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Gas policy needs to aim for best, plan for worst

"A highly contrarian report on gas by the Grattan Institute highlights the need for a strong demand-side strategy, given the risk that the fundamentals of the Eastern Australian market remain unfavourable for gas users," Innes Willox, Chief Executive of national employer association Ai Group, said today.

"Today gas is an important feedstock for industry, a critical source of heat and a big influence on power prices as a fuel for dispatchable generation. It is also a large export industry. Those roles are complex and distinct. They will change as technology and markets evolve and the global quest for net zero emissions intensifies, but not at the same pace or in the same ways. The conversation about gas needs more nuance.

"The environment for gas users has become very challenging in recent years as exports have transformed the Eastern Australian market and undermined the economics of gas use. The vast size of the export channel firmly connects local gas prices to East Asian prices that in turn largely follow oil prices. Export demand and the decline of old reserves have pushed gas supply up the cost curve, to resources that are more expensive to produce and further from current demand.

"Grattan's analysis does not give enough weight to the role that currently gas-intensive industries play in the broader supply chains that underpin Australia's economy and our way of life. However they are right to highlight that gas market fundamentals are grim for gas users. The global impact of the pandemic and oil market turbulence suppressed prices over the past year. But the fundamentals haven't changed and prices appear to be on the way back up.

"The Federal Government has sketched a broad agenda of initiatives to try to improve the gas market situation, with three pillars:

  • encouragement of new supply of gas and clearer agreements between producers and consumers;
  • development of future supply from biogas and hydrogen;
  • safeguards for consumers, including pro-competitive market reform and the consideration of a prospective gas reservation.

"These measures are overall positive and certainly worth a try. But they are at an early stage, most currently involve little resourcing, and it is not clear that all will go ahead – especially reservation.

"Gas market fundamentals may shift, for instance if aggressively transformational local policies decouple domestic and international markets; or if China, Japan and Korea buy much less gas in coming years as they pursue net zero emissions. Technology will surely have more surprises, and could alleviate the rising costs of producing and transporting new gas resources in Australia. But the base case is high local gas prices and Australia's energy strategy needs to be robust to that scenario.

"That means adding a fourth pillar to energy policy: demand management. There is considerable scope for greater efficiency in the use of gas across the economy, and in some contexts electrification or fuel switching are already viable. Reduced demand will reduce energy users' exposure to gas market gyrations. Both supply and demand can help us avert the risk of a tight market that sends prices soaring above international levels again. Upfront investment in efficiency can provide economic stimulus in the near term while freeing up resources in the longer term. And efficiency can help cut Australia's emissions faster.

"Australian policy needs a guiding vision of global competitive advantage in a net zero emissions world. The long term role for gas in that vision is uncertain but most likely to shrink sharply. On the way through, however, gas plays a range of important roles in industry, power, households and exports. We need to aim for the best priced and most secure outcomes for gas users that we can get. At the same time, we need to be ready for the likelihood that the best prices we can achieve still won't be good enough," Mr Willox said.

See Ai Group's Post Pandemic Policy Paper on Climate and Energy for further analysis of the gas market and Australia's wider strategy to energy advantage.

Media enquiries: Tony Melville – 0419 190 347