Ai Group welcomed the chance to make a further submission on the Mandatory Gas Code of Conduct (our initial submission is available here).

Our members include many industrial users of natural gas, who currently rely on it for process heat, electricity generation, or chemical feedstock. While all will need to contribute to the transition to net zero emissions in coming years, most likely through replacing natural gas via electrification, biogas or hydrogen, the availability and affordability of natural gas will be important to their viability for many years to come.

Most of Ai Group’s gas-using members do not participate in the wholesale market but buy their gas from energy retailers. The Government’s proposed monitoring of retail outcomes by the ACCC, AER and other market bodies will be very important to ensure the expected moderation of wholesale gas prices flows through to retail customers, and is seen to do so. If retail customers do not see benefits within a reasonable time, the Government should urgently consider further action to remedy this.

The Mandatory Code and the wider energy policies of which it forms a part respond to extraordinary circumstances in global and local energy markets, particularly the invasion of Ukraine, which have had serious impacts on businesses and households. It is critical to address these immediate needs while ensuring our energy systems are able to meet our long term needs for affordable, reliable and secure energy as we transition to net zero emissions.

The Reasonable Pricing Provision (RPP) has been the focus of especially intense debate over just this question of short-term versus long-term needs. Gas suppliers argued that the previously flagged approach would undermine their future investment appetite, and certainly gas buyers have been unable to find offers for 2024 and beyond while the detail of the Code remained at issue.

The Government’s revised proposal on pricing is a significant simplification and appears to provide gas suppliers with either a clear price cap over at least the next two years, operating similarly to the current one-year emergency cap; or an avenue to be exempted from the caps, either automatically for smaller producers or on application by larger producers that make binding commitments to supply the domestic market. There has not been much time to analyse the proposals, though we recognise the urgency of finalising the arrangements so that contracting for 2024 and beyond can resume. At this point we can simply say that we are hopeful that the proposed Code will be effective in moderating price outcomes over the next two years without undermining supply.

The proper arrangements beyond 2025 are much less clear. We are not attracted to emergency price controls that outlast the emergency. By contrast a more orderly restructuring of the domestic gas market to reduce its exposure to international volatility could be appropriate. Ai Group has been open to the idea of a national version of Western Australia’s successful prospective gas reservation system. If the system of notional caps and operative exemptions works as the Government envisages, encouraging gas development by suppliers with no capacity to export and firm local supply commitments by exporters, it could achieve a similar result to WA by a different mechanism.

As it is too early to tell how the system will play out, we strongly support review of the Code by mid 2025, or earlier if there is a dramatic change in circumstances or obvious failure to achieve price and supply objectives. The continued appropriateness of the RPP, and its settings if it continues for a further period, must be considered in the light of its performance and the state of energy markets.