APA boss Adam Watson warns gas market uncertainty could undermine energy transition

Gas market uncertainty threatens to undermine the crucial element to Australia’s clean energy transition, according to APA Group boss Adam Watson.

Gas pipeline operator APA Group has delivered an improved first half result.

Tapping Australia’s abundant gas reserves will be crucial to ensuring a smooth energy transition, according to APA Group boss Adam Watson, who’s warned a prolonged period of uncertainty in the domestic market threatens to undermine the country’s move away from coal-fired power.

While advocating for an acceleration of renewables generation, Mr Watson says gas will continue to play a crucial role in maintaining reliable and affordable energy supply.

The federal government’s intervention in the domestic gas market, including its introduction of a temporary price cap, has angered upstream producers, who say the move is driving away investment in new projects.

Mr Watson said the heightened period of regulatory and policy uncertainty threatened to increase the likelihood of a “disorderly” energy transition.

“It’s an interesting dynamic we’re seeing and one that we think for the long term is not necessarily sustainable,” he said.

“Everyone knows that the upstream players are concerned about this - the uncertainty in particular. And we’re hearing from them the pause that’s going on in terms of their new investments to bring supply to market.

“They’re looking for certainty and clarity to ensure that when they make their investments, they know what returns they’re generating for their own investors.

“What we need is that level of stability and certainty so that our customers can be making more longer term views around the longer term outlook on gas supply and demand.

“Committing to domestic gas supply is arguably the single most important initiative we have at our disposal to deliver a smooth, effective and successful energy transition.”

Mr Watson’s comments followed the announcement of an improved first half result for APA Group, with the gas pipelines operator reporting a 2.5 per cent increase in EBITDA to $878.9m.

Revenue (excluding pass-through revenue) was up 10.2 per cent in the six months to December, to $1.23bn, with the company benefiting from the inflation-linked tariffs that underpin most of its contracts.

The results were broadly in line with consensus estimates.

Mr Watson said the “solid” first half result was achieved alongside a $465m investment in organic growth projects and an expansion of the company’s electricity transmission footprint via its $758.1m acquisition of the Basslink interconnector between Victoria and Tasmania.

“Our 1H23 result reflects a solid first half outcome with a strong performance from our energy infrastructure portfolio, growth in distributions and a balance sheet that remains robust,” he said.

“Against a challenging backdrop of global pressures, weather events and the continued announcements of the accelerating exit of coal-fired generators from the NEM, the first six months of FY23 has underscored the critical role of APA’s gas infrastructure.”

APA’s capital expenditure during the period included investment in projects including its Mica Creek solar farm in Queensland, which is more than 90 per cent complete, and its East Coast Grid expansion which will help alleviate the risk of gas supply shortfalls in the southern states later this year and next.

In a note to clients, Macquarie said longer term concerns over supply shortages in Victoria meant the threat of new import terminals could emerge down the track.

“APA is watching government intervention into the gas markets, which risks unintended consequences, i.e. accelerated entry of a gas import terminal,” it said.

However Mr Watson said the energy crisis facing the UK and much of Europe before and in the wake of Russia’s invasion of Ukraine underlined the risk of relying on gas imports.

“It’s not ironic that LNG import terminals have gone quiet because we know that they never really made sense in the first place,” he said.

“And we’re seeing that play out when you’re relying and dependent on imports.

“Relative to domestic gas supply, we know that it’s (imports) higher emissions, you’ve got to transport it, it’s less secure and reliable because it may not be there when you need it.

“And we know that it should theoretically be more expensive because you’ve got to process and transport it so I keep coming back to domestic supply is absolutely fundamental.”

Mr Watson would not comment on speculation over APA’s rumoured interest in acquiring Spark Infrastructure’s renewable energy business, but said APA would continue to invest in renewables projects, which would be supported by its enhanced electricity transmission capability.

“Organic growth, there is a significant amount of opportunity ahead of us. Everyone knows the size of the market opportunity,” he said.

“M&A - absolutely it will have a role to play where it can complement our organic growth pipeline, and the best example of that is that we acquired Basslink during the period. That is giving us deeper capability in particular with sub-sea electricity transmission cables.

“Renewable power generation needs to come into the system - it actually needs to accelerate. We need to try and bring it to market faster than it’s currently going at the moment, given the fact that coal is coming out.”

APA will pay an interim distribution of 26c, up 4 per cent from the previous corresponding period. It retained its guidance for a 55c payment to shareholders for the full-year.

The company’s shares were trading 2.3 per cent higher in afternoon trade at $10.89.

Originally published as APA boss Adam Watson warns gas market uncertainty could undermine energy transition