting practices which force customers into facilitated market use, or penalise
customers for not using the facilitated market, should be carefully considered.
3.4.3. Potential government support for infrastructure
APGA maintains that government investment support in energy production, transport or
storage infrastructure risks market distortion. As identified in Section 1.3, an exception to
this rule may be the development of gas infrastructure for non-market specific purposes.
Any government investment support could require co-investment by industry matching such
that typical gas and gas transport pricing arise from the projects, resolving the market
distortion risk
Attachment A: Options to progress the east coast gas market –
Stakeholder feedback template
Submission from Australian Pipelines and Gas Association
The template below has been developed to enable stakeholders to provide feedback on the paper Options
to advance the east coast gas market, in particular:
• Key issues and barriers to performance, participation and liquidity of the Wallumbilla Gas Supply
Hub, and potential policy options
• Key issues and barriers to effectiveness of the pipeline capacity trading framework, and potential
policy options
• Broader issues and options which could enable greater liquidity and participation through related
enabling frameworks
Officials strongly encourage stakeholders to use this template, so that it can have due regard to the views
expressed by stakeholders on each issue. If you wish to provide additional feedback outside the template,
wherever possible please reference the relevant question to which your feedback relates.