On 28 August 2012, the Western Australian government released the Strategic Energy Initiative paper (SEI Paper) outlining the government’s strategic policy framework for energy in WA through to 2031.

The SEI Paper was published after an extensive consultation process with industry and stakeholders conducted over 2010 and 2011, allowing the government to identify the challenges and opportunities facing the energy sector.

The initiative is focussed on a goal of promoting more affordable, secure, reliable and cleaner energy supply in WA with an emphasis on market based outcomes and support in policy areas such as renewables and clean technology, domestic gas security and development of remote infrastructure.

The strategies proposed by the State government to achieve their goal have implications for the energy and resources industry and indicate possible reform of the sector. This article addresses the potential impact of the government’s SEI Paper on gas and power producers, buyers and sellers.

Summary

The key areas for gas and power producers, buyers and sellers are:

  • Defining the to-date unwritten policy of the government in relation to domestic gas reservation. This places a clearer and firmer requirement on LNG producers to commit reserves for domestic gas consumption.
  • Increased regulation and scrutiny of the unconventional gas sector, increasing the burden of compliance and risk management activities on unconventional gas producers.
  • Possible reform of the electricity market in WA to support the introduction of greater renewable energy generation capacity.
  • Adopting a co-ordinated approach to the development of remote infrastructure.
  • Further possible changes in regulation to move to cost reflective pricing and greater contestability in the WA market.

Domestic Gas Reservation

The government has confirmed its commitment to the continued application of the Domestic Gas Reservation Policy, initially introduced by the former State Government in 2006. The lack of a comprehensive statement and clear guidelines for the policy have previously received criticism for creating potential uncertainty and being subject to varied interpretation and inconsistent application. The paper clarifies the policy by:

  • confirming that LNG producers will be required to commit to make available the equivalent of 15% of each LNG export project for domestic gas, rather than the imprecise target of ‘up to 15%’ previously applied;
  • providing that domestic gas should be made available to coincide with the start of LNG production, when previously the policy allowed LNG producers to delay the start of domestic gas production to any point in the lifetime of the project;
  • providing that it will be a condition of project approval that gas producers demonstrate their ability to meet the Domestic Gas Reservation Policy, including developing the necessary infrastructure to deliver domestic gas; and
  • allowing LNG producers to offset their commitment by supplying gas or other energy from an alternative source, provided it can be demonstrated that the proposed offset will result in a net addition to the State’s domestic energy supply.

The policy has been said to have been tightened, while simultaneously giving LNG producers more flexibility in how they meet their domestic supply obligations. The policy is set to be reviewed in 2014-15.

The requirement to demonstrate the ability to comply with the policy, including infrastructure to deliver the domestic gas, as a condition of the project approvals process poses an additional hurdle for gas producers in securing project approval, in particular for the smaller scale LNG exporters. The obligation to ensure the equivalent of 15% of gas to be exported is reserved for domestic use at the time of LNG production limits the flexibility of producers to defer domestic gas production until later in the life of a project, once initial project capital expenditure has been recouped.

There are concerns that reserving gas for domestic use could deter investment in gas projects in WA. The policy has come under recent criticism from the Commonwealth Resources and Energy Minister, Martin Ferguson, who said that ‘there is no shortage of gas for the Australian domestic market’ and that ‘intervention in the market will only serve to dampen any appetite for the very investment needed to bring on new gas supplies’. The Federal government’s position is that the WA policy will artificially stabilise gas prices and act as a disincentive for gas production and may risk gas shortages in the long term.

Unconventional and shale gas reforms

The government intends to increase development of onshore gas resources. While unconventional gas provides a further energy option and may increase supply volumes, the impact from processes used to extract unconventional gas has generated concerns, particularly in relation to the effects on the environment.

The SEI Paper suggests that increasing the development of onshore gas resources could be achieved by:

  • enhancing the approvals system and developing strategies that encourage investment in exploration and development of onshore gas reserves;
  • enhancing regulatory arrangements pertaining to the extraction of unconventional sources of gas, promoting best practice; and
  • supporting research on the environmental impacts associated with the extraction of unconventional sources of gas.

These strategies aim to promote the development and use of unconventional gas, however this seemingly contradicts the tightening of regulations in the unconventional gas sector. On the same day that the SEI Paper was issued, the State Government introduced the Petroleum and Geothermal Energy Resources (Environment) Regulations 2012 (WA) under the Petroleum and Geothermal Energy Resources Act 1967 (WA), which implements strict disclosure obligations on gas producers, requiring disclosure of any chemical used in the extraction process of unconventional gas.

Under the new regulations, gas producers are responsible for providing all required chemical and additive information to the Department of Mines and Petroleum. This information will be used in the assessment of an Environment Plan, including the following information for each product, additive or other substance to be used:

  • trade name, commercial name and supplier name;
  • purpose of use;
  • ingredients and maximum concentrations in products; and
  • ecotoxicity information.

