Transcript
Check against delivery.
Introduction
Acknowledgment of Country
I’d like to begin by acknowledging the Traditional Custodians of the land we are meeting on today, the Gadigal people of the Eora Nation, who have never ceded this land.
I pay my respects to them and their cultures, and to their Elders past, present, and emerging. I acknowledge their continuing connection to the land, sea and community.
I would also like to acknowledge and pay my respects to Aboriginal and Torres Strait Islander people who are attending today’s event.
Welcome guests
I’d like to thank the ADGO conference organisers for again inviting me to speak at this important event.
It was seven years ago now, in 2017, that the Australian Government directed the ACCC to conduct a wide-ranging inquiry into the supply of, and demand for, wholesale gas in Australia.
Our latest interim report that we delivered to the Government earlier this month was our 19th report as part of this inquiry. If the Gregorian calendar ever falls out of use, it’s reassuring to know we can reliably track time through ACCC gas inquiry reports and ADGO conferences.
I’m going to cover two main areas in my speech today: the current supply-demand outlook for the east coast market, and the Gas Market Code.
Specifically, I’m going to talk about the short and long-term trends in the east coast gas market, and I’ll make some observations about prices in domestic and international gas markets.
I’m then going to update you on how the ACCC sees the operation of the Gas Market Code thus far and discuss our very important compliance and enforcement monitoring role.
State of the east coast gas market
So, to our current observations about the east coast gas market.
The ACCC’s December 2023 report forecast a slight deterioration in the 2nd quarter of this year compared to previous forecasts but found that supply was expected to meet demand. We observed in this report that the supply-demand balance for the 3rd quarter of 2024 would be finely balanced, with the southern states relying on imports from Queensland to meet their needs.
Our upcoming March report, which will be released shortly, will provide an updated outlook for the 3rd quarter of this year. It’s fair to say the short-term outlook is helped by a reduction in overall forecast domestic demand for the year. The expected reduction in domestic gas demand is due to additional renewable energy capacity and less demand for gas-powered generation in the 3rd quarter of this year.
Our updated forecasts will draw on the latest available demand projection from AEMO’s March 2024 Gas Statement of Opportunities.
It’s important to say that the supply-demand outlooks we release are prepared with the best available information we have at the time but can change due to unforeseen events, such as weather and production challenges.
For example, one emerging issue we’re aware of is the Northern Territory is facing a potential supply shortage, which creates the prospect the NT will require gas to be transported from the east coast market via the proposed upgrade to the Northern Gas Pipeline.
Regional outlook
On a regional basis, increased demand in the winter months means that the southern states are likely to again rely on gas transported from Queensland and from Victoria’s Iona storage facility in the 3rd quarter of this year.
The South West Queensland Pipeline is expected to be able to transport the necessary gas south.
Long term outlook
Now to the longer-term forecast. In our December 2023 report, we found the east coast market was expected to have enough supply to meet demand until 2028.
However, we forecast an overall 24 PJ shortfall from 2028, and current forecasts indicate that shortfall will increase each year after.
The southern states will face significant shortages from locally produced gas from 2027, and we expect gas transported from Queensland to continue to play a critical role in covering supply gaps.
AEMO’s latest forecast from its 2024 GSOO, released last week, shows similar trends in terms of supply shortfalls emerging from 2028 and shortfalls of supply in southern states emerging in 2026 and 2027.
To meet longer-term demand, particularly through the energy transition, new sources of gas supply will need to be developed.
I don’t need to tell anyone in this room that gas will play a critical role over the next two decades in maintaining power grid security, supplying commercial and industrial customers, and powering households until the residential sector is electrified.
Concerningly, the current gas supply outlook includes undeveloped reserves, which in some cases are yet to receive investment approval and the necessary regulatory approvals to begin production. Delays or ending these projects could result in a worse supply outlook.
Conversely, there are many potential new projects that if successfully brought online will make a material difference to the supply outlook. These projects include production from new fields and basins, as well as LNG import terminals.
To support domestic gas supply over the longer-term, the conditional exemptions under the Gas Market Code are intended to provide certainty for businesses to invest in new projects. And I will come to the Gas Market Code in more detail shortly.
Gas market prices
Before I do that, I want to briefly talk about gas prices.
Our December 2023 report showed that prices offered last year for supply this year had continued a downward trend since the peak in July 2022.
Producer prices offered between February and August last year, for supply this year, averaged about $15/GJ, which represents a 45% decrease compared to the preceding six months.
Retailer prices offered in the same period for supply this year averaged $19.50/GJ, which is 21% lower than the preceding six-month period.
Prices agreed under Gas Supply Agreements executed by producers between February and August last year, for supply this year, averaged around $18/GJ, which is 3% higher than the preceding six months. Prices agreed under retailer Gas Supply Agreements averaged about $19.50/GJ, which represents a 12% decrease compared to the preceding six months.
We also observed that domestic spot prices eased in early 2023 to average around $12/GJ. Spot market prices fluctuated in mid to late-2023, but more recent data shows spot prices, on a 30-day average basis, were between about $11-12/GJ in the middle of this month.
