November 4th 2017


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COVER STORY National Energy Guarantee: lots of smoke, but no coal-fired power

EDITORIAL Popular revolt against the ideology of globalism

CANBERRA OBSERVED Paris still rules in the party room

ENERGY Renewables and gas conspire to push up prices

ENVIRONMENT Climate change did not cause California fires

ELECTRICITY Consumers will wake up only when there are blackouts: economists

ECONOMICS Something new under the sun from China

NATIONAL AFFAIRS Abbott gets brickbats for exposing house of straw

NATIONAL AFFAIRS Australia is far from fulfilling its potential

TECHNOLOGY Aussie scientists 'write' with adult stem cells

75TH ANNIVERSARY NCC: new challenges, kind of new adversaries

MUSIC All around the beat: the essential drummer

CINEMA Happy Death Day: Deja vu with a sharp edge

BOOK REVIEW Traditions under threat fight back

BOOK REVIEW Journey to freedom

LETTERS

ENERGY Coal-fired power needed to restore economic growth

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ENERGY
Renewables and gas conspire to push up prices


by Chris McCormack

News Weekly, November 4, 2017

The Federal Government’s attempt to lower gas prices ignores deeper problems concerning the rising cost of electricity and comes at a time when, despite a manufactured domestic gas shortfall, new gas reserves are increasing in Australia and a world liquefied natural gas (LNG) glut is occurring.

The BP Statistical Review of World Energy 2017 shows that total proved natural gas reserves in Australia increased from 1.3 trillion cubic metres (TCM) in 1996 to 2.3 TCM in 2006 to 3.5 TCM in 2016, a 169 per cent increase in 20 years. Australia’s proved gas reserves account for 1.9 per cent of the world’s total proved gas reserves.[1]

On a global scale, the total proved natural gas reserves increased from 123.5 TCM in 1996 to 158.2 TCM in 2006 to 186.6 TCM in 2016,[2] a 51 per cent increase over 20 years.

The huge rise in the amount of natural gas Australia exports to the rest of the world has seen, despite an increase in the volume of reserves at our disposal, a lowering of the reserves to production ratio (r/p ratio), that is, the length of time the remaining reserves would last at the current rate of production, from 67 years in 2006[3] to 38.1 years in 2016.[4] The world r/p ratio fell more in line with predictions, falling from 63.3 years in 2006 to 52.5 years in 2016.[5]

According to the Department of the Environment and Energy, Australia’s LNG exports increased by 47 per cent in the 2015–16 financial year and have increased by 11 per cent per year over the last decade. Sixty per cent of Australia’s natural gas production was exported in the 2015–16 financial year.[6]

Australia’s natural gas production in 2016 sat at 2.6 per cent of global production. However, our local production has grown by 25.2 per cent from 2015 and 133 per cent since 2006.[7] This is despite bans or partial bans on coal seam gas (CSG) exploration or development, and a moratorium on fracking in Victoria, New South Wales, Western Australia, Tasmania and the Northern Territory.

The Sydney Morning Herald on October 9 reported that the Grants Commission is proposing changing the distribution of GST revenue to penalise states that wilfully forgo petroleum royalties by banning CSG.[8] The recent announcement by the Victorian Liberal Party to give landowners a 10 per cent share of any state royalties from gas extraction beneath their property is a long overdue measure to provide landholders fair compensation for using their land, not to mention combatting resistance to expanding gas production. This came after the South Australian Government announced it would grant 10 per cent of state royalties from gas production to farmers or landholders.[9]

The question is, will allowing development of new gas reserves in Australia bring down the price of gas and, subsequently, electricity. There is no doubt CSG and conventional gas bans are contributing to a reduction in available gas. But an expansion in the amount of gas extracted will only lower domestic prices as long as parameters are put in place to ensure an adequate portion of CSG or conventional gas extracted is reserved for domestic use at a price set for the domestic market. This would ensure our own energy security and affordability for consumers, businesses and industry.

