Gas Industry and the implications of the Carbon Pollution Reduction Scheme

1. Gas Industry and the implications of the Carbon Pollution Reduction Scheme Phillip Coulton IGE Conference Young March 2009

2. Regulatory framework for the gas industrySteve Edwell Sept 2008 • On 1 July 2008 new regulatory framework commenced • National Gas Law (NGL) replaced GPAL • National Gas Rules (NGR) replaced the gas code • Under the NGL • The AER has assumed responsibility for transmission and distribution pipelines from the ACCC and jurisdictional regulators respectively except in WA • NGL is a national framework, consistent where possible with the NEL and providing a supportive environment for investment in gas infrastructure

3. Insert Heading • Natural gas industry will be a beneficiary of the CPRS • New legislative framework supports infrastructure development for initiatives such as the CPRS • The framework incorporates new law and rules; integrated market operator function; and interconnected gas grid

4. Regulatory framework supporting investment • New forms of regulation supporting investment include: • Incentives for greenfields pipelines • 15 year exemptions from coverage • 15 year price exemptions also available for international pipelines • New pipeline classifications • Light regulation services pipelines with optional limited access arrangements to establish non-price conditions of access • New investment criteria

5. Implications of the CPRS for the gas industry • Natural gas industry is a low emitter in comparison to other energy industries • Likely increase in demand for gas for electricity generation • Fugitive emissions – source of emissions in gas transportation sector • Transmission pipelines have minimal emissions • Distribution pipelines make up most of the emissions for the transportation sector, but these are relatively low in comparison to other fugitive emissions (less than 10 per cent)

6. Changes to the operating environment • Gas Demand • End-user energy demand increasing over time, regardless of CPRS • Increases in demand for gas in electricity generation • Gas Supply • Long run gas supply in Eastern Australia is constrained • The carbon price will impact gas competitiveness compared to coal • Queensland Government initiatives for reducing emissions

7. Regulatory framework and policy initiatives • Climate change policies and energy markets have implications for the regulatory framework • AEMC is undertaking a review of energy markets • Establishment of an Advisory Committee • Change in the nature of gas pipelines access regulation under the NGL depending on market circumstances; reference tariffs can accommodate the efficient costs incurred for the CPRS

8. Gas Network Infrastructure & Climate Change ChallengeArek Sinanian Sept 2008 (PB Associates) • Higher average temperatureshttp://www.climatechangeinaustralia.gov.au/resources.php • Regulatory changes • Weather extremes (more severe storms) • Economic (costs and opportunities) • Migration/Demographics • Human health effects • Lower average rainfall • Evaporation and moisture balance • Fire hazard (more) • Water supply (mostly less) • Sea level (rise) • Ecology, agriculture and forestry

9. Required responses • Adaptation– making adjustments to existing systems • Water supply and demand • Additional infrastructure • Redesign of infrastructure, new infrastructure, augmentation of current infrastructure • Abatement (or Mitigation)– reducing emissions • Energy efficiency • Generation • Manufacture • Demand management • Renewable energy, fuel substitution • Carbon sequestration • Resource efficiency and reduction in the consumption of materials • Transport efficiency

10. Current policies and direction • Energy Efficiency Opportunities Act, 2007 • CPRS/Emissions trading scheme to start in 2010 • National Greenhouse & Energy Reporting (NGER) Act, 2007 • 20% Renewable Energy Target by 2020 • Target to cut Australia’s GHG emissions by 60% by 2050 • $100m per year in Global Carbon Capture and Storage Institute (NEW) • $500m Renewable Energy Fund - to develop, commercialise and deploy renewable energy • $240m Clean Business Fund – to help business and industry deliver energy and water efficiency projects, with a focus on productivity and innovation • $150m Energy Innovation Fund – to keep world leading scientists and researchers in Australia

11. CPRS & the Garnaut Review • Action vs inaction • To allow least cost emissions abatement opportunities • Minimise overall cost to the economy • Broad based ETS and permits are to be auctioned • Permit sales revenue to go to: • 50% to households • 30% to business • 20% to R&D • The 5 guiding principles of a CPRS: • Scarcity aligned with the emissions target • Tradability • Credibility • Simplicity • Integration with other markets

12. CPRS & the Garnaut Review con’t • Coverage: stationary energy, industrial processes, fugitive and transport (waste and forestry later) • Each permit, permits the holder to emit one tonne of CO2e, otherwise penalties • The price of a permit will depend on supply and demand • The need for global response

13. The Green Paper (now White Paper) • 60% reduction in Australia's GHG emissions by 2050 • the implementation of an emissions trading scheme in Australia by 2010 • a cap and trade Scheme involving a limit (or cap) on emissions by covered sectors, and permits issued up to that cap • broad coverage excluding agriculture • cover 75% of all of Australia's GHG emissions • permits (Australian Emission Units - AEUs) capable of being fully transferable • reporting under the NGERS to be lodged on or before 31 October each year in respect of the preceding financial year • large emitters (>25,000 t of CO2-e) required to have reports assured by an independent accredited third party • permits will be auctioned (except for free allocations) • all money raised through the Scheme to help households and business adjust to the Scheme and invest in clean energy options • a cap on the price of AEUs will be imposed during initial phase of Scheme (2010/11 to 2014/15), the cap set high above the expected price of AEUs

