Future Gas Strategy: consultation paper

10 November 2023

Future Gas Strategy Taskforce
Department of Industry, Science and Resources
Industry House,
10 Binara Street, Canberra
ACT 2601

Business NSW response to the Future Gas Strategy consultation paper

Dear Taskforce,

Business NSW is grateful for the opportunity to respond to Future Gas Strategy consultation paper. As
NSW’s peak business organisation, Business NSW has almost 50,000 member businesses across
NSW. We work with businesses spanning all industry sectors including small, medium, and large enterprises. Operating throughout a network in metropolitan and regional NSW, Business NSW represents the needs of business at a local, state, and federal level.

Business NSW is a member of the Australian Chamber of Commerce and Industry (ACCI). In addition to this submission, Business NSW also supports ACCI’s submission to this consultation. The creation of a National Gas Strategy is something ACCI has called for in recent years, and both organisations are pleased to see the Future Gas Strategy in development.

The first part of this submission provides some overarching comments on the strategy and the consultation paper. The second part addresses specific questions posed in the consultation paper.

Overarching comments on Future Gas Strategy

Business NSW views the questions about the future role of gas in the NSW and Australian economy as one of the central unresolved challenges in the energy transition. Business NSW understands the importance of reliable, affordable gas to the state’s gas-using businesses. Business NSW also understands the need to reduce greenhouse gas emissions from all sources, including from gas consumption, to ensure that ambitions to reduce emissions to net zero by 2050 can be achieved.

Business NSW is also conscious of a number of upcoming decision points which will determine the direction of gas policy in NSW. These include the upcoming 2025-30 Price Review for the Jemena
Gas Network, NSW’s major gas distribution network operator, and questions about restrictions on gas in building standards and planning procedures at a state and local level, which will shape the availability of gas connections for small business consumers.

Business NSW has long been concerned that decisions about gas supply, particularly in NSW and
Victoria, have become detached from understanding of gas demand, leaving the potential for shortfalls and price rises from the middle of this decade. These concerns have been exacerbated by price rises incurred since the invasion of Ukraine in 2022, and the failure to bring about any significant improvements in the gas supply picture in recent years. Business NSW reported on these topics in
2019, in its report Running on Empty.1

That report recommended:

1Business NSW; Running on Empty; 2019 https://www.businessnsw.com/content/dam/nswbc/businessnsw/pdf/015-Running-on-Empty-Report-7_PRINT.pdf

Level 7, 8-12 Chifley Square, Sydney NSW 2000
Tel 13 26 96 | contact@businessnsw.com | businessnsw.com
ABN 63 000 014 504
• Approving development of the Narrabri gas field by 2020
• Beginning a program of pipeline and infrastructure upgrades to expand capacity by 2021
• Facilitating LNG import terminal construction in NSW to begin in 2022
Since that time, the Narrabri project has received government approvals but has still yet to take its final investment decision. Prospects for an LNG import facility at Port Kembla have been delayed, including by factors related to the Ukraine conflict and the demand for extra LNG supplies into other global markets. And pipeline and infrastructure upgrades to increase supply into NSW from
Queensland and the Northern Territory have been incremental at best.

AEMO’s 2023 Gas Statement of Opportunities (GSOO) describes the growing risk of shortfalls in NSW on peak days from 2023 onwards, and structural supply shortfalls across all scenarios in the period
2025-30 in the absence of new supply.2 With new supply and LNG import options having made little progress over the past four years, while AEMO warnings have become progressively stronger, there appears to be a growing reliance on, and expectation of, demand reductions to balance the system.

For businesses for whom gas is a major input factor, there are significant risks of both physical supply interruptions (in the worst-case scenarios), and of gas becoming prohibitively expensive for gas- intensive businesses to be able to maintain operations in NSW. As a consequence, Business NSW maintains that it is, and is likely to remain for the foreseeable future, vital to provide for reliable, affordable gas supply to NSW businesses.

Role of gas in energy transition

Aside from the direct use of gas by businesses in commercial applications, businesses also have an interest in the way gas is consumed in other parts of the economy.

As NSW’s electricity system, and the wider National Electricity Market, decarbonise, gas generation will play an increasingly important role in balancing and firming the system. It may be the case that the number of megawatt-hours produced by gas decreases in time, but those hours that gas will have to supply will be more sensitive because they will be the ones where other options are unavailable.
Consequently, electricity policy, and in particular the NSW government’s firming stream within its
Electricity Infrastructure Roadmap, must be aligned with policy on gas supply and other elements of gas demand.

