Securing Australia’s domestic gas supply: issues paper

Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

APA submission
Securing Australia’s domestic gas supply: issues paper
August 2022

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Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

Ms Jane Urquhart
A/g Deputy Secretary
Department of Industry, Science, and Resources

Lodged online

22 August 2022

RE: APA Submission to the Securing Australia’s domestic gas supply issues paper

Dear Ms Urquhart,

Thank you for the opportunity to comment on the Securing Australia’s domestic gas supply: issues paper (Issues Paper). We appreciate the consultative approach being undertaken to improve the Australian Domestic Gas Security Mechanism (ADGSM).

APA is an ASX listed owner, operator, and developer of energy infrastructure assets across
Australia. Through a diverse portfolio of assets, we provide energy to customers in every state and territory on mainland Australia. As well as an extensive network of natural gas pipelines, we own or have interests in gas storage and generation facilities, electricity transmission networks, and over $750 million in renewable generation.

Given Australia’s abundant gas reserves, our domestic gas markets should never face the risk of potential gas shortfalls or extreme price events. To support future investment, businesses and households need confidence that there will be sufficient gas to meet current and future needs.

For this reason, APA supports a tightening of the ADGSM to ensure that it is more effective in addressing potential gas shortfalls. More broadly, the Government should be taking action to ensure that Australia avoids shortfalls altogether. We therefore support the introduction of a prospective gas reservation scheme on the east coast to ensure sufficient gas is made available to domestic markets. Such a scheme is already a feature of the west coast market where APA operates.

If you wish to discuss our submission in further detail, please contact John Skinner on
02 9693 0009 or john.skinner2@apa.com.au.

Regards,

Peter Bolding
General Manager
Economic Regulation & Policy

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1 Submission

Key points

• Natural gas is an integral part of the Australian economy and is relied upon by millions
of Australian households and businesses every day.

• Given our abundant gas reserves, Australian domestic gas markets should never face
the risk of potential gas shortfalls.

• The Australian gas industry will lose its social licence to operate, putting new investment
at risk, if potential shortfalls continue.

• APA supports a tightening of the ADGSM to ensure that it is more effective in addressing
potential gas shortfalls.

• We also support the introduction of a prospective gas reservation on the east coast to
ensure sufficient gas is made available to domestic markets.

1.1 Introduction
APA is a leading Australian Securities Exchange (ASX) listed energy infrastructure business.
Consistent with our purpose to strengthen communities through responsible energy, our
diverse portfolio of energy infrastructure delivers energy to customers in every state and
territory on mainland Australia.

Our 15,000 kilometres of natural gas pipelines connect sources of supply and markets across
mainland Australia and our high voltage electricity transmission assets connect Victoria with
South Australia and New South Wales with Queensland.

We operate and maintain gas Figure 1
networks connecting 1.4 million
Australian homes and
businesses to the benefits of
natural gas. And we own or have
interests in gas storage facilities
and gas-fired and renewable
generation power stations.

APA is supporting the transition
to a lower carbon future. Our
ambition is to achieve net zero
operations emissions by 2050
and we expect to announce
interim emissions reduction
targets later this year.

Through our Pathfinder Program, we are investigating how hydrogen and other technologies
such as batteries and microgrids, can support a lower carbon future. Our first Pathfinder
project is seeking to enable the conversion of around 43-kilometres of the Parmelia Gas
Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

Pipeline in Western Australian into Australia's first 100 per cent hydrogen-ready transmission
pipeline and one of only a few existing gas transmission pipelines in the world, 100 per cent
hydrogen-ready.

Australia is blessed with significant natural gas reserves. These reserves sustain the energy
needs of millions of Australian households and businesses, while also supplying our export
partners with a reliable source of liquefied natural gas (LNG). The east coast of Australia now
produces more than three times more gas each year than it needs domestically, with the
majority of the gas produced exported as LNG.1

In the years ahead, gas is expected to play an increasingly important role in Australia’s energy
system. As coal power stations retire, dispatchable gas powered generation (GPG) will help
unlock many multiples of low-cost renewable generation capacity by providing the firm
generation needed when wind and solar aren’t producing and other storage can’t fill the gap.

Following publication of the ACCC Gas Inquiry Interim Report in July 2022, the
Commonwealth Government has announced that it expects a shortfall of gas in the east coast
market in 2023.2

We agree with the Commonwealth Government that such a shortfall would have serious
ramifications for the domestic gas industry and put its social licence at risk. For this reason,
we support the Government’s review of arrangements to support domestic gas security,
including the ADGSM.

1.2 Affordable gas is critical for the Australian economy and the energy market transition
Natural gas is an integral part of the Australian economy and is relied upon by millions of
Australian households and businesses every day. Gas provided 27 percent of Australia’s
energy mix in 2019-20 and was the most used energy source in the manufacturing sector,
providing over 40 percent of manufacturing energy needs.3 The Australian gas industry supply
chain is a significant contributor to GDP, enabling $470 billion in economic activity in Australia
each year as an essential energy source.4

Natural gas also has an essential role to play in helping Australia decarbonising its energy
system and meet its net zero targets. As the penetration of variable renewable energy (VRE)
sources, such as wind and solar, increase, and aging coal power stations retire, GPG will play
a critical role in meeting electricity demand and maintaining the security of the system. This is
because extended periods of low wind and solar will require significant volumes of
dispatchable resources to be available to support the reliability and security of the system.

The ability of gas turbines to quickly ramp up and provide long term dispatchable generation
shows they will be a critical part of the energy system for many years to come. GPG also has

1 ACCC, Gas Inquiry 2017-25 Interim Report, July 2022, p11
2 Issues Paper, p2
3 Commonwealth Government, Australian Energy Statistics 2021, pp1-2
4 Australian Economic Advocacy Solutions, Economic and Employment Contribution of the Australian Gas
Industry Supply Chain: 2020-21, February 2022, p5

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Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

the added advantage of emitting approximately half the carbon emissions of coal powered
generation.