International LNG prices have trended down so far this year, and forward LNG netback prices show an overall decrease in the medium term. If this continues, we’d expect to see more competitive pricing for domestic gas users over time.
Regulatory state of play
Gas Market Code
As you would all be aware, the Gas Market Code fully came into effect in September last year. The Code aims to ensure adequate supply of wholesale gas to the domestic market at reasonable prices and on reasonable terms.
It sets minimum requirements for producer-initiated expressions of interest, such as obligations to publish information about EOI processes and availability of uncontracted gas, which are aimed at improving market transparency and efficiency.
To balance the relative bargaining positions between users and suppliers, the Code also contains requirements related to initial and final stage offers. It seeks to support fair negotiations with overall obligations to deal in good faith.
Importantly, it provides for exemptions to be granted from the reasonable price provisions to incentivise additional supply of gas, and for deemed exemptions for small producers that exclusively supply the domestic market.
While the full impact of the Code on domestic gas supply is not yet clear, suppliers have agreed to commit approximately 560 PJ of additional gas to the domestic market until 2033 through the exemptions framework. Some of these commitments are subject to regulatory and environmental approvals, but they suggest the Code is supporting long-term domestic supply.
The effects of the Code on domestic gas supply and the impact of broader regulatory and policy changes on the gas market will become more apparent over time, and we will be closely monitoring this.
The ACCC released compliance and enforcement guidelines for the Code late last year. Our guidelines summarise the key requirements, available exemptions, the prohibition on avoidance schemes, and consequences of non-compliance.
It’s important to say that we’ve observed generally good compliance with the Code to date, and I will come back to this in more detail shorty.
Developments to date
The emergency price cap of $12/GJ ended in December last year. This was replaced by the reasonable price provisions under the Code, which retains a $12/GJ cap for regulated gas that’s not subject to an exemption.
To date, four conditional ministerial exemptions have been granted under the Code, and the ACCC is currently considering publishing the details of these exemptions on our website. The Code requires us to publish this information as soon as practicable after we obtain the information and have considered public interest and confidentiality concerns.
Small suppliers
Under the Code, a supplier is deemed exempt from the pricing requirements if they produce less than 100 PJ and sell their gas only to the domestic market.
Over 60 suppliers have notified the ACCC of their exempt status in relation to production across 2022 and 2023. We have published over 50 names of deemed small suppliers on the register on our website.
Determinations
The Code also contains some key requirements on transparency, particularly record keeping, reporting and publication obligations for suppliers.
The ACCC can make determinations in relation to the transparency requirements of the Code and the circumstances in which a covered supplier who has issued a gas EOI or offer may withdraw or terminate.
In December last year we made four determinations under the Code. These will commence on 1 April this year, which gave suppliers time to adapt to their new record keeping, publishing, and reporting obligations.
The determinations will assist us in monitoring and enforcing compliance with the Code, as well as supporting our ongoing inquiry function. To this end, we recently published an updated reporting guide to assist industry to comply with these obligations under the Code.
In January this year, we also issued our first information-gathering notices requiring suppliers to provide us with certain records the Code requires them to keep. We issued these notices to about 55 suppliers.
Code review
In terms of the effectiveness of the Code over time, a review is scheduled to occur by 2025. This review will be an opportunity to reflect on the operation of the market and the Code’s impact on that.
The ACCC is named as a possible entity to conduct this review, but ultimately it will be a decision for the Energy Minister and the Resources Minister.
The Code also allows the ACCC to determine the reasonable price. However, it states no determination can be made within two years after the commencement of the Code unless there has been either a substantial change in market conditions, or we are notified to do so jointly by the Energy Minister and the Resources Minister.
We’ll be monitoring supply and pricing as part of our usual gas inquiry reporting functions, in addition to monitoring compliance with the reasonable price provisions and conditional ministerial exemptions. Through this, we’ll assess whether a determination is required.
Review of retailer behaviour
Separate to the Gas Market Code, in June last year we commenced a review into the behaviour of gas retailers. The two-staged review is being carried out in response to concerns from commercial and industrial (C&I) users about the selling and pricing practices of some retailers.
We’re undertaking this review in-line with our inquiry role to, among other things, look at measures to improve the transparency of gas supply arrangements in Australia.
Stage one of the review, which was published in our December report, is focused on retailer selling practices and involved extensive consultation with C&I users, intermediaries, retailers, and industry associations.
We heard that tight and volatile conditions in the east coast market over the past two years posed significant challenges for retailers and C&I users, and contributed to a deterioration in competition to supply C&I users and some retailers’ selling practices.
C&I user experiences differed across retailers, with some retailers more accommodating and employing more customer-centric selling practices than others.
In response to retailer selling practices, some stakeholders expressed concern with short offer validity periods, offer withdrawals and amendments, the willingness of retailers to negotiate, risk allocation, spot market linked products and the adequacy of information provided by retailers. We heard particular concerns about the perceived ‘take it or leave it’ approach employed by some retailers in 2022 and early 2023.
Many retailers told us their standard selling practices didn’t change over this period, but some acknowledged there was a deterioration. Those that did, attributed it to needing to manage their exposure to market volatility and the increasing costs, risks and complexities associated with retail supply.