The use of gas in the residential sector has become increasingly contested as pressure builds from governments, and some individual householders, to replace gas heating and cooking with electric alternatives. From a business perspective, the electrification of household demand may prove helpful if we remain in a position of constrained supply, as it would free up available volumes for harder-to- switch commercial applications.

However, there are also risks to business competitiveness if there is significant growth in disconnections from the gas system, as the fixed costs of maintaining the transmission and distribution systems are shouldered by a shrinking number of users, with proportionately rising numbers of hard to substitute commercial applications. Identifying a solution to this question must be a priority for the
Energy and Climate Change Ministerial Council (ECMC) and the national energy market institutions need to prioritise. There is a risk that business-as-usual processes including gas distribution network pricing resets will be unable to propose fit-for-purpose outcomes if the future of the sector is left in a prolonged state of uncertainty. This issue was explored more extensively in Risks to Gas Consumers

2Australian Energy Market Operator; Gas Statement of Opportunities 2023; https://aemo.com.au/-
/media/files/gas/national_planning_and_forecasting/gsoo/2023/2023-gas-statement-of-opportunities.pdf?la=en

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of Declining Demand released through Energy Consumers Australia, which has informed Business
NSW’s thinking on the topic.3

The number of institutions with influential roles over the future of gas continues to grow. Managing the interrelationships between federal and state governments, energy market bodies, regulated distribution networks, local authorities, climate policymaking agencies and export counterparties is an increasingly complex task. Mismatches in policy between different levels of government, and between the different states and territories, are becoming more apparent. A crucial role for the Future Gas
Strategy is reunifying these increasingly disparate approaches to gas’s future.

The strategy also has the task of balancing the needs for investment in gas supply against the macroeconomic pressures created by other infrastructure developments. Infrastructure development is a significant driver of the inflationary pressures Australia continues to battle. Business NSW members have seen the pressure on workforce constraints as infrastructure construction has picked up speed.

Competition for workers and capital for investments has been heightened by increasing demand around the world, as Europe reorients its energy system away from Russia, and as the US implements the incentives contained in its Inflation Reduction Act.

Industry policies such as the National Reconstruction Fund are focused on increasing domestic processing of minerals, metals and agricultural produce onshore. The consultation paper fails to recognise that these processes will substantially increase demand for gas, as alternative high-heat technology (e.g. green hydrogen) is still very much in the development phase and untested.

The planning and environmental approvals processes are challenges for all energy infrastructure. Gas infrastructure in particular has become increasingly subject to legal challenges which have delayed development and introduced considerable risk into proposed investments.

All of these macro scale challenges will constrain the extent that large scale investment in gas infrastructure can take place, and the potential speed with which it could plausibly be delivered.
Government must ensure that gas investments are sufficiently prioritised compared to all the other infrastructure megaprojects taking place around Australia to prevent gas supply issues holding back other sectors of the economy.

Responses to Consultation Paper Questions

2. What role do you see gas-fired generators playing in supporting Australia’s 82% renewable energy targets and beyond?

Business NSW anticipates a critical role for gas-fired generation as the proportion of renewable energy in the system increases through the 2020s and 2030s. There are currently limited options available for filling gaps in output from renewable sources, and as large scale pumped hydro construction struggles, gas alongside batteries remain the most viable options that will allow ageing and polluting coal power stations to close.

Business NSW notes aspirations that a share of the gas fleet, including the Tallawarra B power station soon to be commissioned in NSW later this summer, will be able to use hydrogen as well as natural gas. There exist a wide range of scenarios about the likely future role of hydrogen in the energy system. Hydrogen used for electricity production promises significant benefits including enabling flexible dispatchability, and utilising solar production that would otherwise have low value or be

3Energy Consumers Australia; Risks to Gas Consumers of Declining Demand; 2023 https://energyconsumersaustralia.com.au/publications/risks-to-gas-consumers-of-declining-demand

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wasted. However, the economics of hydrogen still have a long way to go to demonstrate that it can be a viable and affordable option compared with more established alternatives.

