OPINION: Gas is the first casualty of broken energy market
Summary: A clear long-term energy policy, like matters of national security and agriculture, are at the heart of what governments should provide for their citizens.....
Australia's abundant energy resources have ensured that our country has had a high-quality living standard for all of its citizens, no matter what their socio-economic status. Simply put, in an energy-rich country like Australia, affordable and reliable energy supply should be a national imperative.
After decades of frustrating political ambivalence and neglect, our national leadership is seemingly close to adopting the beginnings of a national energy policy. It's designed to provide outcomes like reliability, and it's market-driven. But there's a critical flaw.
Markets for energy are not made overnight. They rely on all sorts of factors being in place, not to mention a number of natural dimensions – accessible fossil fuels, sunlight or wind, for example. Plus the means to make a market – most obviously electricity grids and pipelines. The price of decades of ambivalence with energy policy is that we have a market that reflects ambivalence. In many ways, it is not a market at all. Supply and demand are mismatched and are oligopolistic.
Australia's electricity grid is a merger of assets designed in very different ways for different purposes by state governments. It allows some load-sharing between the markets and links up the reserve energy of Tasmanian and Snowy hydro but it is not designed for the variety of supply and consumption flows that will certainly follow from contemporary investments and decisions. Critically, there is no natural path of transition from fossil fuels to renewables, leading us to the wrong discussion.
Andrew Liveris, former chairman and chief executive officer of Dow Chemical Co. says the US market has demonstrated strong functioning markets serving substantial gas reserves will have a profound effect on investment. Jason Alden
The market we need to have should meet all Australian needs and interests and make best use of Australia's complete opportunities. We are an energy-rich nation. Our energy market must transition away from ageing base-load coal plant, absorb a variety of distributed sources of renewable energy and maintain stability in cost. This requires flexibility that our market lacks.
The biggest reason we don't have the market we need is that we keep asking the wrong question. Coal or renewables? Renewables or coal? Affordable energy or lower emissions? This is not an either/or debate.
Plainly, renewables do not yet offer the consistency nor price point of supply that we need. Plainly, there is no affordable high-efficiency, low-emission clean coal option. So how can the market deliver what we need?
The question we must ask is: why are we ignoring gas?
There's no doubt that the Australian gas market is broken. In fact, we don't really have a market – despite the fact of our extensive gas reserves and a relatively long history of gas in our basic energy mix. This is not a theoretical observation, since the failure of our gas market has seen local prices triple in a short space of time – perversely in line with quite sharp increases in estimates of Australia's total gas resources.
Australia has a lot of gas. Proven reserves are about the same as those of Iraq and equal to a third of the proven US reserves. Yet our "market" says we have a shortage. This year gas has mostly traded below $US3/million BTUs at the Henry hub in the US while Australian gas has been around $8/gigajoule on the wholesale market. (The metrics in each market are different, but comparable.) Just a few years ago, our wholesale market was priced at about $2.50 – a level it had held for a very long time.
Priced for scarcity
In short, Australian gas prices used to reflect an abundance. Now gas is priced for scarcity. We still have ample gas. What we do not have is the essential precondition for a gas market – an open, tradeable delivery infrastructure.
The solution is very well known: linkages of the north-west and north reserves at Alice Springs, with a connection to the east coast network from Moomba. Given that the north-west already is linked over great distance to relatively small markets in WA and Darwin is already linked to the northern fields, the logistics and cost are hardly off-putting.
The only additional requirement is for the government to legislate for open access, so that the full benefit of Australia's gas can be brought to bear.
A simple, low-cost intervention to create an effective domestic market for Australian gas would itself bring down the cost of electricity immediately, since gas is the key fuel in meeting power demand as it fluctuates during the day.
A functioning market that reflected Australian reserves would supply enough gas and prices that would underpin the otherwise risky transition that we face in the years immediately ahead. It will keep prices low, lower emissions, and over time allow the introduction of affordable renewables.
As the US market has demonstrated, strong functioning markets serving substantial gas reserves will have a profound effect on investment, energy market stability and stable pricing. And lower emissions.
Right now, our gas market is broken. We must make it work. The NEG is one step in the right direction. But it needs several more steps. Urgently.