The Gas Industry Company (GIC) recently released a consultation paper on gas market settings and whether these are fit for the purpose of helping New Zealand through the transition to low-carbon energy. We had every intention of submitting by the due date of 24th June, but we failed to do this due to a combination of workload and illness.
In this blog, I outline some thoughts on the work undertaken by the GIC:
1. the issue of competition in the upstream gas market and whether there is sufficient competition to ensure that prices in future will reflect the cost of production;
2. exploring the future cost of production in the upstream market;
3. uncertainty around the policy environment.
Competition and Cost of Production
To be sure, the report covered a wide variety of topics, but it was virtually silent on one of the two key issues for any energy market affordability (the other one being security of supply).
To be quite clear, our view (and the view of many I’m sure) is that the upstream gas market is currently failing to provide a secure supply of gas at an affordable price. We’ve heard of medium sized gas consumers looking to renew gas contracts and being offered prices hundreds of per cent higher than what they’re currently paying.
An uninformed reader of the report would be excused if they formed the impression that outages of gas supply are to be expected; that consumers are responsible for ensuring supply by consuming more, not less; and that the cost of production is a subject which is “taboo”. In short, that consumers should be grateful for getting any gas at all.
Spending most of our time neck-deep in the electricity market, we observe that there is a huge contrast between the key concerns of the GIC compared to those of the Electricity Authority (EA). The EA constantly reminds us its purpose is to “promote competition in, reliable supply by, and the efficient operation of, the New Zealand electricity industry for the long-term benefit of consumers.”
By contrast, the GIC’s web site informs us that it is about “Providing trusted advice, support, and guidance to the gas and wider energy sector, Gas Industry Company’s work in gas governance and statutory accountability enables industry self-regulation that is efficient, low cost and effective.
We use our specialist expertise and relationships, to help stakeholders navigate change, informed by our daily monitoring of industry information flows.
We facilitate the gas market so that consumers enjoy safe, efficient, reliable, fair, and environmentally sustainable gas delivery.”
It’s pleasing to see that consumers get a mention, although they are well down the list of key stakeholders, based on the order and the number of words dedicated to them. Again, an uninformed reader would be excused if they gained the impression that the GIC primarily exists for the benefit of gas industry participants.
The upstream gas market has become more concentrated, partly as a result of the rate at which permits are issued, or not, for new exploration projects, but also because the rate of transition to renewable energy is accelerating, here and in many countries. There are now only five key players and two of them hold the majority of the reserves.
As a result of this concentration, it may be that competition will suffer in future, if not already. As gas consumption falls, it may well be that gas prices rise due to the need to recover the fixed costs of development required to keep the gas flowing, a point made many times in the GIC’s report. But then surely this is a good reason to check that the gas market’s settings are sufficient to ensure that prices reflect costs?
And what are these costs? The report mentions many times that costs may be increasing but nowhere does it provide any indication of what these costs might be, what they are now, or where they were in the past. Given the GIC’s purpose shown above, surely it must have some idea?
Given the GIC’s stated purpose which, as already noted, seems to be more aligned with the needs of gas market participants than with the needs of consumers, maybe it is not surprising that the report was silent on cost data and on competition. That said, the report was initiated after Minister Woods wrote to the GIC last December asking, in part, “how current market, commercial, and regulatory settings provide major gas users with sufficient certainty/transparency about gas supply for their operations, and whether these are fit-for-purpose during the transition [to renewable energy]”. Note the emphasis on gas users, certainty and transparency; given the interest that politicians tend to have in the cost of energy, I should think that transparency extends to transparency around costs and prices.
I really would like to see more from GIC on the issue of competition and costs versus prices. Perhaps this is something we will see more on in future work: I hope so. Perhaps also, it is time to change the emphasis in the GIC’s purpose to give the interests of consumers a higher priority.
The GIC’s report made the good point that there is an increased level of uncertainty around policy affecting the energy transition: we certainly feel this in the work that we do on forecasting electricity and other prices over the long term.
To a certain extent, heightened uncertainty is inevitable because without rapid policy change, there wouldn’t be a rapid transition to lower carbon energy. Looking at the electricity market, for example, to achieve 100% renewables requires replacement of fuel storage in the form of the coal stockpile at Huntly, and the gas in gas fields, with large-scale direct storage of electricity. Due to the scale and timing of these developments, this will almost certainly require involvement of government, which has led to the establishment of the NZ Battery project, tasked with assessing the feasibility of large-scale storage options.
Even with certainty around policy, however, there remains uncertainty how costs of technology options will change over time. So, uncertainty cannot all be blamed on the government or its various agencies.
I hear a lot of commentary along the lines that government intervention could stifle investment by the industry. But I find this difficult to believe, especially considering investment on the scale that is contemplated to achieve 100% renewable electricity, for example. We expect central and local government to provide roading and other infrastructure, and Transpower as an SOE provides transmission infrastructure for electricity, so can we not take a similar approach to other infrastructure, such as large-scale storage, required to support 100% renewable electricity?
Given this is the case, my plea is for the energy industry and government to find ways of working together effectively, toward the common goal of reducing our energy-related emissions. The GIC’s report did mention government involvement in the context of gas storage, which is interesting if one also thinks about the feasibility study recently released by First Gas, which promotes the idea of hydrogen storage in depleted gas field(s), just as Ahuroa Gas Storage facility currently stores natural gas. If government and industry can find a way to work effectively together, this would be one of the key steps in making the transition to renewable energy.