Securing Australia’s domestic gas supply: issues paper

CSR Limited
Level 5, Triniti 3
39 Delhi Road
North Ryde NSW 2113

02 9235 8000 csr.com.au
ABN 90 000 001 276

22 August 2022

The Hon Madeleine King MP
Minister for Resources
Department of Industry, Science and Resources

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

Dear Minister King,
Options to improve the Australian Domestic Gas Security Mechanism
CSR Limited (CSR) appreciates the opportunity to respond to the Australian Government’s consultation on options to improve the Australian Domestic Gas Security Mechanism (ADGSM).
CSR is among Australia’s most trusted and recognised brand names in providing building products for residential and commercial construction, with a portfolio of leading brands. We operate low-cost manufacturing facilities and a strong distribution network to service our customers across Australia and
New Zealand. CSR is a wholesale Market Participant in both gas and electricity markets and has retail energy contracts for smaller sites.
CSR agrees with the ADGSM Issues Paper that the ADGSM and Heads of Agreement appear to have had a diminishing effect, and increased pressure is being placed on the domestic gas market. Australia’s domestic gas supply-demand balance has been forecast to tighten for a number of years, and a coordinated federal and state energy transition is required that will
• ensure adequate levels of domestic gas supply are brought to market at sustainable prices
• reduce the likelihood of demand destruction
• invest in alternative technologies to reduce dependence on gas
• provide subsidies and incentives for fuel switching, including prioritising those segments that
can more easily transition to electrification
• minimise impacts on long-term investment decisions
• provide a level of regulatory certainty.
A short-term solution to the current supply-demand balance is to be able to easily trigger the ADGSM and ensure gas is diverted to domestic markets, at reasonable prices, to avoid shortfalls. A reasonable domestic gas price should not be on the same high basis as what can be sold on international markets, the domestic prices are already driven higher by gas being purchased from these markets to be exported. Given the smaller size of the domestic market, relative to LNG exports, it is necessary to have the right mechanisms in place that put downward pressure on price and ensure there is sufficient gas made available.
Another consideration of the ADGSM is that it applies Australia-wide but has been focused primarily on
Queensland (Qld) LNG Exports. Due to the changes to Part 18 of the National Gas Rules, Northern
Territory (NT) LNG exporters are now able to purchase up to 10 PJ of gas from the domestic market, something that isn’t likely to have been included in the current shortfall calculations. The interaction of the NT LNG exporters needs to be considered alongside QLD LNG exporters.
The east coast of Australia is likely to face demand destruction in the coming years due to increases in gas prices, prices that are far above the cost of producing that gas.
Consultation Questions:
1. Would a short-term activation power effectively address sudden shocks or shortfall risks?
A short-term activation power would be beneficial and assist in addressing shortfall risks. Increasingly, the potential for a shortfall will be due to unforecast circumstances, such as the combination of events that has been observed in winter 2022. Being able to respond quickly will benefit the domestic market.
2. What timeframes and limitations should apply to shorter-term activation powers?
The right level of governance needs to be in place given the significance of these powers. AEMO is in a good position to understand the demand-supply balance, and this could be supported from the ACCC who have the powers to scrutinise the data and request supporting information. Timeframes of activation should be kept to the minimum, i.e., activated when a shortfall is forecast and a return to business-as-usual as soon as practicable.
3. How would short-term activation interact with other energy security measures, like the Gas Supply
Guarantee?
The Gas Supply Guarantee (GSG) is limited to assisting the NEM, and the ADGSM is focused on a broader shortfall. The overall needs of the domestic market need to be considered to ensure the lights stay on, and gas keeps flowing.
4. What should be the threshold for a short-term activation mechanism?
There should be consideration for thresholds based on different triggers. A forecast shortfall of gas is no longer the only trigger that should be considered, there can be other triggers in the domestic regulated markets such as
• administered price periods (in gas markets)
• excesses of the domestic cost of production plus premium, for a defined period of time,
particularly during periods of peak demand (winter, gas fired power generation during peak
summer); the east coast has abundant gas resources, so prices should be consistent with that in
a commodity market
• threats to system security in the Declared Wholesale Gas Market (DWGM)
• contingency gas events in the Short Term Trading Market
• events in the NEM requiring much higher levels of gas generation
• significant decreases in the overall net contribution by LNG exporters in QLD and NT.
5. What factors should a reference price take into account? How should each factor be measured or monitored?
The reference price should consider the costs of production plus a premium but should be at a discount to the administered price cap of the regulated gas markets. Given the smaller volumes used domestically relative to the LNG exports the domestic price should be at a discount to the netback of
LNG exports, acknowledging that reasonable profit margins for gas suppliers need to be considered.
Any reference price needs to be tested to ensure it doesn’t have unintended consequences.
6. Which entity is best placed to determine the price, and what should that process include?
The ACCC is best placed to determine the price. The process is likely to be similar to the current collection of information but may be expanded to ensure the accuracy of any reference price calculation.
7. What implications or unintended consequences could price-base activation have, including on new supply and the competitive functioning of the market?
To minimise unintended consequences, the government must focus on ensuring new domestically reserved supply is brought to market as quickly as possible. An energy roadmap needs to be put in place outlining the steps to ensure industry has confidence in the framework. This should also consider how
the domestic market can achieve energy security in the context of control of existing reserves and production.
8. How could the ADGSM be amended so that during a shortfall year, stronger incentives exist for LNG exporters to increase domestic supply?
By mandating that domestic gas must be sold at a default price in the event of activating the ADGSM, such as cost of production plus some profit margin, this is likely to ensure sufficient gas is made available prior to any shortfall occurring.
The impact of the level of control of gas reserves and production on potential for competition should be taken into consideration when establishing energy security and supply frameworks. The
Commonwealth power to embargo further sales of spot cargoes should be highlighted and used in need.
The ADGSM is important, however, emphasis should be on putting in place measures to avoid needing it.
9. How could the TMSO be improved?
Security of energy supply domestically should be one of the primary features of the framework. The impact of the capacity of NT exporters to purchase from the east coast market over and above their net contribution should be considered. This is likely to produce an additional destabilising influence on a pressured market.
One possible way to improve the TMSO is to investigate options with spot cargoes, as these are opportunistic sales that further reduce gas available to the domestic market.
10.What features would effective LNG export permits have?
The LNG export permitting process should be set in the context of domestic energy security. Further expansion of east coast nameplate capacity on export plants should be constrained while supply to the domestic market is uncertain and disrupted. The Commonwealth power to embargo further sales of spot cargoes should be highlighted and used when needed.
11. Should contracted gas be exempt from the ADGSM? If so, how could this exemption be designed to ensure the objectives of the mechanism are met?
All gas should be considered if there is a shortfall in the domestic market including gas purchased by exporters in excess of own reserves production, not just from LNG exporters, but from producers, storage facilities, pipelines, and demand response options. This could be similar to the powers that
AEMO has to direct to ensure system security. AEMO, or some other regulated entity, could contract ahead of time to ensure any shortfall is minimised.
12.What can the states and territories do to ensure their gas needs are met during the energy transition? a. How can the Commonwealth support the states and territories to do this?
An energy transition plan must be put in place that ensures enough gas is brought to market at the right time. Adequate supply into the domestic market will assist with downward pressure on prices. While the Commonwealth does not directly control reserves and exploration, it controls competition laws, information publication, export permits, foreign investment approval, and taxation, all of which provide considerable scope and means of influence. As the market transitions to a lower carbon future the balance between supply and demand needs to be maintained to avoid price shocks.
The following supply side measures should be considered
• the introduction of domestic reservation, if not implemented retrospectively then all future gas
fields should progressively have a component, and some fields that are fully, domestic allocated
• bringing enough available gas reserves to the market in the short term, which could include
providing incentives to do so (or alternatively having the threat of use it or lose it type
mechanisms), recognising gas will be essential to the economy and industry for many years until
the full transmission and equipment replacement is phased in
• investing in alternative supply sources such as hydrogen and biofuels, and incentivising
accelerated fuel switching for feasible applications
• prioritising electricity storage to support the move to renewables and enable accelerated
electrification.
Demand side measures could include:
• energy efficiency programmes and innovation grants to assist large-industrials that have limited
options to move away from gas
• fuel switching incentives including moving residential and industrial (to the extent possible) off
gas and electrifying. At the same ensuring that electricity networks and firming options are in
place, i.e., avoiding offsetting reduced gas usage with an increase in gas generation
• encouraging and incentivising States to prioritise energy efficiency at scale in their own
expenditures, programs, and regulations, for example, gas pipeline losses in transmission,
electricity transmission losses, plant and equipment such as air conditioning and building
occupancy, and State assets and tenancies.
Information measures should include:
• up to date publication of reserves and production
• collated and published, readily accessible information on exports by export facility
• publication in accessible form of net buying on regulated short term markets
• publication of a domestic price on long term contract information on a confidential basis to
facilitate a more liquid term hedging market would assist in price discovery and efficient pricing
Noting that much of this information is available to AEMO and the ACCC/AER or will be available
through the measures to improve transparency in gas markets. Information must be published in a
way that is meaningful, easy to digest and provides insights to the industry.
The use of the ADGSM should be considered a last resort, which is why it is so important to implement other measures, to minimise a shortfall, as quickly as possible.

