Rising gas costs are “the single biggest factor in the current rise in electricity prices”.
What is most noteworthy about this statement is not the fact that it is true, but that it was made by Prime Minister Malcolm Turnbull, many of whose party colleagues remain convinced that renewable energy is the real bogeyman.
Turnbull’s comments were made in response to a report released this week by the Australian Energy Market Operator (AEMO), which yet again warns of impending gas shortages.
I argue below that renewables are a solution to the problem, rather than its cause. But first, is there actually a gas crisis?
A gas crisis?
Although AEMO has predicted a potential gas shortfall for the east coast, there is no shortage of gas. Unprecedented amounts are being produced and exported as liquified natural gas (LNG) from terminals in Queensland, while at the same time the domestic market is being starved, driving prices sky-high.
Without government action there could indeed be a domestic shortfall next year, but the government has already set in place a system of export restrictions to ensure domestic supply. These restrictions have not yet been invoked, but the crisis for the government is that they may have to be, and the decision must be made before November 30.
Emergency export restrictions are an intervention of last resort for a governing party built on free-market principles. They are necessary because the government has failed to champion a longer-term and less interventionist strategy, such as the reservation of a certain percentage of gas produced from new gas fields for domestic use. Western Australia has had a policy of 15% reservation for many years and other states are following suit.
Not only is there plenty of gas being produced, but it would be relatively painless to divert some of it to the domestic market. AEMO notes several times in its report that producers have some flexibility in where they send their gas. In particular, a significant proportion of the exported gas is not under long-term contract but is destined for the overseas spot market, where surplus energy is traded for immediate delivery. This gas could easily be diverted to the east coast market.
On current projections, 63.4 petajoules of gas is destined for the spot market in 2018. To put this in context, the projected shortfall is 54PJ in 2018 and 48PJ in 2019. In other words, the uncontracted gas destined for the spot market is more than enough to make up the expected shortfall.
Turnbull is also arguing that the potential shortage is due to state bans on gas exploration and production. However, the production costs associated with as-yet-untapped reserves and resources in those states are much higher than for Queensland. Thus, even in the absence of bans it would still make sense to target untapped Queensland resources first.
Moving the gas south
The extra gas released in Queensland for domestic use would need to be transported to the southern states by pipelines that are already close to capacity. This is a potential problem. However, it could be resolved by means of “gas swaps”.
Gas produced in the southern states that has been contracted for sale through the Queensland terminals could be swapped for gas released by Queensland producers for distribution to the southern states. This would avoid bottlenecks and gas transportation costs.
This facility could process LNG either from Queensland or from further afield. The terminal would have the potential to provide all of Victoria’s household and business customer gas needs. If all goes to plan, AGL will begin construction in 2019 and bring the terminal into operation by 2020–21.
Our free-market government is now firmly in interventionist mode, with gas export restrictions and plans to fund a Snowy pumped hydro scheme. There is even a proposal to subsidise the continued operation of the AGL’s Liddell coal-fired power station beyond its scheduled closure in 2022.
But rather than continuing to badger AGL about keeping Liddell open, the government would be wiser to press the firm to bring its regasification plant online as soon as possible. Not only does it make economic sense, but it is greatly preferable from an environmental point of view.
The renewables solution
Another way to deal with the predicted gas shortfall is to reduce demand. According to AEMO figures, gas-powered electricity generation in 2018 is expected to require 176PJ of gas, dropping to 135PJ in 2019. The lower demand in 2019 is due to increased renewable energy generation, as well as increased consumer energy efficiency.
Recalling that the shortfall in gas for 2018 is 48PJ, it is apparent that this shortfall would be wiped out by a 30% reduction in gas used for gas-fired power generation. Based on 2016 figures, that would require an increase of roughly 30% in power generation from renewables.
Given the relatively short time it now takes to build new renewable generators, this is a very promising path. Coupled with battery storage or pumped hydro, these new generators would provide dispatchable power exactly as gas does. All that is required is for the government to implement the right policy settings.
Finally, state government policies may already be taking us in this direction. The Queensland government recently announced a major program of incentives for solar power. This will significantly increase renewable power generation and dampen the demand for gas-fired power. AEMO notes this development but states explicitly that this has not been taken into account in its projections.
For whatever reason, AEMO’s final conclusion is not as gloomy as its analysis might suggest. It states that the gas situation in eastern and south eastern Australia “is expected to remain tight”. Rather than calling for action, it considers that the situation “warrants continued close attention and monitoring”. Amid all the talk of impending crisis, what we need is steady pressure on the steering wheel, rather than a sharp swerve.