A bigger problem than state government’s banning CSG is the policy of not ensuring that a percentage of gas produced, regardless of how it is extracted, is quarantined for use in Australia. This was an error on the part of governments when drawing up the contracts with gas exporters. Australia is the only country in the world that allows unrestricted gas exports.

Western Australia is the only Australian state with a gas reservation policy, whereby 15 per cent of all gas produced must stay in the state.[10] Since WA developed an export market for gas in 2006, prices for large industrial customers surged from around $5/Gigajoule (GJ) to $16/GJ in 2009, when WA mandated reserving 15 per cent of total gas extracted for domestic use. Since the introduction of that policy, gas prices in WA fell markedly to under $10/GJ in 2015.[11]

The other major gas export market, Queensland, has seen a similarly spectacular rise in the price of gas from around $5/GJ in 2010 to over $10/GJ in 2015, the most expensive gas price for large industrial customers of any state in the country.[12] According to The Guardian, three gas exporters in Gladstone, owned by Shell, Origin and Santos, have been selling locally produced gas over and above their export contract amounts on the international spot market at a price 30 per cent below what they could receive for it in Australia, and shouldering the added costs of liquefying and shipping on top of that.[13]

An ACCC report published in September, shows the southern Australian states spot market price averaged $9.52/GJ in the second quarter of 2017, compared with $4.41/GJ for the first quarter of 2016. Queensland spot prices rose from $5.06/GJ to $8.29/GJ (Brisbane Short Term Trading Market (STTM)) and from $4.73/GJ to $7.23/GJ (Wallumbilla Gas Supply Hub).[14] In comparison, the Asian LNG spot market price reached $6.50/GJ in the first quarter of 2017.

ACCC head Rod Sims said: “International prices are at all-time lows; Australian gas prices are at all-time highs.”[15]

It is argued that the gas exporters have been doing this in order to create a shortfall in domestically available gas and thus push up the local price. If this is true, the Federal Government needs to trigger export controls, until such time as all states enact permanent reservation policies to reserve gas for domestic use at a unique domestic price.

So, how does the price of gas affect the price of electricity? Well, due to the massive taxpayer-funded subsidies, totalling $3 billion in 2015–16 alone, rewarding the rapid uptake of renewable energy, and the compulsion for energy retailers to buy renewable energy first, coal-fired power stations are operating only intermittently making them uneconomical.

Now, the cheapest source of base-load power, coal, (with the possible exception of nuclear) is being usurped by gas-fired power plants, which can power up on demand. When the wind doesn’t blow or the sun doesn’t shine and renewables produce little or no power, these gas-fired plants are fired up in order to make up the shortfall in power generation that was once filled by coal-fired power plants. During these periods and at times of peak demand, it is the price of gas-fired power that determines the final price of electricity.

The range of prices that electricity generators bid into the National Electricity Market is between $1000 and $14,200 per megawatt hour (MWh).[16] As gas is much more expensive than coal and gas power generation is sold on the spot market in times of high demand in virtually a “name your price” scenario, the corresponding electricity generation is much more costly and the costs are passed on to business and consumers.

The rise in gas prices and therefore electricity prices has led to reports of pensioners and others freezing in winter and boiling in summer because they cannot afford to heat or cool their homes, or having to choose between eating or heating or cooling their homes. Industry and businesses are either closing down or relocating overseas as skyrocketing energy prices and unreliable delivery make it uneconomical to operate. This is a situation one would expect from a corrupt and/or third-world country.

