Reforming Australia’s Domestic Gas Security Mechanism: guidelines

23 February 2023

The Hon Madeleine King MP
Minister for Resources and Northern Australia
Parliament House
Canberra ACT 2600

Submitted online: https://consult.industry.gov.au/securing-australias-domestic-gas-supply

Dear Minister

Australian Domestic Gas Security Mechanism – Draft Guidelines

Origin Energy Limited (Origin) welcomes the opportunity to provide comments on the Commonwealth
Government’s Draft Australian Domestic Gas Security Mechanism (ADGSM) Guidelines.

The ADGSM represents an extreme form of intervention, the application of which is likely to result in significant unintended consequences for the market. As such, the mechanism was originally developed as a measure of last resort with increased resource development considered the most efficient means of resolving any domestic gas market pressures.1 The proposed changes imply a material departure from this approach with the prospect of quarterly activation allowing for more frequent intervention in the market. An outworking of this is increased regulatory uncertainty, greater sovereign risk (which discourages investment) and moral hazard to the extent it dissuades contracting in anticipation of the mechanism being triggered. The new framework is also being considered at a time when a broader range of more targeted operational tools are being developed with the aim of ensuring the Australian
Energy Market Operator (AEMO) can better manage the domestic gas market.

Given this, the Government should reaffirm that the revised ADGSM will be reserved as a last resort mechanism, only to be utilised if all other options are exhausted, that would sit at the end of any hierarchy of interventions. It is also crucial the framework facilitates an appropriate allocation of risk across impacted parties and minimise the potential for market distortion. It is in this context we have provided comment on aspects of the Draft Guidelines below.

1. Quarterly activation

Increasing reliance on export controls through quarterly activation of the ADGSM is not an efficient means of managing short-term operational shortfalls. The mechanism does not adequately account for practical issues that would materially impact its effectiveness such as the location of any shortfall and availability of pipeline capacity to move gas to where it is needed. It could also discourage some users from contracting and instead incentivise reliance on spot purchases in anticipation of export limits being applied. As acknowledged by the Australian Competition and Consumer Commission (ACCC), there are inherent risks with such an approach.2

1
Commonwealth Department of Industry, Innovation and Science, ‘Review of the Australian Domestic Gas Security
Mechanism’, January 2020, pg. 10 and 29.
2
ACCC, Gas Inquiry 2017-25 – Interim Report’, July 2022, pg. 60-61.

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Flexible mechanisms like the Gas Supply Guarantee (GSG) that are designed to facilitate an industry- led response are better suited to addressing any short-term supply gaps due to intra-year changes in marginal gas demand (primarily due to generation). Reforms are also being progressed to provide
AEMO with a broader range of operational tools to manage supply that will further reduce the need for a more flexible ADGSM framework. These include:3

▪ establishing a Gas Supply Adequacy and Reliability Conferences (GSARC) framework that will
formalise the existing GSG and allow AEMO to call mandatory industry conferences in the event
of an identified threat to reliability of supply with a view to facilitating a market response; and

▪ providing AEMO with powers to direct east coast gas market participants (e.g. to inject available
gas, fill storage facilities, refrain from taking specific actions) and trade in gas to the extent
necessary to address a threat to system reliability or adequacy.

Given the above, Origin suggests Section 6 of the Draft Guidelines should include an additional provision that specifies:

‘The ADGSM is reserved as a last resort mechanism, only to be utilised if all other options
(including market-led solutions and operational tools available to AEMO) are exhausted’.

Additionally, Clause 9(2) within the current framework should also be retained, which would explicitly require consideration of the availability of industry-led solutions prior to pursuing the formal activation process with a view to reducing the level of intervention and regulatory burden.

2. Approach to determining a shortfall

The approach to determining a shortfall and any resultant triggering of the ADGSM requires careful consideration. In its recent Gas Inquiry reports, the ACCC has determined a shortfall where there has been uncontracted demand, despite there also being sufficient supply in each instance. Under the proposed framework, this approach could lead to more frequent activation and inefficient utilisation of the mechanism. This is because it is unlikely all load will be fully contracted at any given point in time, particularly given the reliance of gas power generation (GPG) on more short-term contracting and / or spot market purchases.

To assist with addressing this, the factors set out under Clause 8(11) that may be considered by the
Minister when determining a domestic shortfall should be expanded to require explicit consideration of:

‘The key factors driving the shortfall (including, but not limited to, the extent to which
uncontracted demand is primarily attributable to gas power generation (GPG)).’

3. Shortfall allocation and export permits

The Draft Guidelines allow for the volume of any declared shortfall to now be allocated across the three
LNG projects in equal proportions. This represents a material change relative to the existing framework, which is underpinned by the core principle of attributing any shortfall to LNG projects in net deficit. It is crucial that export permits are allocated in a manner such that projects positively contributing to domestic supply do not subsidise the impact of other LNG producers. We have provided comments on two key aspects of the Draft Guideline in this respect.

3
Commonwealth Department of Climate Change, Energy, the Environment and Water, ‘Information paper: Extending AEMO’s functions and powers to manage east coast gas system reliability & supply adequacy’.

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3.1 Initial allocation of allowable volume (AV) permissions

The AV export permission calculation under Clause 9(8) effectively penalises an LNG project that commits gas to the domestic market, as the contracted domestic supply is deducted from the initial export permission awarded. Conversely, the calculation rewards domestic purchases, which are treated on an equivalent basis to gas production and increase the level of the LNG projects’ initial export permission. There is an inherent risk the proposed approach would exacerbate the issue the mechanism is intended to resolve by reducing market-led incentives to supply the domestic market and driving additional withdrawals.

To address this and ensure the allocation of AV permissions does not undermine market-led incentives to supply the domestic market:

▪ the note provided (under Clause 9(8)) should be made into an explicit provision whereby the
Minister is obliged to ‘consider any contributions to the domestic market, or withdrawals from the
domestic market, in the calculation of the alleviation contribution’; and

▪ Clause 9(8)(b), which deducts gas already committed to the domestic market, should be removed.

3.2 Protecting long term contracts

An overarching design objective should be to protect long-term foundational contracts. Providing LNG projects with the ability to quantify a protected volume of long-term contract gas and apply for an increased AV permission to meet the volume is consistent with that objective. However, it is crucial a robust framework is established to govern the circumstances under which additional permits can be requested and allocated by the Minister to avoid shifting the shortfall burden solely to LNG projects that are net contributors. We therefore support the provisions outline under Clause 10(8), which should ensure an LNG project would not be provided with an increased AV permission in circumstances where alternate commercial solutions were available to alleviate any disruption to its export contracts.

If you wish to discuss any aspect of this submission further, please contact Shaun Cole at shaun.cole@originenergy.com.au or on 03 8665 7366.

Yours Sincerely,

Steve Reid
General Manager, Regulatory Policy

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