Submission: Domestic Gas Reservation Scheme – draft Design Framework

To: Department of Climate Change, Energy, the Environment and Water
Re: Domestic Gas Reservation Scheme – draft Design Framework

Thank you for the opportunity for the Institute for Energy Economics and Financial Analysis (IEEFA) to provide input to the department’s consultation on the design of the domestic gas reservation scheme.

IEEFA is an independent energy finance think tank that examines issues related to energy markets, trends and policies. The Institute’s mission is to accelerate the transition to a diverse, sustainable and profitable energy economy.

IEEFA’s submission outlines feedback on selected aspects of the draft design, set out in detail in the table below. In summary, IEEFA recommends:

• The national scheme should be applied to Western Australia. In practice, the existing 15% (of reserves) obligation can be recognised, with an annual domestic supply obligation (DSO) applying to address the risk of gas shortfalls.
• Government should develop and publish detailed guidance for market participants, including on the responsibilities of Ministers and the Australian Energy Regulator (AER), as well as criteria that will be assessed by Ministers and the AER as part of their decision-making and determination roles. 
• Adjusting DSO requirements to avoid “significant oversupply” is sensible, but the threshold of 110% of domestic consumption still risks oversupplying the domestic market and crowding out supply from non-regulated entities. It would be more appropriate to set DSO requirements based on forecast domestic consumption plus a small buffer (which could be met through minimum storage levels across a range of storage facilities). In other words, defining “significant oversupply” as 100% of what the domestic market can absorb (including storage injections) is likely to be sufficient. 
• Government provide greater flexibility to regulated entities by introducing a “demand reduction” framework that would allow regulated entities to reduce their DSOs through funding of credible, effective and permanent demand reduction. 
  • To the extent a regulated entity invests in demand reduction, this should only affect their DSO rather than acting to generally lower DSOs across all regulated entities.
  • Government will need to develop guidance on how such a framework will work in practice, including how demand reductions from specific initiatives will be estimated and how this will affect DSOs. 
• The “additionality test” be further tweaked to allow supply from only small domestic producers to regulated entities for the purposes of acquitting their DSOs. This could be implemented through eligibility thresholds related to size, such as market capitalisation or existing gas production. 
  • In practice, larger, established gas producers are highly unlikely to require underwriting from regulated entities to develop new gas supplies given their ability to access financing and/or self-fund gas development. 
  • By limiting the applicability of the “additionality test” to small producers only, the government will minimise the risk that such commercial arrangements result in regulated entities purchasing gas that would have been supplied domestically anyway.
• Government should also consider adding a cost element to the “additionality test” to ensure exporters are incentivised to underwrite the lowest-cost reserves so the intent of the reservation policy is not undermined. Regulated entity joint venture partners may, in some instances, have incentives to seek to develop higher-cost reserves in which they have separate commercial interests.
• Operation of the “release valve” will be crucial to balance gas markets in light of the approach of setting annual DSOs. It is vital that sufficient gas is held in storage before the release valve can be accessed. This will provide an important buffer while giving regulated entities the flexibility to be able to commit to LNG spot sales (noting spot sales are often organised weeks to months in advance). It will important that gas held in storage is made available if needed.  
• The government consider measures to address the potential for creeping acquisitions of existing tenements (whether producing or otherwise), which may allow regulated entities to better acquit their DSOs but in turn limit how much additional gas is supplied.
   

Kind regards,

Joshua Runciman | Lead Analyst, Australian Gas
 

READ THE FULL SUBMISSION