Igniting the way to cheaper energy

The Federal Government needs to stop demonising gas and start seeing it as part of the solution for cheaper energy. By Amanda Stoker.

The recipe for cheaper energy in Australia is remarkably simple. But it seems Energy Minister Chris Bowen either can’t – or won’t – do what is necessary to deliver it.

Labor promised cheaper energy and higher wages before May’s election.

October’s budget shows it will deliver neither; its promise for energy bills to be $275 a year cheaper for households and businesses incongruent with budget papers telling Australians to expect a 56 per cent increase in the price of energy over the next two years.

Although Labor is keen to blame the conflict in Ukraine for higher prices, the demand that it has produced is only one part of the story. Let’s face it, Europe’s energy woes were well and truly apparent at the time of May’s promise.

The rest of the cause is home-grown. The good news is that the solution can be too.

The bad news is that it will take a government willing to stop demonising gas and support the role it can play in delivering lower emissions, improved reliability and lower prices.

There are three elements to achieving this goal.

First, it is vital that our nation does not over-invest in transmission. As state governments have learnt the hard way, the effect of over-building or “gold-plating” networks creates a high fixed component in the price of energy, undermining the benefits of lower energy prices when they are achieved.

It seems from recent announcements that the Albanese government is yet to learn this message. It announced in the budget a $20 billion investment in transmission networks and seeks a further $58 billion of private investment.

Upgrading transmission networks is expensive, and the need to do so is created by over-investment in renewables with insufficient firming capacity; that is, too little gas.

Second, downward pressure is required on the price of gas in the domestic market.

In the USA, there is clear price separation between the export market and the domestic market. The same was emerging in Australia before the last election. The key to ensuring a lower domestic price than is achieved for exported gas is to pump more gas than can be exported through local terminals. A pro-gas attitude from governments is key to achieving this objective.

But the Albanese government continues to treat gas like the enemy.

The obvious next question is: how do we get gas companies to pump more gas?

It will take more than politicians beating their chests.

There is a practical, sensible deal to be done between the big gas producers – Shell, Origin and Santos – and governments to ensure Australians get what they need for a reasonable price.

Australians need more gas pumped into the network. Gas producers need assistance with the carbon capture and storage pathways that will help them become the low-emission operations they want to be. They need assurances that governments won’t create an adverse environment for investment by changing the rules of the game too wildly or too often, and they need help to work through barriers such as moratoriums on the development of gas fields and unbalanced project approval processes.

This is the deal that will deliver prices below $10 a gigajoule, which former ACCC chairman Rod Sims said Australia should be targeting.

The third element is to ensure there is enough dispatchable energy in the market. As coal is leaving the market it must be replaced by dispatchable, rather than just intermittent, energy sources.

In the short term, that means removing disincentives to get gas and hydro projects underway, and in the long term it means getting over the dated and ill-informed opposition to nuclear energy.

Any government serious about addressing the cost of living needs to be serious about getting dispatchable energy projects off the ground. Extreme environmental approval processes and dogmatic moratoria might appease the political left, but their effect is to cruelly put the cost of energy out of reach for average Australian households.

The most recent AEMO report into the energy dynamics of the quarter ending September 2022 shows the practical harm done by too little dispatchable energy investment.

It shows that as renewables penetration increases, the intraday demand swing is increasing – in some states to record levels. This means that even though household solar creates an excess of supply (and low cost) in the daytime, consumers in the evening and night market feel massive cost pressure from shortages. At night, with no solar input and variable wind input, gas and hydro sources must meet most of the demand. It is what makes pumped hydro profitable, because it collects the solar surplus from the day market and offers it at a premium at night.

Night consumers suffer from the way that hydro suppliers let the price run up. In the low-competition environment they face, it is no surprise hydro suppliers go for the gouge. But again, more gas is the answer. Lowering the gas price with more supply so that it can add competition in the night market will make a substantial difference for the consumer.

Together, these three measures will lead to reduced emissions, improved reliability and lower prices. It is what Australians of all walks of life want and need.

The only question is whether Bowen can set his pride and ideology aside and act in the national interest.

Amanda Stoker is a Distinguished Fellow of the Menzies Research Centre and a former senator for Queensland. This article first appeared in The Australian Financial Review.