Gas burner

Science and economics mean the way we use natural gas must fundamentally change

by Tony Wood

Published in The Australian Financial Review, 16 November 2020

Science and economics mean that the way we use natural gas must begin to fundamentally change. Accepting the change and dealing with its consequences will be hard for the gas industry, its customers and for governments.

A hard-headed analysis of gas supply on the east coast of Australia shows that gas prices are unlikely ever to return to the levels of previous decades. Gas has become an expensive energy choice as we have run down the sources of low-cost supplies. And gas is a fossil fuel, the production and use of which contributes almost 20 per cent of Australia’s greenhouse gas emissions. The implicit cost of gas in a low-emissions future will only rise in coming decades.

In a new Grattan Institute report, Flame out: the future of natural gas, we dissect these challenges and provide recommendations on how they should be addressed.

Many gas producers envisage an ongoing, long-term role for their product. Gas network businesses hold assets whose value could decline steeply if gas usage declines; gas-intensive manufacturers depend on gas as an essential feedstock or as an important business input; and households and small businesses value gas as a choice for cooking and heating. It is unsurprising that denial and resistance present governments with a wall of concerns.

There is widespread business support for policy action on climate change. There is far less agreement on what form this should take. In the case of gas, while there are low-emission alternatives, the economics of the options and the best timing for change are far from clear and vary by sub-sector.

For large gas users, it can seem like the gas market has been in a constant state of crisis for several years. Yet, although far from perfect, the market is not broken. Recent government actions have helped, and more can be done to restore a semblance of confidence in the market by improving liquidity and transparency. One measure of a functioning market will be how well domestic contract markets reflect continuing lower spot prices in our region. Although there are some indications of improvement, ongoing monitoring by the ACCC remains necessary.

Yet, no matter how efficient the market, it will not deliver the cheap gas of history – and attempts to drive a gas-led economic recovery through manufacturing will almost certainly fail. Manufacturers would welcome cheaper gas, yet gas prices are not an existential threat to large numbers of jobs. And, if cheaper gas were the saviour, we would have had the manufacturing boom years ago.

The best role for the government is to support the development and deployment of the low-emissions technologies that can replace natural gas in manufacturing over the next few decades.

Natural gas will have an important role as a critical backstop to the power system as the share of wind and solar steadily grows. In this case, the role of the government should be to focus on measures that clarify the closure of coal stations and ensure that wholesale electricity markets are working effectively. Gas will then make its efficient contribution. Threats to force in more supply through direct market intervention are unlikely to improve reliability or reduce prices.

Australian homes and small businesses have been using natural gas for more than 50 years. While hardly an essential service, natural gas had been a low-cost energy supply and often preferred over electricity for cooking. In states where power generation has been based largely on coal, gas has also been a lower-emissions fuel.

The cost of electrification of this gas load would be large, removing the choice of fuel would be a political challenge, and there would be major financial implications for gas network businesses. Such a transition would involve many technical and planning issues. Yet the future cost of alternatives such as renewable hydrogen or biomethane are not well quantified.

The hard analysis to identify the best long-term outcome and how to get there must be a policy priority in Australia. In the meantime, in Queensland, NSW, South Australia and the ACT, new homes would be financially better off with electricity for all their energy needs, and emissions would be reduced in the near future relative to a dual-fuel home. In these cases, a moratorium on new gas connections would be a prudent, no-regrets option.

Ongoing high costs and the imperative to dramatically reduce emissions over the next few decades lead to the challenges listed above. Prevarication, or thinking we can avoid the challenges, will only make things more expensive in the long run.