3. How will the expected trends in demand from gas-fired generators impact other gas users?

This is a significant question, and carries additional weight after the events of 2022, when a spike in demand from gas-fired generators led to gas price rises that have placed industrial and commercial users’ competitiveness under pressure. As discussed above, without additional supply being made available, there is significant concern about supply adequacy in NSW and Victoria. To the extent that supply remains constrained, increases in demand from gas generation have the potential to drive up prices or deprive other users of the ability to secure supplies. Measures to improve the efficiency of gas consumption, and to promote electrification where gas is used in easily converted applications, will help in ensuring that limited gas supplies are used where they are valued highest. Business NSW awaits the release of the National Energy Performance Strategy and hopes to see in it measures to assist businesses and households reduce inefficient gas use.
7. Are there alternatives that your business can use instead of gas (for example electrification, hydrogen, biomethane or circular economy inputs)? What barriers exist to using these alternatives?
How can the substitution of gas be accelerated?

AND

8. What factor/s influence your willingness to adopt electric appliances or processes? How could governments support small businesses to decrease gas consumption?

Access to funding

Across a range of prospective business investments in energy technologies and energy productivity enhancements, access to funding remains the most commonly cited constraint. 4 Alternatives to gas require at minimum upfront capital investments in equipment. At present there are very few instances where these alternatives would require a lesser upfront investment that a gas option.

Even assuming the business is able to provide or access sufficient capital to make the upfront investment, it also needs to be confident that the investment can generate returns on a reasonable timescale. For less mature technology options, the overall business case may not be compelling. Even when a positive return can be expected, this must be set against other options for investment available to the business.

Timing of capital investments is another limiting consideration for many businesses. Businesses are usually reluctant to replace equipment ahead of its depreciation schedule unless an obvious benefit in productivity and profitability can be realised. Any program aimed at encouraging businesses to invest in gas substitution needs to take into account these equipment replacement cycles. That means avoiding programs with short term funding allocations and limited application windows. When grant programs are run in this way, beneficiaries are more likely to be those businesses who happen to be at an appropriate stage in their investment cycle, rather than those for whom the grant might make the most difference, or where the greatest benefits in terms of emissions reduction can be realised. The small business energy incentive is an example of a potentially beneficial policy which is weakened significantly by its short term time horizon. 5 A more stable funding stream, commensurate with the long-term objective of emissions reduction, is required to avoid stop-start supply chain outcomes.

4 Business NSW; Unfinished Business; 2022; https://www.businessnsw.com/content/dam/nswbc/businessnsw/thought- leadership/November_2022_ECA_Survey_Report_low-res.pdf
5See Industry joint submission on the Small Business Energy Incentive; https://www.businessnsw.com/advocacy/submissions/sebi-joint-submission

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Expertise in the business

The ability for businesses, especially small businesses, to switch to alternatives including through electrification, varies significantly depending on the application of gas and the level of expertise within the business. While there are some exceptions, small businesses frequently lack awareness of simple cost and efficiency saving measures. Expecting them to undertake complex investments in electrification or hydrogen-enabling technologies without considerable assistance is unrealistic. Even with support, there may be many other actions the business would be better off undertaking before investing in gas substitution actions.

Substituting gas applications for other technologies requires the business to understand the replacement technology, its business case, and how its technical characteristics relate to the operations of the business. For many businesses, especially smaller businesses, the lack of expertise on these matters is a significant barrier to making energy-related investments of all kinds, including in gas substitution.

Improving smaller businesses’ access to relevant energy advice is a key objective of Business NSW.
Since the Federally-funded Business Energy Advice Program (delivered by Business NSW) ceased in
2022, there has not been a service available to provide independent advice to small businesses.
Business NSW strongly believes that an enhanced replacement energy advice service will be needed if emissions targets are to be met.

In our view, a successful, upgraded energy advice program would have the following features 6:

• A focus on energy consumption, rather than headcount, as the entry criterion. The greatest bang for buck from energy efficiency and productivity measures comes from reducing large energy users’ consumption. The energy intensive end of the SME sector – small manufacturers, hospitality, agriculture amongst others – have the most to benefit from a future program to improve SME efficiency, and their improved energy efficiency will deliver the greatest public benefits in terms of emissions reduction and avoided energy infrastructure capital investment.

