Fixing our gas woes to power Australia out of recession

Australia’s National Covid-19 Coordination Commission (NCCC) has recently had its draft interim report leaked to the media. It centres around the Manufacturing Taskforce (a project which I discussed in my last article), which has been looking at solving how Australia might recover from the ‘Great Shutdown’ as a more competitive and productive nation.

Its main bleat? We need more gas to solve our energy woes and rebuild our manufacturing capability. Gone are the days of thinking that coal is only the reliable source of energy. Chairman Nev Power and team are mobilising to help steer Australia through our recession utilising one of our most abundant natural resources.

Some might be thinking that exploring gas at this stage, after our worst bushfire season on record, is ludicrous. There is no question that using gas will result in carbon emissions, but when compared with coal, which makes up 60% of our electricity generation (gas at 10%), emissions from gas are half that of coal for a given level of energy generation. If you consider the simple arithmetic of Australia converting most of that coal to gas, that amounts to a 30% reduction in total emissions (after transition), before any other reductions.

However, beyond the obvious carbon emissions, there are further environmental consequences of expanding gas-powered energy; for instance, its exploration can disrupt surrounding ecosystems, as well as water supplies with processes like fracking. In this way, we need to maintain reasonable standards for extracting natural gas, but also strongly encourage it where appropriate. Victoria has taken this direction somewhat, now banning fracking but unbanning onshore exploration (for conventional gas).

Ultimately on the climate debate, gas should be strongly considered as a transition fuel whilst we beef up our two-part long-term energy security: renewables (solar, wind) coupled with storage (pumped-storage hydropower, battery). In an energy crisis like ours, with pumped hydro projects taking 8 years to produce, reliability, affordability, and sustainability should be prioritised.

Economically, Australian manufacturing is being crippled by high gas prices. We tend to focus on the electricity side of gas, but the cost of gas as an input in the production process (feedstock, e.g. for plastics) places another high expense for local business.

Increased gas prices are in large part due to the actions of a weakly competitive, export-focused Australian gas market – rushing into overseas contracts which leave less and less domestic supply (and so price is forced up from there). Not only did Australian gas export volumes triple in 2015 from 2000, but they tripled again by 2019; we are now the world’s largest LNG exporter, exporting more than both the US and Qatar.

Exports of this quantity create a situation which has frustrated many: Australia, the country oozing with a bountiful natural gas supply, has now resolved to start building import terminals. We might soon be sending ships of natural gas out to sea, only to turn them back again at a much marked-up price. It beggars belief that this exercise could occur in our economy, but it is – Port Kembla in NSW will be finishing our first import terminal soon.

Resolving our gas troubles is likely to require strong government intervention.

The ACCC released an interim report into the market, with its inquiry into wholesale supply and demand for gas in Australia in 2019. It established that industrial Australian users of gas in our East Coast are paying more than local industries of other exporting nations, like the US and Canada – keep in mind that we are now the world’s largest exporter of natural gas.

You might think that we should just hold back a level of gas for domestic markets so that we lift our supply and help push down prices – and you would be on the right track. In 2017, the government meant well with the Australian Domestic Gas Security Mechanism, which aimed to secure a supply of gas for the market. But although some supply was secured, the scheme had a major flaw, which many observed, that it was not price-focused; ultimately it did little to bring down prices.

Samantha Hepburn from Deakin University’s Centre for Energy said late last year that a board involving the ACCC should oversee fair pricing and have powers to enact export controls. Western Australia, whose energy markets are largely separate from eastern Australia, has a gas reservation policy retaining 15% for the domestic market, which meets local industry’s needs and maintains high profitability and working reputation for gas companies.

Such a scheme has also been advocated for on a national level by Centre Alliance Senator Rex Patrick, and backed up by ACCC chair Rod Sims. Patrick and researchers at IEEFA have both alleged that the Australian gas market is exerting cartel behaviour, and so national reservation is aiming to be the policy to rein in these gas giants (who are, unsurprisingly, opposed to it). In the end, while the economy is also simultaneously under pressure with the coronavirus-induced recession, any relief in costs for businesses and consumers will expedite our structural recovery and give a boost to economic activity.