How many times have you heard the catchphrase “gas is an important part of the energy transition”? Maybe it was from Madeline King, Angus Taylor, or the PM, maybe a premier, or even a gas industry CEO.
It’s political shorthand for the view that, although Australia’s economy is largely going to be fuelled by renewables in the long term, gas is being used in many places now and will be needed in the medium-term for backing up the power system and for industry.
There are two problems with this catchphrase. Firstly, important doesn’t mean large. The net-zero economy has a supporting role for gas that’s much smaller than its role today. Secondly, governments aren’t doing the work to ensure that gas can play its small but critical role.
In fact, the phrase they should be using is “gas will go through a transition”.
Australia is using less gas than we used to: since 2020, it has fallen by 16 per cent in households, 10 per cent in industry, and 12 per cent in the power sector. Even the LNG sector looks to have peaked and is likely to shrink in coming years.
Once the decline of gas picks up speed, the systems, markets, and regulations that deliver gas to users will no longer be fit for purpose.
We know we’re going to need new gas power generators, but investors are holding back because uncertainty about future gas demand and policies create too much risk.
Industrial users have the federal government’s new gas reservation to shore up supply for now; but there’s no pathway to develop the renewable gases they’ll need in the long term, and little support to upgrade facilities to use electricity instead of gas.
Returns on regulated gas networks are starting to look shaky because the regulator is unwilling to allow high levels of accelerated depreciation to recoup capital faster against declining demand.
If governments don’t make the tough calls soon, Australia’s gas transition will be chaotic and costly.
Here’s what they need to do.
Step one is to recognise that a transition has an end point. We will stop using gas, and we’ll mostly replace it with electricity. The date will be different in different sectors, but having a clear idea of the likely date well in advance will enable every business to plan its own way out of gas. It will help investors decide what can stay in their portfolio for the long haul and what should be sold off soon.
Step two is to ensure that there is a renewable gas available for the residual users who need it – such as fertiliser manufacturers and gas power generators. Australia has a tiny renewable gas industry now, and it needs to scale up 1000-fold in the coming decades. The technology is mostly known, but the sector is still a risky investment with high costs and low demand. Governments urgently need to put in place structured long-term policy to address both.
Step three is to change the rules and systems that govern the gas market and infrastructure.
Much of our gas infrastructure receives regulated returns – a reliable investment when the system was growing, but now at risk from declining user numbers. Fewer users mean higher prices to recover previous capital expenditure and fixed operating costs. But higher prices drive away users who have other fuel options, which pushes prices for remaining users higher still – potentially resulting in unrecoverable losses by the infrastructure owner and balance sheet impairment.
State governments need to change these rules so that the costs of writing down and decommissioning gas infrastructure are shared fairly between companies that own them, people who use them, and governments.
Then there’s LNG. Australian export gas production has probably peaked and will decline over coming years. Our export gas is more expensive than the gas from other exporting countries; destination markets are reconsidering how much they want to rely on imported fuel and have emissions-reduction targets to meet. This won’t happen overnight, but if the government wants big reforms like its reservation scheme or a fairer tax regime, it is running out of time to implement them.
Australia is at a critical juncture in energy policy. The decisions made now around gas will have lasting ramifications. The gas transition will not get easier or cheaper if we wait. The choice is between chaotic and inequitable, or steady and fair.