Towards the end of our consultation, stakeholders told us there had been some improvements in competition and a resumption of retailers’ standard selling practices in the second half of 2023. While this improvement is encouraging, some retailers’ standard selling practices do appear to fall short of what we would expect in a workably competitive market. We will continue to monitor retailer selling practices in 2024 for improvements in line with the selling practices that we would expect to observe in a workably competitive market.
We have also commenced the second stage of our review this year, which focuses on retailer pricing practices, including the costs, risks and other factors that influence pricing decisions. We’ll report the findings in our December report this year, and if we identify any systemic issues in retailer behaviour, we may make recommendations to the Australian Government.
Enforcement role
The ACCC is first and foremost a law enforcement agency. We’re responsible for monitoring and enforcing compliance with the Gas Market Code, the Gas Market Emergency Price Cap Order, and the avoidance scheme provisions under the Competition and Consumer Act.
One of our current compliance and enforcement priorities is promoting competition in essential services, such as supply of gas, and addressing misleading pricing in relation to essential services, including in the energy sector.
There are significant penalties for non-compliance with the requirements of the price cap order and the Gas Code, and the ACCC takes very seriously and will fully investigate alleged contraventions to circumvent those requirements through avoidance schemes.
The Code contains three tiers of pecuniary penalties for companies that are in breach. For the highest tier penalty provisions, the maximum penalty is up to the greater of $50 million or three times the value of the benefit obtained, or, if that value cannot be determined, 30% of the company’s turnover during the period it engaged in the conduct.
Requirements under the Code and the Competition and Consumer Act relating to compliance with the price rules, good faith negotiations and avoidance schemes, as well as the conditions attached to Ministerial exemptions, will attract the highest penalties. This is because they are critical to the effective functioning of the wholesale gas market and the Code’s objectives.
The good faith provisions seek to address long standing imbalances in bargaining power and promote honest and fair dealings between sellers and buyers of gas. The maximum penalties available for breaches of the good faith provisions should deter parties from acting other than in good faith in relation to negotiations and performance of agreements, including by deterring conduct that is arbitrary, unreasonable, or reckless.
Gas industry participants who witness behaviour that indicates a supplier may have breached the good faith obligations, or who suspect there may have been a breach of another civil penalty provision of the Gas Code, are strongly encouraged to report it to the ACCC.
Similarly, if industry participants suspect a supplier has been engaging in a scheme to avoid the application of a civil penalty provision of the Code or the Price Cap Order, they are strongly encouraged to report it to us.
We recently launched a gas industry online complaints portal to allow people to anonymously report conduct to us that may breach the Gas Code, the price cap order or the avoidance scheme provisions. This anonymous portal is accessible through both the gas price cap and Code pages on our website.
Our primary objective is ensuring compliance with the law, and we will use a variety of tools and approaches to prevent or address contraventions, including industry engagement and monitoring, education initiatives and enforcement action when appropriate.
We’ll continue to actively monitor gas suppliers’ behaviour to ensure compliance with the specific gas industry laws we administer. We’ll also investigate potential gas-related contraventions of other provisions of the Competition and Consumer Act, where appropriate.
Between December 2022 when the price cap was introduced and August 2023, producers appear to have sold gas to the domestic market under short-term contracts at or below $12/GJ for 2023 supply. We are continuing to review contracts from late 2023 and our observations will be published in our June report this year.
We’ll continue to closely monitor compliance with the Gas Code, including ministerial exemptions which form part of our primary monitoring focus.
Since the Code was introduced, we’ve prioritised engaging with the gas industry to support compliance, including with the reporting requirements. However, we’ll be quick to detect, investigate and consider any appropriate enforcement action in response to alleged Code contraventions.
Conclusion
When I spoke at this conference a year ago, the supply-demand outlook on the east coast was more precarious, international gas prices were higher, and the Gas Market Code was still in draft form.
I want to end my speech on an optimistic note by reiterating that we have seen an improvement in the supply-demand outlook for the east coast, forward medium-term LNG netback prices are trending downwards, and domestic wholesale prices have been declining since late last year.
There is also approximately 560 PJ of additional gas committed to the domestic market through the Code’s conditional Ministerial exemptions framework.
We continue to hold concerns about the longer-term outlook, particularly the shortfall in the southern states, and it is therefore critical that new projects are brought online, and the LNG producers commit sufficient gas to our domestic market.
The ACCC has an important role to play, through both our ongoing gas market inquiry and our role enforcing the specific gas market regulation. As always, our objective is to facilitate a well-functioning domestic wholesale gas market.
We’ve observed good compliance with the price cap and Gas Market Code so far, and we expect gas producers to continue to comply with their legal obligations so domestic users receive gas at reasonable prices and on reasonable terms. We’ll be monitoring this very closely.
Our next report in June this year will provide an update on the short and long-term supply demand outlooks, as well as an update on the price outlook. In our future reports, we’ll be able to examine the impact of the Code, and that information will inform the Code review due by next year.
Thank you for the opportunity to speak at this event on this critically important topic. If there’s any time left, I’d be happy to take some questions.