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Client Update: Finkel Review – Gas: A revolving door or real change?

20 June 2017

In brief: In the first of our series analysing the Finkel Review, we look at Dr Finkel's assessment on the place of gas in the Australian energy landscape and his suggestions for the creation of 'more efficient gas markets'. These suggestions include both the familiar and the novel, but it is yet to be seen if Dr Finkel's vision of the future will be realised. Partner Igor Bogdanich (view CV) and Lawyer Darcy McLennan report.

Key themes and suggestions

  • Increase supply: State and territory governments have once again been urged to lift moratoria on gas exploration and development, and consider unconventional exploration and development on a case-by-case basis.
  • Incentivise investment: Gas-fired electricity generators may be eligible to receive large-scale generation certificates (LGCs) as part of the proposed new 'Clean Energy Target' if emissions remain below a prescribed threshold. Energy retailers would in turn be required to purchase LGCs. 
  • Improve transparency: Gas-fired generators and gas producers may be required to provide additional information to AEMO and the COAG Energy Council, heightening the compliance burden placed on the industry.
  • Enhance security: Generators may be subject to a requirement to provide three years' notice of closure, which may influence ongoing investment decisions.

Background

The Finkel Report is the product of an extensive examination of all aspects of the future of the National Electricity Market. (See our previous Client Update: Finkel: the solution for our energy future? for more detail.)

In considering issues in the gas sector, the Finkel Report drew on previous inquiries in this space and covered now familiar ground, such as the ACCC's 2015-16 inquiry into the east coast gas market. It also noted the recent gas market reforms and initiatives driven by the COAG Energy Council and the Australian Government, such as COAG's 'Gas Market Reform Package',1 gas-related measures in the Federal Budget and the Australian Domestic Gas Security Mechanism.2

What did Dr Finkel say about gas?

Set out below are the key recommendations outlined in the Finkel Report relating to gas. We have also considered the opportunities and threats for the gas sector flowing from these recommendations.

Recommendations Opportunities and threats for the gas sector
  • Broadly, gas-fired generation can provide a reliable, low-emissions substitute for coal-fired generation, and essential security services to complement variable renewable generation. However, the economics of gas-fired generation are challenged by the widely reported domestic gas supply shortages and increasing prices. As such, policy and regulatory frameworks should:
    • facilitate new investment and foster the development of Australia's gas resources; and
    • address community concern surrounding the extraction of gas, including in respect of the environmental and social impacts of unconventional gas.
  • Specific recommendations include:
    • governments should adopt evidence based regulatory regimes allowing the risks of individual gas projects to be managed on a case-by-case basis, and should avoid blanket moratoria on exploration and development. However, such regimes should include mechanisms to ensure landholders are fairly compensated;
    • a new 'Clean Energy Target' should be introduced, allowing new gas-fired generators to receive LGCs for electricity produced below a prescribed emissions intensity threshold, and existing eligible generators to receive LGCs for electricity production above their historic output;
    • by mid-2018, AEMO should be given a last resort power to procure or enter into commercial arrangements to have gas-fired generators available to maintain reliable supply in emergency situations;
    • generators should be required to provide three years' notice of their intention to close, and AEMO should publish a register of expected closures to assist long-term investor planning;
    • by the end of 2017, AEMO should require gas-fired generators to provide information on their fuel resource adequacy and fuel supply contracts, (building on the current requirements to notify whether they will have availability at a given point in time); and
    • by mid-2019, the COAG Energy Council should bring together relevant regulatory and scientific data on gasin an informative and easily accessible format, including data relating to seismic activity, fracking fluid composition, aquifer purity and fugitive emissions.
  • Opportunities:
    • State and territory governments are urged to lift moratoria on gas exploration and development, including unconventional exploration and development. This may represent an opportunity for both gas producers and gas users, as producers may be able to develop further resources, including unconventional gas resources, and users may, as a result, be able to access additional gas supply on more favourable terms. It may also benefit land owners to facilitate access in return for fair compensation.
    • Gas-fired generators may be eligible to receive LGCs and sell these to electricity retailers, if they produce electricity with a corresponding emissions level below a prescribed threshold.
    • Gas-fired generators may be able to enter commercially favourable agreements with AEMO to provide reliable generation in emergency situations and to seek to enhance their social licence to operate.
  • Threats:
    • Gas-fired generators may be required to provide three years' notice if they intend to close, which may create difficulties in making confident ongoing investment decisions to keep generators open.
    • Gas-fired generators may be subject to a heightened compliance burden in respect of reporting requirements surrounding fuel resources adequacy and gas supply contracts.
    • Gas producers may need to provide an extensive range of data relating to the gas production process as part of the recommendation for COAG to assemble a more coherent system of gas-related information.
    • Gas producers should seek to be involved in the process for determining how landholders should be compensated if their land is affected by gas exploration and development, to ensure that any such compensation mechanism is fair and reasonable.

Will the Finkel Report stop the revolving door of debate?

It is yet to be seen whether Dr Finkel's recommendations will be implemented. Internal divisions within the Federal Government have been widely reported since the release of the Finkel Report, provoking uncertainty surrounding whether Dr Finkel's blueprint will come to fruition.

A number of the recommendations described above have been made in previous inquiries and by myriad stakeholders in the gas industry. Whether the Finkel Report will stop the revolving door of debate in the gas sector or foster real change is unknown, and only time will tell.

 
Footnotes
  1. This package includes the establishment of the Gas Market Reform Group to implement reforms including a framework for information disclosure and commercial arbitration in relation to unregulated pipelines, transportation capacity trading reforms, market transparency reforms and broader wholesale gas market reforms.
  2. The Australian Domestic Gas Security Mechanism is a Federal Government initiative designed to prohibit the export of liquefied natural gas in 'domestic shortfall' years. Read the exposure draft of the Regulations, draft Guidelines and explanatory material for more information. 

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