Summary
Transparency in the domestic gas markets continues to play a critical role given the changing landscape.
While there is a lot of information available, being able to centrally access this information in a meaningful way continues to be a challenge. Transparency should be increased in what new gas is coming to market and when, and when it is likely to be offered contractually. Transparency shouldn’t just be the obligation of providing data to a centralised body, the reporting of it also needs to be meaningful and clear in its message and should be for a specific purpose.
Careful consideration needs to be given to ensuring that a solution to the problem is being implemented, and a well-designed energy roadmap is in place. The current problem is that the east coast of Australia is facing a gas shortfall and one temporary solution is the use of the ADGSM. More permanent, and ongoing, solutions must be implemented.
The east coast of Australia is likely to face demand destruction in the coming years due to increases in gas prices (prices that are far above the cost of producing that gas). Any solution must result in an increase in supply, that assists in putting downward pressure on prices in the short to medium term. As well as the immediate changes to the ADGSM, CSR supports a domestic reservation to ensure adequate supplies are available to the domestic market.
The existing frameworks and price references were established at a time that didn’t contemplate the current domestic and international dynamics, and how these might flow through to the domestic market. This is now a recognised risk in this current environment. There may be a need for other measures to be put in place reflecting the potential for ongoing instability over a more extended period of time. A new potentially longer term mechanism may be needed to manage protracted shocks.
CSR supports an approach that is transparent and puts downward pressure on gas prices, ensuring a sustainable future for industries in Australia. If you would like to discuss this submission, please contact me at rflood@csr.com.au.

Your Sincerely,

Robbie Flood
Energy Manager, CSR Limited