The support that will be required when coal power stations retire can be clearly seen in South
Australia which no longer has operational coal power stations. Despite the introduction of
synchronous condensers in SA, GPG remains critical in keeping the lights on during periods
of low wind and solar generation.

As can be seen in Figure 2, on 1 June 2022, GPG provided the majority of supply at the
evening peak and into the following day. This followed several windy days where less GPG
was required.

Figure 2: Case Study 29 May to 1 June 2022 in South Australia

Gas generation providing critical supply
at the evening peak

Source: OpenNEM

The importance of affordable gas is more pronounced when considering the impact that high
gas prices are having on wholesale prices. With coal generation exiting the system and being
off-line more regularly, GPG is increasingly becoming the marginal generator in the National
Electricity Market (NEM).5 This means that in the absence of more expensive generation
types, such as hydro, if gas prices are high and GPG is setting the dispatch price in that NEM
region, the higher gas prices flow through to wholesale electricity prices. In this situation, there
is the risk that energy users will be faced with both high gas prices and high electricity prices.

1.3 Improving Australia’s domestic gas security

1.3.1 Strengthening the ADGSM
As noted in the ACCC’s July 2022 Interim Report, the effectiveness of the ADGSM is limited
due to the timeframes in which it can be applied, and its potential limitations in addressing a

5 ACCC, Retail Electricity Pricing Inquiry – Final Report, June 2018, p60

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Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

potential market shortfall.6 The Issues Paper is seeking views on options to strengthen the
ADGSM by enabling it to be activated more flexibly and quickly, or by incentivising LNG
producers to increase sales to the domestic market.

APA supports a tightening of the ADGSM to ensure that it is more effective in addressing
potential gas shortfalls and will deliver more gas to the domestic market.

1.3.2 Gas reservation
Given our abundant gas reserves, Australian domestic gas markets should never face the risk
of potential gas shortfalls. To support future investment in gas infrastructure, businesses and
households need confidence that there will be sufficient gas to meet current and future needs.

According to the ACCC, in 2022, east coast LNG producers expect to produce around three
times more gas than needed to meet domestic demand, with the vast majority of gas produced
converted to LNG and sold offshore under long term sale and purchase agreements.7

The current energy crisis has demonstrated that more action needs to be taken to improve
Australia’s domestic gas security and avoid future gas shortfalls.

The Australian gas industry will lose its social licence to operate, putting new investment at
risk, if potential shortfalls continue and gas producers are seen to be neglecting domestic
markets. High gas prices will also continue to put Australian jobs at risk, through their impact
on both electricity and gas bills.

Simply put, supplying export markets should not be prioritised over domestic supply. At a
minimum, we support the introduction of a prospective gas reservation to ensure sufficient gas
is made available to domestic markets. Such arrangements could look like those introduced
in Queensland under the Petroleum and Gas (Production and Safety) Act (Qld) 2004, under
which exploration licences are granted on the condition that producers must first supply to
Australian markets, and since 2018, manufacturers in particular.

Gas reservation policies are already a feature of the Western Australia (WA) gas market,
where APA has existing operations. The WA domestic gas policy makes gas equivalent to 15
percent of exports available for WA consumers. LNG projects must demonstrate their ability
to meet the policy as a condition of project approval.8

While a prospective gas reservation policy may not solve any immediate gas supply issues on
the east coast, in the long run, it would provide clear signals for both LNG producers and
domestic consumers of the supply arrangements that will apply for new investments. The
percentage of gas that would need to be made available to east coast customers is another
factor that would need to be considered in the design of a gas reservation policy. To obtain a
similar balance on the east coast as the 15/85 ratio in WA (which essentially mimics the ratio
of exports to domestic use in WA), a higher percentage than 15 percent may be required.

6 ACCC, Gas Inquiry 2017-25 Interim Report, July 2022, p8
7 ACCC, Gas Inquiry 2017-25 Interim Report, July 2022, p11
8 WA Domestic Gas Policy, https://www.wa.gov.au/government/publications/wa-domestic-gas-policy,
Accessed 22 August 2022

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Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

1.4 We must continue to invest in gas and gas infrastructure
Given its importance to the security and reliability of the energy system, we must continue to
invest in our gas system. This includes both investing in new supply, as well as the
infrastructure to transport gas to where it is needed.

To date, the incremental expansion of existing infrastructure has been the most efficient and
lowest cost solution to ensure that gas is delivered when and where it is needed. On 25 May
2022 APA announced that it will commence the second stage of its expansion of the East
Coast Gas Grid, which, together with stage one, will add around 25 percent of capacity for
southern states ahead of peak winter demand in 2024. The commencement of the second
stage recognises the critical importance of natural gas to southern markets.

As a nation with an extensive, interconnected grid that can move gas between supply fields
and demand locations, we should not be exporting gas and re-importing LNG through gas
import terminals.

Not only would this option be more costly and increase the exposure of domestic customers
to export pricing, it would also be inconsistent with governments’ net zero policy targets. This
is because the carbon emissions of LNG import terminals are around 20 percent higher than
pipelined gas. Any LNG imports that displace domestic gas would add to, and not reduce,
Australia’s domestic carbon emissions. Should carbon pricing become mandated, LNG’s
higher intensity will also mean that LNG imports will become incrementally more expensive.

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Australian Pipeline Limited ACN 091 344 704
Level 25, 580 George Street, Sydney NSW 2000
PO Box R41, Royal Exchange NSW 1225
P: +61 2 9693 0000 | F: +61 2 9693 0093
APA Group | apa.com.au

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