Australia's new focus on gas could be playing with fire

Gas is back on Australia’s agenda in a big way. Last week’s meeting of state and federal energy ministers in particular saw an extraordinary focus on gas in the electricity sector.

While the meeting promised major reform for the energy sector, the federal energy and environment minister, Josh Frydenberg, highlighted the need for more gas supplies and “the growing importance of gas as a transition fuel as we move to incorporate more renewables into the system”.

Gas is certainly a lower-carbon energy source than coal, but gas prices have soared as Australia begins shipping gas overseas.

So what might this mean for energy and climate policy?

Rising gas

In 2013-14 natural gas-fired generation rose to account for 22% of Australia’s electricity generation, although the figure falls to 12% in the National Electricity Market (NEM), which excludes Western Australia and the Northern Territory, both of which use a large amount of gas.

Among the NEM states, South Australia relies the most on gas-powered generation. This means that gas generators generally set the state’s average electricity price, which has usually been higher than those in the eastern states. Average electricity prices in Victoria, New South Wales and Queensland tend to be set more often by coal power generators than by gas.

Over the past couple of decades, the construction of interstate transmission lines has helped to smooth out the different prices among states by allowing exports from those with excess, and cheaper, power to those with shortfalls or more expensive power. On balance, the process has helped to provide more affordable and reliable power across the country.

For some years views of the role and future of gas in Australia have been mixed.

But in the United States, abundant natural gas at low prices prompted industry and politicians to welcome gas as a bridge between today’s coal-intensive electric power generation and a future low-carbon grid. The share of natural gas-fired electric generation capacity more than doubled from 19% in 1990 to 40% in 2014, while the share of actual generation from natural gas rose from 12% to 28% over the same period. Last year it accounted for a third of all US electricity generation.

Soaring prices

Yet in Australia, the renewable energy target has forced our energy supply towards renewable energy, namely wind and solar. Together with the absence of a carbon price and the high price of gas produced by the lucrative export market, there have been few reasons for growth in the role of gas to generate power in Australia. This all changed last month.

In July the average wholesale electricity price in South Australia was A$229 per megawatt-hour, compared with around A$60 in the other NEM states. The state’s spot price soared to A$8,898 on the evening of July 7. Low wind output, the darkness of night, high cold-weather electricity demand and the absence of coal plants after several shutdowns all handed strong pricing power to a few gas generators.

The price volatility attracted much alarm, although the Australian Energy Market Operator noted there were no system security or reliability issues, nor departures from normal market rules and procedures. Climate Councillor and former Origin Energy executive Andrew Stock concluded that “increasing reliance on high-priced gas is not a viable solution to reduce power prices or to tackle climate change”.

He argued that more gas power would push up prices even more, increase reliance on the state’s ageing obsolete gas-fuelled fleet and increase greenhouse emissions, including risks of fugitive methane emissions.

On the side of gas, Origin Energy chief executive Grant King pointed out: “South Australia’s electricity demand was met in full. The reality is that, while spot prices ran up, 99.99% of customers in South Australia did not pay one more cent for their electricity. So, from a reliability and affordability point of view, the market delivered.”

Similarly, Tristan Edis from the advisory group Green Markets noted: “In reality the wholesale electricity market as it is currently designed is doing precisely what you would want it to do to accommodate increasing amounts of renewable energy while also ensuring reliable supply of electricity.”

What energy system do we want?

The role of gas is now a conundrum, particularly if, as seems to be the case, Australia’s energy ministers see gas playing a bigger role in shoring up the electricity market.

How this would work is far from clear. Current energy and climate change policies combined with relatively high gas price forecasts suggest that the proportion of gas in the power generation mix is unlikely to rise significantly.

Yet gas plants that can provide backup for intermittent renewable sources such as wind and solar may very well be needed. How much will be needed, for how long and how it will be paid for will depend on how quickly a superior mix of generation and storage technologies with very low emissions emerges and what policy mix drives the transition.

One consequence of these changes must be recognised. Whatever mix of wind, solar and gas power begins to replace our coal-dominated supply sector will cost more. Without a carbon price, electricity is generated from existing sources at less than A$50 per megawatt-hour, while wind, solar and gas all cost at least more than A$80 per megawatt-hour.

In responding to the real or perceived recent crises in South Australia (and Tasmania), our political leaders need to abandon wishful thinking and laying blame to focus on delivering and explaining the energy system that we want and need.