• A focus on net zero transition in addition to direct cost savings. As we found (see page 44 onwards), net zero transition is as significant a motivator as cost reduction for some businesses or investment classes. A more overt accounting for emissions benefits, and a deeper understanding of what SMEs want from the energy transition, will enhance a future program’s ability to deliver advice relevant to businesses’ interests.

• expanded technical capabilities to support businesses with the following aspects of managing and developing energy productivity improvements:
• Project management
• Governance support
• Project guidance
• Reporting assistance
• Implementation review
• Strategy review
• Coaching
• Connect to ecosystem partners
o Certified
o Trustworthy
o Remain independent and free for businesses to access
• Client upskilling
o Review recommendations
o Review progress

6 Ibid; pp. 28-29

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• Socialise with peers
o Knowledge sharing
o Normalising attitudes
• Data Capture
• Metering check
• Energy usage
• Interval and bill data
• Gather client context
• Strategy and operations
• Introduce energy pricing services

Hydrogen and Biomethane

Business NSW participates in Jemena Gas Networks’ Customer Council representing small business customers, and is aware of efforts within the Jemena network to undertake blending of both biomethane and hydrogen within the existing gas supply system. Business NSW supports both activities. We observe that biomethane production in NSW is in its infancy. Biomethane production is a relatively mature technology in other markets, especially in Europe, and it is clear Australia is lagging well behind other comparable markets in its adoption of the technology. The situation is further hindered by the lack of incentives to use biomethane to displace or supplement fossil fuel gas, and the absence of a certification scheme to accredit its use. Business NSW sees opportunities, either at state or federal level, to improve the recognition of biomethane and increase the role it plays in local markets.

Hydrogen blending also presents opportunities for reducing the emissions intensity of gas supplied to
NSW businesses. However, while blended hydrogen at modest volumes (up to circa 10 per cent) may be compatible with most ordinary household and business appliances, there are some commercial gas applications where the presence of hydrogen could alter the efficiency of equipment. As a result, the rollout of hydrogen blending in the distribution system needs to be conscious of the use cases where it could create complications for users.

Over the longer term, the role of hydrogen in a future gas distribution system is hotly disputed. With no clarity yet available from governments, regulators or the industry about the long-term prospects for the gas distribution system, it is very difficult for businesses to make informed decisions about their own future energy options.

39. What are the risks to Australia’s domestic gas security in the medium (to 2035) to long term (to
2050) for your industry and how can these be addressed?

40. What do you see as the biggest risk to the ongoing affordability of Australia’s domestic gas supply? For example, what are risks to affordability in the wholesale or retail market?

41. What reforms can be made at a Commonwealth, state, territory, or industry level to allow gas supply to be more responsive to domestic demand signals?

42. What actions are available to lower gas costs, including substitution and new supply, to provide certainty to consumers? How would these actions further the Australian Government’s decarbonisation goals?

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Alongside our counterparts at ACCI, Business NSW has long emphasised the need to increase gas supplied into the NSW market. Consequently, Business NSW has been concerned by the mixed signals provided in recent years about investment in new capacity.

Governments and energy market bodies have reported on the need to boost gas availability, yet a restrictive approach to planning and regulatory approval, combined with measure to cap gas prices, act to discourage investment. Business NSW recognises that, following the turbulence of winter 2022, short term measures to stabilise gas prices were necessary. However, such price controls are unlikely to be compatible with longer-term improvements in the supply position. As a result, Business NSW anticipates a return to prices being determined by supply and demand fundamentals, and efforts to keep prices down focussed on increasing supply and improving efficiency (and encouraging fuel switching where appropriate) on the demand side.

In NSW, the Narrabri Gas Project is still awaiting Final Investment Decision years after the project itself received its approval (with hundreds of obligations), in part because of continued uncertainty over its pipeline connection. The proposed offshore development at PEP-11 has been embroiled in political scandals and appears to have little backing from federal or state ministers. Business NSW is not aware of any other NSW gas proposals which have progressed towards production. The result is that NSW (and Victoria) are becoming increasingly dependent on Queensland and the Northern
Territory to take on the responsibility of facilitating gas production.

The disjointed approach to gas at federal and state levels has been a cause for concern. The test of this Future Gas Strategy will be its ability to reconcile these tensions and set out a coherent path forward.

If you have any questions about this submission or would like to discuss it further, please contact

Yours Sincerely,

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