Until the announcement of a National Energy Guarantee (NEG), the Federal Government had seemingly been in a state of paralysis on energy policy. It had tinkered at the edges, whether through discussions with AGL on extending the life of the Liddell coal-fired power station beyond 2022, talking with energy companies about more transparency in customer billing, and asking people to turn off their power. In virtually an admission of failure to provide a reliable national electricity grid, the Federal Government is offering $30 million and the NSW Government $7 million to households and businesses that turn off their power or appliances during periods of peak demand.[17]

Highlighting the failure of renewables to provide sufficient synchronous (base-load) or uninterrupted power, Australian Energy Market Operator (AEMO) chief executive Audrey Zibelman, said that turning off the power would help the electricity system to manage peak demand in real time, without the need for new fossil-fuel generation.[18] Australian Renewable Energy Agency (ARENA) chief executive Ivor Frischknecht added: “We need to find new, smarter ways of coping with spikes in demand and volatility as we move towards an electricity system with more variable renewable energy supply.”[19]

The NEG is actually masking an emissions trading scheme (ETS), or carbon tax. It’s also inherently contradictory. The Government claims the NEG is “technology neutral” (that is, not favouring any particular form of electricity generation). On one hand it is removing all renewable energy subsidies from 2020 and requiring energy retailers to guarantee a certain level of base-load power. On the other hand, an Australian Energy Regulator will force energy retailers to buy a certain percentage of “clean” or renewable energy in order to meet the Paris climate agreement of a 26-28 per cent reduction on 2005’s carbon-dioxide emissions by 2030.

Retailers that fail to reach the set level of emissions could be penalised or purchase Australian or international carbon credits to offset their higher emissions.[20] This will inevitably add to the cost of electricity. It seems Malcolm Turnbull may get his beloved ETS (via a wolf in sheep’s clothing NEG) after all, despite losing the leadership in 2009 over his support for the scheme.

With electricity retailers forced to purchase low-emissions power contributing to the lack of investment in coal-fired power, expensive gas-powered generation will continue to keep electricity prices high. Except for hydro and nuclear (the latter of which we have none), which can provide base-load power, renewables need gas-fired power to kick in when the weather is unfavourable; and as long as low emissions are mandated, it conspires against the viability of the lowest-cost form of base-load power generation, coal.

The capacity of a country with abundant reserves of cheap coal and (what should be) cheap gas to chase an emissions target down a rabbit hole and in so doing destroy our competitive advantage in industry, business, and the once low-cost electricity for consumers, beggars belief. A lack of political willpower on reserving domestic gas and building the cheapest form of base-load power, coal-fired power stations, is showing its results.

The politicians who have pursued this ideological madness and now see the solution in turning off the power and continuing to mandate low emissions through unreliable renewable power, must be held to account for imperilling our energy security, exporting industry and jobs, and lowering the standard of living of every Australian.

References

[1] Natural gas total proved reserves, BP Statistical Review of World Energy June 2017, p26.

[2] Ibid.

[3] Ibid., p22.

[4] Op. cit. [1]

[5] Op. cit. [1], [3]

[6] Department of the Environment and Energy, Australian Energy Update 2017, p30.

[7] Natural gas: Production in billion cubic metres, op. cit. [1], p28

[8] Peter Martin, Adam Carey and James Robertson, “Victoria, NSW to be penalised for outlawing fracking under Grants Commission plan”, The Sydney Morning Herald, September 30, 2017.

[9] Nick Harmsen and Angelique Donnellan, “SA power: Energy Minister to be given more control in state’s $500m plan to secure future”, ABC News, March 14, 2017.

[10] “The solution: gas reservation. How it works elsewhere”, reserveourgas.com.au, accessed October 24, 2017.

[11] Michael Janda, “Gas prices will rise and there’s not much we can do to stop it”, ABC News, March 9, 2017.

[12] Ibid.

[13] Michael Slezak, “The high price of Australian gas: is low supply really to blame?”, The Guardian, September 29, 2017

[14] “Gas inquiry September 2017 interim report”, ACCC, September 25, 2017, p65.

[15] Op. cit. [13].

[16] Op. cit. [14], p56.

[17] Louise Yaxley, “Power bills: Why the Government wants to pay you to switch off this summer”, ABC News, October 11, 2017.

[18] Arena and AEMO join forces to pilot demand response to manage extreme peaks this summer”, AEMO, May 19, 2017.

[19] Ibid.

[20] Peter Hannam, “Malcolm Turnbull's national energy guarantee plan masks a carbon price”, The Sydney Morning Herald, October 18, 2017.




























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