Government support in the pipeline?

The latest reports on the  Nev Power-led COVID commission are that the Commonwealth should underwrite new gas transmission pipelines. As predicted in yesterday’s blog, the proposal has already served as political wedge. The ALP is divided, with Resources spokesperson Joel Fitzgibbon expressing support while Energy spokesperson Mark Butler derides the idea.

It’s also the kind of feel-good industrial policy that the sector can get behind – whether you’re a producer, pipeliner or industrial gas customer there’s something in it for you.

But it’s also a solution looking for a problem. The expansion of Australia’s gas pipeline infrastructure is basically a success story. New pipelines linking production basins with consumers – whether industrial, cities or export facilities – have been built almost every year for the last thirty years, according to the AEC’s Electricity Gas Australia publication. Most of these have been built by the market, i.e. underwritten by foundation contracts from their users. Most of the recent investment on the east coast has been driven by the expansion of the coal seam gas to LNG export industry. Some pipeliners have even speculatively built pipelines with greater capacity than the initial contracts in order to be able to sell extra capacity – Jemena’s recently completed Northern Gas Pipeline is an example.

This all stands in contrast to the stately progress of major new electricity transmission, in particular the interconnectors that link regions. Ironically, electricity transmission is a more secure investment for the owners than gas transmission because it receives guaranteed regulatory revenue. But the quid pro quo is that each project has to pass a regulatory investment test to receive that guarantee. In principle, market-led investment is allowed but hasn’t occurred for over a decade. Basslink is the only non-regulated interconnector.

So, why is there any reason to be concerned about gas transmission? The issues are two-fold. One is more straightforward. Sometimes politicians have bright ideas that don’t really stack up on commercial grounds. The oft-mooted idea of a pipeline linking the eastern Australian system with West Australia to tap into the cheaper North-west shelf gas is one.

The other is more complex. The market-driven model for investment has worked well, because of the use of foundation contracts to underwrite the investment. But the other side of this coin is that these contracts lock up capacity that is not always used. Other parties then eye up that spare capacity and wonder how they can get their hands on it. Ask the pipeliners and they will tell you that they can’t sell capacity that can’t guarantee will be available, but they are always interested in extra revenue opportunities. Ask those seeking access, whether they are shippers (often gas retailers, but potentially anyone who has contracted to move gas from where it’s produced to where it’s wanted) or large users and you hear a different story. This story is based on existing capacity holders hoarding capacity they aren’t using in order to thwart their competitor and pipeliners using their monopoly power (there are limited options for moving gas between any two points on the system and most of them involve pipelines owned by one of the two big ownership groups: APA and Jemena).

The changing dynamics of the eastern gas market as gas flows switch between north and south put a greater premium on flexibility in pipeline access. As a result, policymakers have been progressing reforms to prise open existing capacity to greater competition. In March 2019 a capacity trading platform (CTP) and day-ahead auction (DAA) were introduced. The ACCC which is keeping a very close eye on all aspects of the eastern gas market, reported that there were signs that these reforms were “having a positive influence” on the gas market. The same report however also reported on complaints that regional pipelines were still hard to access and that pipeliners were levying standardisation charges that might discourage further use of the new trading functions.

Meanwhile, policymakers continue to explore the best way to regulate (or not) pipelines. There is a careful tightrope to walk here. Pipeliners have always argued (with some logical justification) that the historically light regulation of their sector was what allowed them to build under commercial deals. If regulators take a tighter grip and make it easier for other parties to access pipelines, this may discourage the foundation users from signing contracts that others can gatecrash. If pipeliners get told what rate of return, they can receive, rather than letting them negotiate with willing customers, then they are less likely to initiate new investments. The act of oversight itself can also affect the market. The ACCC has received reports that one-off discounts were disappearing because they would have to be reported to the ACCC’s enquiry team and then made available to all other customers of that pipeline. These drawbacks notwithstanding, large users in general would rather have the regulators standing by their side to make gas transport deals easier and cheaper.