The Australian Competition and Consumer Commission (ACCC) has released its seventh Gas Inquiry Report, highlighting that although the east coast gas market is unlikely to experience a shortfall in 2020, supply remains tight and more development and production is needed.
The ACCC has found that a gas supply shortfall in the east coast gas market in 2020 is less likely than it was for 2019, mainly because east-coast producers expect to produce more gas, about 113PJ, than in 2019.
In addition, lower gas consumption is expected for power generation during 2020, according to forecasts by the Australian Energy Market Operator.
ACCC Chair, Rod Sims, said the supply-demand balance in the southern states remains tight, and there is uncertainty about how much gas will actually be used for gas power generation and how much of the gas produced in the south, particularly the Cooper Basin, will flow to Queensland.
“What would most relieve price pressures is developing new low-cost supply in the southern states,” Mr Sims said.
Although a supply shortfall is unlikely in the short term, high gas prices remain a concern for commercial and industrial (C&I) gas users particularly in the southern states.
The ACCC has published export parity prices on its website since October 2018. In Queensland, prices offered by producers for gas supply fell below $10 per gigajoule in early 2019 at the same time that the expected LNG netback prices for 2020 fell.
However, it appears that prices offered in the southern states, particularly by retailers, have not decreased with expected netback prices. In the first quarter of 2019, these mostly remained in the $10-12 per gigajoule range.
“It is clear that these current gas prices remain high and challenging for many C&I gas users, and while some have found ways to absorb the higher costs, this is often not possible,” Mr Sims said.
“This underscores the need for timely action, both by governments, by gas producers and by retailers.”
The ACCC has made a range of recommendations to improve the transparency and operation of the east coast gas market, including in a joint report with the Gas Market Reform Group, published in December 2018, and in a series of reports published in June 2019.
“Even if the current supply problems did not exist, this market would still be in need of significant reform to ensure it operates efficiently and transparently,” Mr Sims said.
“We will be doing further work in other areas, such as in gas transport and storage, to see if there are problems in these parts of the supply chain and if so, how they can be addressed.”
Review of gas pipeline reform
The ACCC’s latest gas report includes a detailed review of reforms to gas pipelines, introduced in 2017 to address issues identified in the ACCC’s 2015 gas inquiry. This inquiry found that the majority of transmission pipelines on the east coast were using their market power to engage in monopoly pricing.
The reforms, contained in Part 23 of the National Gas Rules, aim to improve market transparency and facilitate access to pipelines on reasonable terms.
These rules include disclosure requirements for pipeline operators; an access and negotiation framework; and an arbitration mechanism.
The ACCC has found that, overall, Part 23 is working as intended and is having a positive effect on some pipeline prices and the contracting environment.
However, the ACCC has significant concerns with some information published by pipeline operators, including instances where errors have been made and others where measures were taken that had the effect of overstating a pipeline operator’s costs and asset values.
“We are disappointed pipeline operators do not appear to be taking their reporting obligations seriously,” Mr Sims said.
The ACCC will refer a number of compliance-related matters to the Australian Energy Regulator and, where relevant, the Western Australian Economic Regulation Authority.
To further address these issues, the ACCC has made 14 recommendations to improve the Part 23 information disclosure and arbitration framework.
“These recommendations, if implemented, will improve the quality, reliability and accessibility of the information that is reported by pipeline operators, as well as strengthen the negotiation process and improve overall market operations,” Mr Sims said.
Retail margins look high but significant changes are occurring in the market
The ACCC conducted a detailed review of the costs and margins of AGL, EnergyAustralia and Origin, Australia’s three biggest gas retailers.
These retailers supply gas to a range of east coast customers. The ACCC’s analysis focused on two market segments; mass market customers, including residential households and small businesses, and large and small C&I users.
“These three major gas retailers posted high margins between 2014 and 2018,” Mr Sims said.
“These margins were much higher than would be expected.”
These high margins may be due to low-priced legacy supply contracts that have kept retailers’ average costs down, when compared to the higher market prices they can then charge when reselling gas.
The ACCC’s analysis also uncovered a significant shift in market share in the C&I market, where the major retailers have lost business to gas producers and new market entrants like Alinta and Shell.
Larger C&I users say producers and retailers are now more willing to engage and negotiate for gas supply. However, a number of smaller users say they received only one offer when they went to the market seeking a supplier.
The ACCC is doing more work to better understand the factors influencing margins and the different experiences of smaller and larger C&I users.