Gas producers are under an obligation to monitor and ensure that the concentration of petroleum in any produced formation water does not exceed the specified concentrations.

These obligations mean WA has the greatest level of chemical disclosure in Australia. Producers of unconventional gas are also required to report monthly against performance objectives within Environmental Plans which are required to be revised every five years.

While this regulation is directed to promote best practice in the industry and will ensure the impact on the environment is closely monitored, there is a question as to whether it strikes an appropriate balance between protecting the environment and community stakeholders and exploitation of resources. A future article will consider these reforms in detail.

Reforms to improve access for renewable energy sources

The government is also focussed on promoting the development of renewable energy supplies. This strategy is driven primarily by the Commonwealth Large Scale Renewable Energy Target, complemented by the carbon pricing mechanism. In the long term, the government aims to ensure a significant and continually growing proportion of WA’s energy needs will be met from renewable energy sources.

The SEI Paper provides a number of potential government actions to achieve this, including:

  • managing the impacts of intermittent generation by continuing to support market reforms and refinements to enhance the capacity of the wholesale electricity market and electricity systems;
  • ensuring that consideration is given to potential renewable energy project requirements in any proposals for developing a constrained access model for the South West Interconnected Network. There is a current proposal to transition the WA market from an unconstrained access model (where generators are required to make available their declared capacity into the market) to a constrained model, which is the same basis on which the National Electricity Market operates. The constrained model is thought to encourage more efficient use of networks by reducing requirements for network expansions and reinforcements and maximising economic return from the existing network as a result;
  • reducing the cost of developing, and demonstrating the commercial viability of,  emerging technologies and their application in WA by establishing renewable energy precincts which would provide essential common user infrastructure, such as networks; and
  • identifying opportunities for funding by the Commonwealth Government and improving the quality of, and access to, government information.

The SEI Paper discusses many of the issues facing the use of renewable energy in WA, but does not expand on how these issues will be addressed to promote the use of renewable energy. One of the significant issues with renewable energy supply is that it is intermittent and often dependent on weather. Security of supply depends upon back-up power and stand-by generation. This necessitates a co-ordinated approach to installing renewable and non-renewable generation sources in the South West Interconnected System and other networks within WA, including the North West Interconnected System (Pilbara).

Supporting infrastructure

The government aims to ensure regional energy strategies give consideration to infrastructure requirements for the use of energy as a commodity for mineral and industrial processing and export.

WA has faced significant shortcomings in infrastructure to facilitate industrial and mining activities, particularly from the Pilbara region. Rail and port infrastructure is inadequate to meet mineral export demand and has posed a significant hurdle for mineral producers, particularly smaller scale miners. The transport system is currently dominated by single-company railways, limiting access to many in the mining industry.

In its goal for pro-active energy planning, one of the strategies proposed by the government is to integrate energy infrastructure planning, funding and expansion with general State development strategies. The government proposes the following potential actions to implement this strategy:

  • identify options and plans for future energy supply in regional areas, including remote and indigenous communities, aiming to utilise local energy resources, renewable energy and liquid fuel resources;
  • enhance existing network planning arrangements, including considering aligning with similar processes in the National Electricity Market, where it is practical and beneficial;
  • develop plans to expand the North West Interconnected System in the long term, subject to cost-benefit analysis and establishing a funding and governance model;
  • ensure greater clarity in processes to guide government investment in infrastructure, having regard to the impact on the financial position of the State and potential investment from the private sector.

No specific details have been announced to date.

Reforms promoting private sector participation in energy

The government intends to optimise private sector participation in energy markets. The government aims to develop a regulatory framework over time which would promote private sector participation and minimise the need for government involvement and intervention.

The government proposes to:

  • align WA to the east coast interconnected gas and electricity markets where this is practical and beneficial to the WA energy market;
  • move to cost reflective regulated energy prices;
  • establish independent price setting for regulated electricity and gas markets; and
  • facilitate greater contestability in the retail gas and electricity market.

Market reform in WA has been focussed on transparency and economic flexibility and in many respects the policies contained in the SEI Paper are similar to those that drove the policy reform behind the disaggregation of Western Power. In some respects the SEI Paper reaffirms the commitment of the government to an opening of the electricity market in WA, but does no go so far as to describe the proposed changes or a process for engaging with stakeholders in that reform.

Conclusion

The SEI Paper is, essentially, a commitment to existing policies with further clarification and detail of these policies. The implementation of these policies and their effect on the energy market, in particular gas producers, buyers and sellers, will be an area of attention in the energy sector in the coming years. The SEI Paper reveals the State government’s focus on the energy sector in WA and suggests further reforms and developments to tackle the challenges facing the industry, foreshadowing a significant transformation of the energy market.