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Victorian consumers could end up footing the bill for expensive imported LNG under a controversial proposal that assumes the additional gas would lower the cost of domestic gas rather than increase it, as many expect.

Gas producers in the south-east are voicing strong concerns about the plan to give the Australian Energy Market Operator the ability to underwrite new supply options if required to head off a shortage, including LNG import terminals.

While the increased powers being considered for AEMO are intended to be used only as a “last resort”, domestic gas producers say governments have failed to take many other steps that would tackle the supply squeeze that is underpinning prices.

Those steps include streamlining approvals for gas projects and including gas power in the federal Capacity Investment Scheme, Canberra’s flagship program to support the clean energy rollout.

Some producers argue the proposal would result in the energy market operator acting as a buyer and seller of gas, putting it in direct competition with the private sector.

One gas industry executive described the proposal – which was quietly released earlier this month by the Department of Climate Change, Energy, Environment and Water together with full draft legislation – as “extremely problematic”.

They said it represented a step towards nationalising the gas supply sector.

Beach Energy chief executive Brett Woods said he was concerned about the extent of the powers proposed.

“Short-term market intervention often results in adverse consequences over the longer term for consumers, the industry and the broader economy,” Woods said.

“Therefore, the government should be focusing on streamlining approvals and supporting upstream investment through the Federal Gas Market Review as a more balanced solution for threats to Australia’s energy security.”

A spokesman for the gas industry association, Australian Energy Producers, said such a significant new intervention in the gas market risked undermining the objectives of the Albanese government’s review of the east-coast gas market.

“It also risks crowding out private sector investment and discouraging long-term contracting, the opposite of what is needed to improve gas supply and system reliability,” he said, calling for the focus to be on streamlining approvals and bringing on new domestic supply.

The Victorian government last year pushed for a plan to stave off gas shortfalls by allowing AEMO to underwrite the development of LNG import terminals on the east coast, but met strong pushback, most notably from Queensland.

Domestic supply options a priority

The latest plan would partly circumvent that resistance because, while the proposed legislation would require Queensland approval, it would be up to AEMO and the individual jurisdiction threatened by a shortage – most likely Victoria – to decide how to implement it.

The proposal envisages AEMO underwriting supply options that could meet a forecast shortfall, which could involve domestic gas projects, pipelines, storage plants, or LNG import terminals, the energy department’s acting head of gas and liquid fuels, Andrew Pankowski, said in a January 14 briefing.

He said the scheme would prioritise domestic supply options, but gas industry sources fear that Victoria would prefer to support LNG imports rather than local projects.

Large energy users also strongly opposed using the system to underpin LNG import plants, said Andrew Richards, chief executive of the Energy Users Association of Australia, whose members include BlueScope and Orica.

“It’s a lose, lose, lose”

“We would be dead against using this to underwrite an LNG import facility, because it is not going to be cheap gas, and it is going to have more emissions associated with it … so it’s a lose, lose, lose,” Richards said.

“But if it is targeted well it could actually work. It’s all about how are we going to get more gas into the market at a time of such uncertainty and particularly targeting … the smaller tier-two players for domestic use.”

MST Marquee analyst Saul Kavonic questioned whether the proposal was “an avenue for Victoria to secretly fund imports in practice”.

“This appears to be designed at the behest of the Victorian government who now face mounting energy security risks after years of hostility to investment in gas in the state,” he said.

“The measure could lead to a slippery slope of much higher costs being imposed on Victorian energy users.”

A spokesperson for federal Climate Change and Energy Minister Chris Bowen said work on the issue continued and underscored the government’s commitment “to securing the gas Australian consumers and industry need to support our energy transition”.

Aspiring LNG importer Viva Energy welcomed the proposal, which it said could boost energy security on the east coast.

”Viva Energy has long been of the view that a well-located gas terminal is the best and most cost-effective solution delivering both the necessary energy and the capacity to provide for our future security,” Viva chief strategy officer s Lachlan Pfeiffer said.

The consultation paper for the proposal cites preliminary modelling by ACIL Allen that found retail gas prices would be up to 30 per cent lower in 2029 if the reform was implemented, and retail electricity bills up to 8 per cent lower. The modelling did not appear to differentiate between whether the additional gas came from imports or domestically.

Assumption “absurd”

But Kavonic described the assumption behind the policy that LNG imports would reduce gas prices as “absurd”, while the chief executive of gas pipeline owner APA Group, Adam Watson, said LNG imports would result in higher prices.

Kavonic said that while the proposal was designated a “last resort” measure, all the criteria that needed to be met before it would be implemented appeared a foregone conclusion.

Those criteria include AEMO identifying a material threat of a gas shortage and communicating that to the market – something it has already done.

The east coast gas market is already the subject of a wide-ranging review by the Albanese government, which intends to introduce a domestic gas reservation scheme, as flagged by Bowen before Christmas.

Richards said both reforms needed to be co-ordinated to avoid any AEMO underwriting for projects that produce gas that could be exported, and to avoid consumers overpaying for the security of increased gas production. The system also had to ensure gas producers cannot withhold new supply for the purpose of getting access to AEMO support, he said.

Consultation on the AEMO underwriting proposal closes on February 13, and the new system is expected to be implemented in the second half of the year, assuming energy ministers approve it.