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IEEFA podcast Australia: Why Gas?

September 22, 2020
Bruce Robertson

This podcast was produced by ABC Signal. Listen here.

The Australian government is pitching gas as the economic and energy solution, but not everyone is on board.

Last week Prime Minister Scott Morrison gave the energy sector an ultimatum: if the sector can’t come up with a plan for an extra 1000 megawatts of energy in the next seven months, the government will step in and direct the government-owned Snowy Hydro company to build a new gas-fired power plant. If the energy companies choose to step up and make these investments to create that capacity – great! The government will step back. If not, the government will step up and fill the gap.

Is there really such an urgent need for gas?

The government has moving towards a gas-lead recovery to the economic downturn for a while now. 

But is there really such an urgent need for gas? And why gas, and nothing else?

IEEFA’s LNG/gas analyst Bruce Robertson explains. 

Basically, the private sector isn’t rushing to invest in gas, and it follows a trend that has been in place since 2014. 

Gas usage in the power system has declined 58% since 2014. It’s a massive decline and the reason why gas has slumped in the National Electricity Market is that gas is not competitive. It’s not a competitive fuel because we pay far too much for gas in Australia. We pay well above international prices. 

Gas usage in the power system has declined 58% since 2014

Currently, according to the Australian Competition and Consumer Commission (ACCC), we are paying considerably more than they do in Japan for Australian gas. But not only that, we are paying twice what the ACCC says we should be paying in Australia. Gas prices are low in Australia now, but they’re nowhere near as low as they should be. 

The Australian Energy Market Operator (AEMO) says we need some gas peaking plants going forward, but they will not be used very often so we don’t need much gas to run them.

We don’t need to be opening up vast new gas fields when gas usage is declining – as an industry its declining in Australia. The usage of gas is down 12% since 2014. 

Renewables are currently cheaper, and investment is flying towards those projects rather than gas. 

The Chair of the National COVID-19 Commission (Advisory Board) Andrew Liveris says they have a target of $4 gigajoule (GJ). The industry itself says it can’t deliver gas at $4/GJ. Santos says it can’t deliver gas into Sydney at $4/GJ.

We’ve had so much gas come on stream and yet prices have gone up.

This idea that we’re going to somehow magically have cheap gas when you have a market structure that is artificially fixing the price at a higher level – it’s not attacking the problem. The problem is the market structure. We don’t have a market for gas on the east coast of Australia. 

They’re saying supply is the problem. Supply can’t be the problem because supply has tripled since 2014. We’ve had so much gas come on stream and yet prices have gone up. The whole thing doesn’t make sense. The only way it makes sense is they’re fixing the price and it’s a few companies that are doing it. 

We still need gas for relatively few forms of manufacturing: like making bricks and in fertilizers where you use gas as the feedstock. But it’s a small usage and if we look at Australian’s consumption of gas, we can easily get that by getting the domestic consumer off gas. It’s cheaper to heat your home with a heat pump, it’s cheaper to cook with induction cooking and you can get rid of another connection fee by doing that. 

Over time, if we move the domestic consumer off gas, we can free up a lot of gas supply. They’re looking at a demand supply picture. Instead, let’s reduce demand. We can reduce demand economically – easily – by getting the domestic consumer off gas. Reducing the demand frees up that supply for the industrial sector. 

You need certainty for investment and this is creating massive uncertainty.

The industry is very scared about the government’s announcement because basically it scares off investment in power. They’re going, well hold on a minute, is government changing the rules again? You need certainty for investment and this is creating massive uncertainty. The only certainty is that we can have more gas in the system. That seems to be the way because that’s what the government wants. Will the government say the following week: we’re going to build another gas plant, or we’re going to build another coal plant… Will they say that, and will that change the dynamics of the market?

Let’s take the power station that they’re proposing to build. My guess is you’re probably looking at a good 3 – 4 years away before this announced new gas plant would come on-stream. Snowy Hydro say they already have a site in mind in the Hunter Valley, which is a good start. But you know, you’ve still got to actually build the plant and that takes a while to do, if they push the button. What they’re saying is that the power station will be built and then it won’t see out its’ economic life. In other words, you will pay for the asset as a taxpayer, and you won’t get a return from that asset. And that is, in all likelihood, the most likely result because currently we have energy price deflation. In other words, solar and wind are getting cheaper and cheaper, and so are batteries – very rapidly with batteries – and gas will get more expensive. 

If we go down this path, we’re looking at a 30 to 40 year commitment to gas which obviously takes it out to 2050 to 2060 in terms of being locked-in to that fuel source.

What the government is proposing is basically transitioning us onto gas, not transitioning us off gas.

This podcast was produced by ABC Signal. Listen here.

Related articles:

When investors won’t back gas, why should taxpayers?

Grid scale battery costs have reached a tipping point

The markets won’t respond to Australia’s proposed “gas-fired recovery”

Bruce Robertson

Energy Finance Analyst – Gas/LNG, Bruce Robertson has been an investment analyst, fund manager and professional investor for over 36 years. He has worked with Perpetual Trustees, UBS, Nippon Life Insurance and BT. He has appeared as an expert witness before a number of government enquiries into energy issues.

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