14. CPRS Impact on Gas Supply, Demand & Pricing(ACIL Tasman ESAA Report July, 2008) • Supply scenarios • Existing and future coal seam gas (CSG) developments in Qld and NSW (»400 PJ/a) • Main source of future gas discoveries in Bass Strait region of SA • Wholesale gas price will increase to $5.5-$8/GJ (2020) • Demand scenarios • Gas demand for electricity will increase from 139 PJ (2008) to 375/508 PJ (2020)

15. Gas Industry Developments • Additional infrastructure • Gas fired generation plants • Embedded generation • CSG • Geosequestration • Vehicle re-fuelling • Biomass

16. Gas Industry Implications of an Emissions Trading SchemeAlf Rapisarda Sept 2008 (Jemena) • Framework to enable Australia to meet emissions reduction targets • Reduce the linkage between economic activity and greenhouse gas emissions • Creating a market for carbon • Green Paper explains what it might look like • Final design early 2009 • Effective from 2010

17. CPRS - Key Proposed Features • Support mechanisms to offset higher costs • Offsetting reductions in fuel taxes • Assistance for low/middle income households to become more energy efficient • Free permits for trade exposed industries • Assistance for coal fired generators

18. General Considerations for Individual Businesses • The role of carbon in the business • Exposures and risk under the emissions trading scheme • Effect of CPRS on input costs • Effect of CPRS on demand the product • Business strategy around climate change/carbon exposure • Stakeholder views about your carbon foot print and your strategies • Opportunities ? new markets, new technologies

19. Network Leakage • Fugitive Emissions -“methane, carbon dioxide and nitrous oxide emitted during the production, processing, transportation, storage, and distribution of coal, oil and gas.” • Un-accounted for Gas = Fugitive Emissions • Estimation methodology of key importance • Many, but not all, network businesses will have to participate in the permit system • Forecasting and trading risk • Quarterly auctions 3 years in advance • Compliance and enforcement provisions yet to be finalised • Clear cost passthrough arrangements for regulated businesses need to be agreed

20. CPRS and Gas Network BusinessesThreat or Opportunity? • Residential gas usage • I&C gas usage • Operating costs • Construction costs • Economic returns

21. Residential Gas Usage • Mixed bag • Positive impacts of electricity to gas substitution • Reduced demand with more energy efficient gas appliances • Evolution of solar products • Role of government programs and subsidies for consumers • Likely short/medium term picture • Continued strong demand for gas connections • expansion of network footprint in NSW, QLD • Declining average usage per connection • New connection usage lower than average usage • Energy efficiency, solar • New applications ?

22. Industrial & Commercial Gas Usage • Significant increase in large scale gas fired generation • Strong drivers to reduce process gas usage at existing sites • Large scale co-generation will increase • Small to mid sized co-generation should become more economically viable Likely short/medium term picture • Pipeline • increased throughput, expansion & extension of pipeline systems • Networks • gains and losses likely to offset and remain relatively flat

23. Operating Costs • Increases in key input costs, • energy, system use gas, materials used in O&M • CPRS costs associated with gas leakage will be significant • Cost of unaccounted for gas will increase • robustness of assumptions used in passthrough arrangements will become much more important • Need to establish with the AER mechanisms that ensure that efficient networks have fully pass through of CPRS related costs in network charges

24. Increased Capital Works Costs • Key input costs for construction activity will increase • steel, plastic, and civil contractor costs • Peakier load on the network driving increased capacity development investment • result of gas boosted solar and high efficiency instantaneous water heating appliances • Pipelines • initially peakier load as gas fired peaking plants are established, flattening out as gas becomes base load

25. Network Economics • Higher costs and lower average usage will drive higher network charges • Higher prices likely to impact residential demand • Impact will vary by climatic zone • Gas network regulation exposes owners to potential asset write-downs • unlike electricity networks • Economics of network expansion • higher construction costs and lower average usage => • increased need to seek contributions => • incentive for builders and developers to seek out non-gas solutions • the challenge will be to remain relevant to the market • Gas pipeline throughput and revenues will improve

26. Sector Summary • Pipelines • very positive, CPRS should encourage gas fired generation and increase business in pipelines • Energy Services Providers - • very positive outlook as larger consumers look to minimise CPRS costs • Gas Appliances • generally positive, gas appliances should be well positioned against higher carbon emitting electric products • Gas Networks • more challenging • increased risks both in terms of utilisation and regulated outcomes and longer term uncertainty for continued asset growth