15 September 2020

Gas shake-up strikes right energy and climate balance

"Put customers first” was the message at the heart of Prime Minister Scott Morrison’s energy announcements on Tuesday.

Households and businesses shouldn’t be forced to turn down or turn off, as Energy Minister Angus Taylor said, because there isn’t enough firm, dispatchable power to meet demand or because prices are too high.

Australian manufacturers shouldn’t be driven offshore because our key competitive advantage – affordable energy – has been eroded by policy failure and a dysfunctional market that lacks competition.

And Australians shouldn’t have to choose between reducing emissions or reducing power prices, when we can do both.

Tuesday’s announcements are a practical and common-sense antidote to an energy debate where complexity is too often an excuse for inaction by policymakers or regulators, or for maintaining the status quo because our energy majors have no incentive to disrupt it.

Morrison and Taylor have sought to shock that inertia and complacency out of the energy market, because they know they need to.

Some will deride the measures as too interventionist. Others will say they haven’t gone hard enough. On that basis, they’ve probably got the balance about right, and the measures should attract bipartisan support, as well as support from energy customers and producers alike.

That was certainly the view of most in the audience for the Prime Minister’s speech. Fittingly, these were mostly business leaders from Newcastle and the Hunter Valley – a region synonymous with coal, of course, but also with industrial ingenuity and manufacturing jobs.

They know that thermal coal has underpinned their region’s history but probably won’t underpin its future. They know that a power grid with progressively more renewables and progressively less coal is the right pathway for Australia. But they also know that we can’t replace a power station like Liddell with renewables alone, and the transition doesn’t work without affordable gas. Crucially, they also aren’t concerned by the notion that if the market can’t or won’t provide that, the government should.

Ultimately these measures will be judged by the only yardstick that really matters: will they reduce power prices in Australia and make it easier for businesses that need competitively priced energy to invest here and create jobs.

There’s every reason to expect they will.

Implemented well, these measures will reduce emissions, improve stability in the power grid, strengthen Australian manufacturing and reduce energy costs for consumers.

They rightly target the biggest challenges facing our energy market: replacing thermal coal generation with reliable and cost-competitive alternatives, better integrating renewables into the grid, reducing fixed costs and transmission charges and boosting competition in Australia’s dysfunctional gas market.

Cost disadvantage

Coal to gas switching has removed 500,000 tonnes of emissions globally in the past decade, according to the International Energy Agency.

As the Chief Scientist, Alan Finkel, tells us, even when fugitive emissions are taken into account, gas-fired power produces vastly lower emissions than coal-fired power, especially when used alongside renewables in peaking plants such as the one proposed by Morrison on Tuesday.

In Australia, where the vast majority of our electricity comes from coal, and where gas is plentiful, that makes it a logical choice, both as a transition fuel and to firm renewables.

What makes or breaks that transition, of course, is cost.

Reducing the cost of gas, the cost of transmission and transport and the cost of integrating new generation requires more supply, more suppliers, new market rules that suit the technologies of the day and, most importantly, a more competitive market. Tuesday’s announcements make inroads on all four.

Opening up new gas basins, strategic investments in infrastructure and grid connection, significantly upgrading the Wallumbilla gas hub, compelling producers to “use it or lose it” and establishing clear price expectations for Australian gas are a sensible response to this country's stubbornly high gas prices.

As the ACCC made clear in its latest gas inquiry report, the nation’s high energy costs are caused as much by lack of competition and a dysfunctional market as they are by lack of supply. That makes careful interventions in the market that boost competition, disrupt the status quo and hold our energy majors to account an appropriate government response.

The status quo – it must be said – is severely weakening Australian manufacturing, which relies on globally competitive energy prices to sustain and attract investment and to create well-paid, good quality jobs.

Despite our abundant energy resources, contracted energy prices in Australia are in the highest quartile globally. Today, manufacturers in eastern Australia pay, on average, 150 per cent more for gas and 175 per cent more for electricity than they did a decade ago.

In the US, which has put its diverse energy mix – especially gas – to work in reducing its reliance on thermal coal, manufacturers pay 63 per cent less for gas and 30 per cent less for electricity, and more than a million new manufacturing jobs have been created on the back of a cheTuesday’s announcement is an important step to reset Australia’s energy market and make it more competitive and better able to sustain and attract manufacturing investment.

The measure of its success will be simple: long-term, contracted energy prices in Australia should be in the lowest half of global prices or better, even as we reduce emissions and embrace new technologies.

The government should keep its hand firmly on the tiller throughout this transition. Doing so couldn’t be more in the national interest.