Gas imbroglio

 

Back in 2015 the collective governments of Australia made a promise to energy consumers.

The CoAG Energy Council declared: “(We) have agreed to a national, cooperative effort to better integrate energy and climate policy, with a clear focus on ensuring that consumers and industry have access to low-cost, reliable energy as Australia moves towards a lower-emissions economy.”

One may judge the policymakers’ success so far in pursuit of this pledge against what the Australian Industry Group is saying to the federal government in its submission ahead of the 2017 Budget: “Our energy market designs and policy frameworks fall far short of what is needed to achieve affordability, reliability or sustainability. Reform is needed, and soon.”  AiG adds: “Without nationally coordinated and durable action, price increases and supply risks are likely to intensify. Industry investment and employment are threatened.”

And how hollow that CoAG pledge rings after a week in which the federal government, writhing in the coils of what it acknowledges is an energy crisis, has walked away from another summit meeting with suppliers with only an ACCC monitoring role as cover for the gas imbroglio – while at the same time it has started talking up pursuit of a 40-year-old concept, a west-to-east gas pipeline (that would cost an estimated $5 billion — and how many years? — to build).

It’s been a week for talk of interconnection, with the Prime Minister also slipping down to Tasmania to promote the prospect of expanding the State hydro system as a “battery” for the NEM, a possibility that comes with the need for a second Basslink costing north of a billion dollars.

To which, of course, one has to add some $2 billion to upgrade Snowy Hydro, last month’s throw of the federal dice – along with the network costs of integrating several thousand megawatts of wind power in to the Victorian system as a purported substitute (promoted by the Labor State government) for the shuttered Hazelwood.

Plus whatever eventually comes out of the thrashing about in South Australia.

The charges for all this must be recouped from the mass market, which takes about a quarter of consumption, and from business.

And they will be costs on top of the price rises already in train – of which, AiG, in its Budget submission, says: “The substantial price rises under way for electricity and gas can be softened by good policy but are unlikely to be reversed. Greater efficiency and productivity in the use of energy will be needed to limit the extent to which higher prices translate to higher final costs.”

For its part, the ACCC, via chairman Rod Sims, is telling the media that gas business users on the east coast are now faced with a “worst-case scenario,” adding “I do think companies will go out of business because of this and that’s a crying shame.”

Just how big the gas problem is depends on perspective. AiG, in an open letter to Malcolm Turnbull and Bill Shorten proposing remedial actions (which the upstream petroleum industry has dismissed as “half-baked” and threatening to “shred incentives for investing in new projects”) makes this observation: “There are different views on how big the shortfall is. Some gas suppliers appear to still deny the market is physically short at all. The recent Australian Energy Market Operator Gas Statement of Opportunities finds a gap of 10 to 54 PJ per annum from 2019 to 2024 (unless demand from gas fired electricity generation declines equivalently, which would lead to electricity shortages at critical times) or a cumulative gap of 156 PJ to 2024. We are aware of significantly more pessimistic assessments by gas market observers. EnergyQuest believes the market is a cumulative 172 PJ short by 2020 and 205 PJ short by 2025. Credit Suisse believes the gap is bigger, sooner.”

It goes on: “However short the market is, the price impacts are clearly enormous.”

What follows from this, only too obviously, is that the domestic gas market will self-correct over the next few years through consumers (and especially manufacturers) either going out of business or shifting towards alternative energy sources.

What may surprise some dancing on the periphery of the issue is the extent to which this correction has already bitten in to the market over the past decade. Go back to 2009 – the time of the global financial calamity – and our gas suppliers, then selling 373 petajoules a year to our factories, expected manufacturing demand at the end of this decade to be 509 PJ annually and to continue rising to 537 PJ a year by 2024-25.

The current ElectricityGasAustralia yearbook has 2014-15 factory gas demand at almost 345 PJ and sliding to 302 PJ by 2024-25. (For context residential consumption is 162 PJ and projected to flatline over the next decade while commercial business requirements are 53 PJ annually and expected to stay there over the next 10 years, a time of expected ongoing substantial population growth.)

A huge manufacturing correction manifestly has already taken place (obviously reacting to a lot more than just energy prices) and energy suppliers were already factoring in a further 10 per cent dip in factory gas requirements before the present crisis enveloped all concerned.

Where manufacturing needs are now heading is a large question and one that should be researched (perhaps by the Productivity Commission).

The other big aspect of the forward demand equation is the gas requirement of power generators. Back in 2009 (when electricity requirements exceeded 400 PJ) suppliers expected a rise to about 562 PJ by now and a push towards 630 PJ by the decade’s end.

Today actual demand is more than 10 per cent lower than it was at the close of past decade and, via the yearbook, is forecast to be below 240 PJ by 2019-20, bouncing back a bit to around 270 PJ in 2024-25.

The other side of the generation coin is that gas suppliers today foresee the much-discussed energy transition pushing the need for their product up the curve in the years ahead, projecting more than 350 PJ a year in requirements by the mid-2030s.

Of course green activists don’t want this to happen and the Web resounds with their arguments about why it shouldn’t do so.

The challenge for Turnbull, south-east government leaders and the body politic generally is not just to look around themselves now and react to today’s pressures but to look beyond the present electoral cycle – and not to create more (and perhaps different and bigger) problems down the track by wrongheaded activity today.

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