By Jim Cox PSM, Deputy Chair, Australian Energy Regulator
The role of natural gas in the renewable energy transition has been debated for a number of years now, with no firm conclusions reached. What does remain clear is that natural gas will be part of the Australian energy industry for a while to come, and as such, it remains a key consideration for the Australian Energy Regulator. In this article, Jim Cox has provided Energy with some reflections on his time at the AER and the challenges facing the future of gas regulation.
This year marks the end of my journey as a Board Member at the Australian Energy Regulator. I will be retiring in the middle of this year having worked for the past 30 years in economic regulation, the last 10 of which have been with the AER.
When I joined the Board in 2013, Australia’s climate change debate was in full swing. The controversial carbon tax scheme was slated to be abolished and investment in natural gas transportation and storage capacity was expanding.
Fast forward ten years and we now have a legislated carbon emissions target of net zero by 2050 and a National Gas Objective that includes achievement of emissions reductions targets.
Gas demand is expected to decline, but there is uncertainty as to how quickly it will happen. Gas underpins the security and reliability of our electricity network and for many thousands of household consumers, it has just always been there. Boil the kettle. Heat up the lounge room.
Switch it on and it is instantaneously there. Maintaining aging gas pipeline infrastructure and the costs of doing so are far from household consumers’ minds. But it’s firmly front of mind at the AER.
Everyone uses electricity, but not everyone uses gas. The customer base is different. It’s critical to Australia’s manufacturing base, but it’s increasingly being switched off in households as various government policies favour renewables.
Protecting the long-term interest of consumers is at the core of what we do at the AER. If I think back to that first year as an AER Board Member in 2013, we made gas access arrangement decisions in that year that supported network investment and expansion while minimising bill impacts to consumers.
But how do we deal with an increasingly uncertain future demand for gas, ensuring that fairness and equity for all gas consumers prevails? If, over time, there are fewer customers to share the fixed costs of the network, there may be some customers who cannot afford to electrify all of their energy supply and may face the very real possibility of higher gas bills.
At the same time, investment will continue to be needed to maintain the safety, security and reliability of the network. Continuing investment will add to prices since the costs will be recovered from consumers. Some assets may become stranded if costs are high enough and demand is low enough.
Access arrangements that are in the best long-term interest of consumers have just become a whole lot more challenging. Thankfully the economic regulatory framework is flexible and allows us to take the steps to manage the risks of uncertainty in the future of gas.
My key message in all of this is that the AER is willing to listen, innovate, and move quickly on finding solutions. Our one constant is that it is done in the long-term interest of consumers. We did just that with our access arrangement decisions for three Victorian gas transmission businesses last year.
We built in short-term solutions that address the possible future decline of natural gas demand and potential safety concerns if unused gas assets remain in place. The final decisions allowed for a small start to accelerated depreciation of the networks to balance recovery of asset costs between current customers, while the customer base is still relatively high before potentially reducing.
We also worked with the network businesses to narrow the price gap between temporary and permanent gas disconnection services. We set a charge of $220 for the disconnecting consumer, with the remaining costs of the permanent gas disconnection service being recovered through the haulage tariffs which are spread across all gas consumers in their network.
Socialising costs in this way helps to address the safety risk of leaving ‘live’ but unused assets in place. I was pleased that through our approach and willingness to meet network businesses ‘half way’ so to speak, we minimised the impact to consumers over the next five years of the revenue period.
But we know this is only an interim measure and further work is required across the sector to develop a more sustainable solution to permanent disconnection and declining demand. In the longer term, it may be that five-year gas access arrangement reviews are not enough, or not the best avenue, to deal with these safety and equity issues.
The policy directions set by government will continue to develop in response to changes in technology and costs, and community needs and preferences, to ensure that we have a safe, reliable and affordable transition to net zero by 2050.
Market bodies, like the AER, should contribute to these discussions. However, they also need to be flexible enough to adapt their regulatory approach to a changing technological and policy environment. One of the key contributions the AER makes in this is through our extensive performance reporting of gas markets.
Quarterly reports of wholesale and retail markets, annual network performance reports, and our flagship State of the Energy Market report offer up in-depth data and expert analysis that contribute to increased understanding and informed decision making.
I would recommend anyone new to working in the energy sector to look through an AER State of the Energy Market report. Our team goes to great lengths to make the analysis and explanations in this report accessible to anyone interested in Australia’s energy markets.
The AER’s new contract market monitoring powers, due to be legislated this year, are set to increase the transparency of both the wholesale gas and electricity markets. In relation to gas, a key element of our new powers will be to look at how gas contract markets impact operations of the spot wholesale markets and the implications they have for the final costs consumers face.
Without understanding these contract positions, the AER can only speculate on what may be driving participant behaviour. These contract market powers will build on the gas market transparency measures already implemented in March 2023 to address information gaps across the east coast gas industry.
We published our first Short Term Transactions Special Report in December 2023 which discusses the observations of the first six months of operation of these measures as they relate to the gas short-term trading markets. In the first quarter of 2024, the AER will be seeking input from across the sector through an Issues Paper on how we apply these new contract market monitoring powers to ensure there is clear intention and benefits, without unnecessary regulatory burden.
I urge interested market participants to get involved in this conversation, to set the right foundation for information requests and balanced reporting that will contribute to meeting the challenges of an uncertain gas future head on. It’s been a privilege to be part of the AER at this transformational time for Australia’s energy markets. The environment is now very different from when I first started but I leave knowing that the AER is a flexible, innovative regulator, with an ear to the ground, an eye to the future and the long-term interests of consumers at its core.
The Australian Energy Regulator’s gas market performance reports, the Short Term Transactions Special Report, as well as current and historical State of the Energy Market reports are available at www.aer.gov.au Jim is a keynote speaker at this year’s Australian Domestic Gas Outlook Conference, taking place in Sydney from 25-28 March 2024
