10 Dec 2022

Transcript: APPEA Chief Executive Samantha McCulloch responds to the Australian Government’s energy plan

Doorstop Interview

Parliament House, Canberra

Topics: Australian Government energy plan, impact of gas price caps on investment, importance of gas in the energy transition, export contracts

Q: What is your reaction to the caps?

Samantha McCulloch: We welcome effective relief for Australian households and industry but what we saw last night announced by the government is a fundamental dismantling of the Australian gas market. It will do the opposite of what’s needed and will destroy investor confidence in bringing on new supply and that’s the key to bringing down prices.

Q: The government claims that these caps will leave the average households will be $230 better off next year as a result of these caps. What do you say to that?

McCulloch: Let’s just look at the role of gas in the power market. The reduction in electricity prices is being primarily driven by the coal measures, not by the gas measures. On the east coast of Australia gas is only 7% of the market, or 7% of generation, and it’s actually coal or hydro that set the price of electricity most of the time.

Q: So what do you think we’re actually going to see happen with power prices as a result of this plan?

McCulloch: I’d like to talk about wholesale prices in the gas market. Gas producers and APPEA members are selling into the wholesale market and the ACCC has highlighted just recently that the prices received by gas producers have increased about 11% in the last 12 months. In the retail market, prices have increased 95%. But what we didn’t see last night was any measures to address those retail prices. The focus is entirely on the wholesale market.

Q: So has it unfairly targeted your members?

McCulloch: I think it’s inefficient in terms of a response. What we’re seeking to do is provide relief to Australian households and industry. What we need to do is let the market work, let the market work to bring on new supply, to reduce prices in the long term.

Q: But we’re trying to undo that, we’re trying to (inaudible). In any case, this is driven by the Ukraine. Hopefully that will be somewhat temporary. Is there something a little bit hollow about your concern about the long term?

McCulloch: In terms of the energy transition, we need gas. The role of gas has never been more important because we need gas as a partner to bringing on more renewables into the electricity system. We need gas to help support energy security as we move away from coal. So the role of gas is actually growing as we head towards to net zero. In terms of temporary measures, what we have seen is a fundamental dismantling of the Australian gas market and, out of that, out of the pressures that we are seeing, of course because of Russia’s invasion of Ukraine, but these are also problems that have been a long time in the making. Prices and energy prices were going up even before Ukraine and that was because of tight supply and volatility in the power market.

Q: When you say we need more supply, which is what the opposition has been saying – it’s not about capping prices, it’s about getting more supply – that takes five, six years for new supply to come on…

McCulloch: What we do need, though, is to bring on new supply to reduce prices in the medium term. We’ve seen yesterday that the Narrabri pipeline will be given major project status. Our APPEA members and gas producers in Australia have announced more than $20 billion in new investment in supply in the last few years. But what we are seeing now is increasing uncertainty. We’re seeing bans and moratoriums. They are impeding the ability of the industry to make those long-term investments in new supply, and that’s the key to bringing down prices for Australian households and Australian businesses.

Q: What is your answer to the immediate problem, the immediate price issues?

McCulloch: As I just highlighted, when we’re looking at the gas market, the gas wholesale market is working. Just in September, the major gas producers and LNG exporters on the east coast of Australia struck a Heads of Agreement with the Federal Government that ensured domestic supply. It ensured domestic supply at competitive rates. And we were already seeing signs that this was working. We saw Santos just last week strike an 11-year supply deal with Brickworks. These are agreements being struck at competitive rates. But we’re not giving these existing mechanisms a chance to work. There’s intervention, after intervention. And what we’re seeing, after billions of dollars of investment by the industry, is that government is changing the rules of the game on an almost constant basis.

Q: The government says that this won’t impact Australia’s reliability as a gas exporting nation. It won’t affect those export contracts. Is that not the case?

McCulloch: So one of the measures that was announced in the Budget and reinforced yesterday was the quarterly review of the ADGSM, the Australian Domestic Gas Security Mechanism. That means on a quarterly basis the government will be investigating whether or not it needs to interrupt those long-term international supply agreements. This is going to undermine Australia’s reputation of being a secure, safe reliable partner for countries like Japan who rely on our energy exports.

Q: You’re suggesting that this will see prices go up rather than go down. How concerned do you think (inaudible).

McCulloch: The introduction of gas price caps is destroying the incentive for investment in new supply. We released analysis last week that highlighted that not only does it undermine the economics of new supply, but in other measures such as gas storage facilities in Victoria, in LNG import facilities. This is going to create long-term risks to our energy security and it will ultimately drive up prices because we will see shortages of supply.

Q: Is that even the case even though it’s got a 12-month limit on it?

McCulloch: This is not a short-term measure. The gas price cap of $12 announced yesterday initially will be 12 months but subjects to review. But the government also announced a regulated price under a mandatory code of conduct which has an indefinite period. So the government promised short-term measures emergency responses to the current pressures in the energy system – what we are seeing now is ongoing regulation of the gas market in Australia.

Q: Isn’t $12/GJ a pretty OK cap. Just a year ago gas was selling for about $10/GJ. So this is above that. Sure, it’s not at the $26 or whatever it is today, but it’s still above what it was?

McCulloch: When we look at the gas market, there’s, of course, the spot market, which is about 15% of supply, which tends to have higher prices. Those long-term contracts, the average price for those long-term contracts at the moment is around, the contracts being struck currently, is around $12. There’s a big difference between having an average of $12 and a cap of $12 because what the cap doesn’t recognise is the complexity of some of these agreements and the differences in terms of the quantity being supplied, the duration of the agreement, the interuptability of the agreement. This just underscores that these measures are being introduced without a strong understanding of the gas market and without an understanding of the unintended consequences.