Key points
- Gas prices have been increasing over the last 12 months, primarily due to international factors.
- The Federal Government has intervened in the market, implementing a 12-month price cap on future domestic gas offers.
- From late 2022, wholesale contracts offered by producers are subject to a $12/GJ price cap and will be subject to an ongoing mandatory code of conduct containing ‘reasonable’ pricing obligations.
- The legislation was implemented quickly and contracting activities have paused while the industry has been grappling with understanding the new requirements.
- As a consequence, retailers have had difficulty securing any additional gas supplies and many have paused making contract offers to C&I customers.
- The current challenge with availability of contract gas does not directly impact residential customers – it is an issue affecting Commercial & Industrial (C&I) customers who do not contract directly with gas producers and have not recontracted (or are now unable to recontract) with a retailer for 2023.
Gas contracting
To manage market risks the vast majority of gas is traded through bilateral contracts. Gas contracts give both the buyer and seller certainty over the price and amount of gas for a specified period.
There are two broad types of gas supply agreement in the east coast gas market:
- Contracts between gas producers and very large customers, primarily energy retailers, power generators, and large industrial customers. It is these contracts which the $12/GJ price cap applies to, however it only applies to new contracts, not existing contracts.
- Contracts between retailers and aggregators who sell to commercial and industrial (C&I) customers. The $12/GJ price cap does not apply to these contracts.
Retailers contract gas in advance to meet their forecast customer demand levels. Retailers who have already committed their existing gas book need to secure additional contract supplies to be able to make further offers for businesses.
Recent government actions are aimed at the wholesale price for future contracts – as noted by the Federal Energy Minister, Chris Bowen: (ABC Capricornia interview, 18 January: “… most of the gas for 2023 has already been contracted. So those deals are already done, already locked in. This is more a discussion about 2024-25.”).
One complication that has emerged (based on public statements) is producers have indicated they would pause new contract offers to review the full implications of new Federal rules and to avoid inadvertently breaching them and potentially facing severe penalties (up to $50m, or 3 times the value of the benefit obtained, or 30% of turnover in the period it engaged in the conduct: ACCC).
This has led to an expected short-term tightness in gas supply for C&I customers.
Retail-C&I Contracting
Retailers normally enter agreements with their C&I customers for a defined contract period, volume and price. Towards the end of the contract period the parties will discuss future needs and contract arrangements – including volume and price – with deals then usually struck near the end of the previous year or the beginning of the new year.
Where customers choose not to recontract with a retailer, but still require ongoing gas supply, the incumbent retailer continues to supply gas to that customer, typically at the retailer’s default price. The default price is set to reflect and cover uncertain costs and market exposures including potential seasonal variations in such costs, risk management, haulage/pipeline transport and other costs that the retailer will incur by the unexpected and unplanned customer load.
Recently it has been reported that some C&I customers now on default prices were offered new contracts, but chose to wait to see if cheaper contract gas would become available upon the introduction of the new Federal price cap. In many cases those customers have been impacted by the lack of new gas contracts as a result of the factors mentioned above.
Spot Markets
Separate spot markets operate in eastern Australia – Victoria’s declared wholesale gas market, the short-term trading markets (in Sydney, Adelaide and Brisbane), gas supply hubs and there is another separate east coast wide market for transportation and compression services.
Spot market prices will fluctuate based on market conditions due to factors such as available gas supply, gas storage levels, demand and conditions in the electricity market.
Spot market trading can be a useful mechanism for wholesale market participants to manage imbalances in their contract positions. But there can also be risks created by price volatility that need to be managed. It would be very risky for a participant to rely on spot markets to buy all its gas needs.
To take part in short term trading markets participants need to be registered and meet the Australian Energy Market Operator’s prudential requirements and be able to manage the transport of gas they buy or sell. Given the significant complexity, in addition to stringent financial and trading rights requirements, customers who are not large enough to manage it will choose not to participate and will have retailers carry these risks and obligations on their behalf.
Default Prices
As per their contractual arrangements, customers who have not recontracted with their retailer or contracted with another retailer will be placed on the incumbent retailer’s default price on expiry of their contract term.
Gas default prices are traditionally charged for temporary supply. This might be where a customer has rolled off a contract and is yet to recontract, or where a customer is transferred to the retailer unexpectedly – this could occur through a retailer of last resort (ROLR) event, where customers are reassigned from one retailer to another. Default prices are used where there is no control over the forecast load or the length of an uncontracted period.
The default price does not reflect short-term pricing as the uncertainty around the duration of this arrangement and gas usage in respect of a customer means pricing must be set to cover seasonal variations in costs, risk management, haulage and other costs for a generic C&I customer. It is not tailored to a customer’s individual requirements, and the retailer must ensure they are able to cover their costs irrespective of the customers usage patterns.
Price Cap
The price cap of $12/GJ is aimed at future domestic wholesale contract gas offers and will take time to filter through (this will depend on a retailer’s existing portfolio position). The cap applies to contracts between gas producers and retailers or other large customers that have access to gas transport. The cap price does not include other costs that are incurred by the retailer and that will be reflected in the retail offers to C&I customers. Those additional costs include transport, network charges, storage, market fees, supply flexibility and retailer costs (such IT systems, support services, admin etc).
Retailers will also have historical gas contracts in their portfolio that were not subject to the gas cap, meaning the wholesale gas cost component forming part of retail offers to C&I customers is necessarily a blended rate rather than a rate that reflects only specific contracts. To the extent there are contracts in a retailer’s portfolio price above $12/GJ, this blended rate will be higher than $12/GJ.
As retailers are able to secure contracts for gas at the capped price of$12/GJ, this is expected to flow-through to lower prices for C&I customers. A customers’ delivered gas price will vary widely based on factors including the required volume, shape and location, with pipeline transport from Qld to southern markets adding up to $2-2.50/GJ.
