Gains from gas-fired energy transition are too great to ignore

When gas becomes price competitive, its benefits naturally shine. The large-scale production of shale gas in the United States has resulted in a market-driven transition from coal generation to natural gas, reducing energy prices, encouraging the repatriation of manufacturing, and reducing carbon dioxide emissions by 13 per cent since 2005.

Scaling back the use of gas would increase the adjustment costs of the difficult transition away from fossil fuels.

Worldwide, the transition from coal to natural gas has made a bigger contribution to reducing carbon dioxide emissions than any other technology.

Scaling back the use of gas, as the Grattan report advocates, would deprive Australia of these benefits and increase the adjustments costs of the difficult transition away from fossil fuels that we face.

By dismissing the importance of natural gas in manufacturing, Grattan also denies a source of employment to working Australians. Gas accounts for 40 per cent of the final energy demand and is the most common source of industrial heat in Australia. The benefits of affordable gas will be felt across the whole sector, not just in energy-intensive industries.

Effect on electricity prices

Lower gas prices will drive down wholesale electricity prices, as they did in the second half of 2019 when electricity spot prices responded to lower-priced offers from gas-powered generators.

Putting limits on the use of gas will inevitably mean higher prices and lower employment. It will also make it harder to meet our greenhouse gas reduction goals, and limit the penetration of wind and solar, which rely on natural gas as a back-up.

To assume that east coast gas prices will remain at historically high levels ignores the impact of adjustments to government policy and changing conditions in the market.

Removing moratoriums on gas production, streamlining approvals, improving infrastructure and increasing market transparency will inevitably put downward pressure on domestic gas prices.

So too will improving the network in pipelines, an investment in infrastructure in which Grattan argues the government has no role.

The disconnect between domestic and international prices is steadily resolving with the entry of the US into the gas export market and the emergence of a global spot market.

The trend towards parity with the global market and a move away from fixed contracts will continue with the likely development of import terminals with the capacity to supply the east coast market with imported gas. The transformation of the international gas market is not unlike the changes witnessed in the iron ore market. There, too, commentators suggested that the market would never move away from long-term contracts, but change it did.

Competition both from increasing domestic supply and imported gas will drive efficiencies, forcing local producers to find savings in production costs and trim margins. Government initiatives to increase market transparency will also put downward pressure on prices.

Grattan’s call for a moratorium on the installation of gas in homes is an unnecessary restriction of consumer choice and competition. Among other reasons, consumers choose to have multiple energy sources to reduce the risks of supply disruptions. Others simply prefer gas cooktops. A moratorium on gas connections would also reduce the overall effectiveness of the future possibility of blending hydrogen into the gas reticulation system. Measures to deny consumers choice reduce consumer welfare.

If we restrict the role gas can play as our energy sector transitions, we will be obliged to resort to more expensive, less developed and less reliable options. It will place heavier demands on an electricity grid that is already under pressure and require further investment in transmission.

The lesson from past policy mistakes is that avoiding the least-cost solution to the clean energy challenge exacts a heavy price on industry and consumers.

Brian Fisher is the author of the Menzies Research Centre report Powering out of Pandemic: Unleashing the Potential of Gas.