In the past weeks the federal government has made a series of announcements supporting gas development and production. The rationale, in the government’s words, is that gas is a critical enabler of the economy, particularly the manufacturing sector. The Grattan Institute is writing a report on gas that, among other things, examines these claims.
From what they have found so far, the government’s plan to use gas to stimulate manufacturing, and thereby the wider economy, will fail.
What is the government’s logic?
The Morrison government’s plan rests on two propositions:
• that the government policy can make gas materially cheaper;
• that cheaper gas would stimulate manufacturing and bring a wave of new investment to Australia.
The Morrison government’s announced policies will not materially reduce gas prices; eastern Australia has a lot of gas, but it is increasingly expensive. The laws of economics dictate that gas producers will not indefinitely produce at a loss, and so the price must cover the industry’s rising costs as low-cost legacy gas fields deplete, and new supply is needed from more expensive sources.
Small amounts of funding to develop plans to look at new basins and “missing” pipelines will not make gas cheaper to produce. Unless the government is planning on subsidising the gas industry indefinitely, we can forget about the National COVID-19 Coordination Commission’s hoped-for $4 per gigajoule. Prices of at least $6 per gigajoule, and probably $8 per gigajoule or higher, are here to stay.
Even if the Morrison government could swim against the economic tide and miraculously reduce gas prices, the benefits of doing this have been mightily oversold. The core argument seems to be that 225,000 manufacturing jobs rely heavily on gas. Other analysts of individual companies and facilities indicates that the true number is closer to 10,000. This is a significant difference.
Overall, less than 1% of Australia’s 850,000 manufacturing jobs are in highly gas-intensive industries in eastern Australia. The remainder of the manufacturing sector is far less gas-reliant.
The current government has also argued that gas-fired power generation can reduce power prices for industry and households. These claims also do not hold up to scrutiny. Gas will have an important role in balancing the energy system and maintaining reliable supply for the foreseeable future, but it is an expensive fuel and cannot be used to drive prices down.
So what should the government do from here? One response would be to double down on gas and continue to subsidise gas production until gas prices meet their objectives but that would be an expensive mistake.
The other path is to recognise that Australia needs to use less gas, not more. Recently the prime minister for announcements emphasised Australia’s commitment to achieving net zero emissions this century.
However fast you plan to move to net zero emissions, a COVID-inspired gas splurge appears to be a terrible misstep on what is already a long journey on a road full of potholes.Let's look more closely at the government’s gas plan.
It’s expensive energy
Since gas, as a fuel, costs around three times as much as the equivalent amount of coal, power from gas costs a lot more than from coal. If a new gas power station were to run around the clock, it might be able to produce electricity for as low as $90 per megawatt hour, almost twice as much as current long-term power contracts. A ‘like for like’ gas replacement of Liddell would make a multibillion-dollar loss over its lifetime – it won’t happen.
In general, gas power stations are run much more sporadically, only during peak demand events. If the mooted gas power station were to run only as a peaking plant, the cost of energy produced could easily be twice as high again.
It kills competition
Snowy Hydro already owns the largest gas-fired generator in NSW, the vast majority of the hydroelectric capacity in the state and will soon add the massive Snowy 2.0 to its portfolio. As Dylan McConnell of Melbourne University’s Climate and Energy College has pointed out, if the Snowy Hydro were to build 1000 MW of new gas power generation in NSW, the federal government would control around 85% of NSW’s peaking market.
As Rod Sims found in the ACCC’s 2018 review of the electricity sector, if we want lower prices, we need to introduce more competition. This plan does the opposite.
It’s bad politics
The Morrison government’s obsession with Liddell is not new. In October 2017, the Turnbull government tried to strong-arm AGL to keep the power station open. AGL dutifully prepared a plan explaining how it would ensure there was no shortfall. The Australian Energy Market Operator wrote to then energy minister Josh Frydenberg, giving the plan the tick of approval, noting that even with no new investment, the state would continue to meet the reliability standard.
With this latest move, MP Angus Taylor has effectively conceded that the end of coal power is on the horizon. His strongman performance is no doubt necessary to keep the confidence of the carbon-loving backbench but leaves him exposed. If the power station is not built he’ll look as impotent as Frydenberg in the fight with AGL. If it is built, Taylor’s many opponents will ensure he wears it like an albatross around his neck.
The opportunity cost is huge
The saddest thing about this “gas-led recovery” is the immense opportunity cost.
A steady stream of “build back better” stimulus plans have been presented to government, plans that could create a million jobs and reposition Australia as a clean energy superpower in the carbon-constrained 21st century.
The great shame is not so much that the government plans to invest in fossil fuels, against economic, technical, political and environmental headwinds. The real shame is that we’re wasting this opportunity on culture wars and vested interests.
Acknowledgements to The Guardian Australia.