10 February 2020

More gas is key fuel for shift to clean energy

As featured in the Australian Financial Review 10th February 2020.  

This month’s energy agreement between the Prime Minister and NSW Premier has put natural gas back at the centre of Australia’s transition to a lower emissions economy, right where the Chief Scientist, CSIRO, ACCC and International Energy Agency have long argued it should be.

It triggered a raft of responses from pundits and industry players, some of which warrant a bit of myth busting.

Australia’s gas debate has always been about price. Today manufacturers in Eastern Australia pay, on average, 150 per cent more for gas and 175% more for electricity than they did a decade ago. AFR

“More gas won’t reduce emissions” is a common refrain, but it’s not borne out by global experience. According to the IEA, coal-to-gas switching has saved about 500 million tonnes of CO2 globally since 2010.

“More gas won’t lower prices” is another. Certainly there are other levers needed to reduce prices. Expanding Western Australia and Queensland’s reservation policies to other states, tougher “use it or lose it” rules and triggering the Australian Domestic Gas Security Mechanism are examples. But in the long term, none of these work without more supply and more suppliers, and a short market will always be an expensive market.

“We don’t need gas any more because we’ve transitioned straight to renewables with battery storage,” some argue.

Firstly, this ignores the many other uses of gas in our economy, notably as an essential feedstock into plastics and chemicals manufacturing. But even if we forgive that, the argument doesn’t bear scrutiny. Every credible report on Australia’s energy transition has recommended a greater role for gas-fired generation, alongside renewables, at least until pumped hydro and battery storage technologies mature and become cost effective at scale. Continued growth in renewables generation is a given, and we are right to be proud of that. Indeed, manufacturers are among the largest buyers of renewable energy in Australia. But there are many industrial applications for which thermal generation remains a necessity, and gas plays a pivotal role in forming a bridge to newer technologies.

“If we reserve gas, we won’t need to develop more,” some say. Actually, we need to do both. Australia is now servicing both an international and a domestic market for gas. On the east coast, we got the planning of that wrong. Warnings from domestic energy customers about the downstream impact of unconstrained liquefied natural gas exports were largely ignored by successive state and federal governments. History relates that we have suffered high prices and tight supply for most of the past decade as a result.

The lowest cost, lowest emissions, least disruptive way to solve our gas challenge is to develop new gas . . . and reserve it for domestic customers.

Australia’s gas debate has always been about price. 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 United States, it's about 63 per cent less for gas and 30 per cent less for electricity.

Some say the US achieved this by simply allowing onshore gas development and letting the market work. That is only half true.

Certainly those US states that have enabled and supported onshore gas development have been the drivers of the US’s stunning energy transformation. But often missed is the careful and strict limits on LNG exports put in place during the Obama administration to ensure sufficient gas remained in the domestic market to drive down prices and allow shale gas technologies to mature, and production costs to decrease, before exports increased.

Template for Australia

In Australia, we can’t undo the decisions of the past, but we can learn from them. Thankfully, Western Australia and Queensland have provided a template, proving that the lowest cost, lowest emissions, least disruptive way to solve our gas challenge is to develop new gas, close to customers, and reserve that gas for domestic customers.

For almost a decade, Manufacturing Australia has championed the need for competitively priced gas, both for manufacturing competitiveness and to smooth our energy transition. In 2012, Manufacturing Australia chairman, James Fazzino, said this: “Our value proposition is that Australia can have its cake and eat it too. We can have a wonderful LNG industry, we can have a developing manufacturing industry off the back of cheap gas and we can actually keep some of that gas in country to produce clean electricity.”

If gas prices in Eastern Australia aren’t globally competitive, then more coal-fired generation will be needed.

That value proposition hasn’t changed, but if we are to realise it, it all comes down to price.

If gas prices in eastern Australia are globally competitive – lowest quartile in the OECD at least – then the PM’s vision of gas displacing coal-fired generation, stabilising renewables and providing a bridge to newer technologies is realistic.

If gas prices in eastern Australia aren’t globally competitive, which they certainly aren’t now, then a different scenario is more likely: coal-fired generation will be needed in greater volumes and for longer; high gas prices will continue to drive high electricity prices for all Australians; and manufacturers that rely on gas as either a feedstock, a heat source or a source of energy will invest offshore rather than in Australia.

This month’s announcement is an important step towards the first scenario, but we have a long way to go.


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