05 Jul 2021

ACCC draft decision confirms netback pricing continuity

The use of a LNG netback pricing method is well established in the natural gas sector, and the method used by the Australian Competition and Consumer Commission (ACCC) is one that works. As the ACCC notes, a netback price “… do not represent the ACCC’s view of a fair price for sellers or buyers, or a regulated price cap.”  Instead, it serves as more of a guide for one consideration in one segment of the market. 

LNG netback prices offer a way to conceptualise how businesses can set differing prices for differing products for differing consumers. For example, an LNG producer may sell gas to a local buyer or liquefy it for export. A netback price represents the price at which the producer would be “indifferent” between selling the gas domestically or exporting it. 

While LNG netback prices can in some circumstances provide a guide, they are not an actual price in the market, and they should not be viewed as a price benchmark. International experience has shown that intervening in gas markets through price controls stymies investment in new supply projects, leading to gas shortages, and in the end, higher prices for end-users. 

Other factors influencing gas prices paid by individual users include factors such as gas supply terms and conditions and charges from transporters, distributors, and retailers.  

As the ACCC has confirmed repeatedly, there is no shortfall in domestic gas supply, and domestic gas customers in Australia do not pay more than overseas customers; the wholesale price for east coast gas in Australia, currently $6.22 per GJ, is significantly lower than neighbouring APAC countries such as China, South Korea, Japan and Taiwan. 

Netback pricing is sometimes used as a measure with which to compare the Australian gas market to the US-based Henry Hub, which is not apt given the relative differences in scale and population between the two countries. The Henry Hub services 330.1 million people and connects to 485,000 kilometres of pipeline, compares to 25.7 million and less than 40,000 kilometres in Australia. While the product may be similar, the needs of the two markets are not. 

The ACCC’s decision confirms that its methodology is appropriate and shows the market is continuing to work for Australia and Australians; interventions on gas pricing would only serve to discourage continued growth and investment, impacting communities and the nation’s wider economic recovery.