Albanese dissembles on Australia’s fossil fuel exports, and he knows it

Prime minister Anthony Albanese states on ABC TV that he does not support a ban on new coal and gas, because he says coal and gas would just be replaced by other producers and Australia would be a loser.

Albanese dissembles, and he knows it.

One of the greatest things about a democracy is its moral foundation. It is inappropriate, or a non sequitur, to talk about moral superiority, but compared to the sort of political systems in place in, say, China or Russia, citizens of democracies such as the US, the UK, Germany, New Zealand and Australia can think of their system as “desirable.” It is natural to think that a democracy is as close to “fair” as we are likely to get.

If you want to go down that path, and it is paved with good intentions, you need policy with a moral foundation. And some degree of logic goes with the morality.

Phew.

Only the most basic micro economics knowledge, as systemised by Alfred Marshall and which is now just about a high school subject, is needed to note that reducing the supply of a commodity has three effects: (1) it increases the price, (2) it encourages substitution, and (3) it reduces consumption.

Australia is the world’s largest exporter of coal as measured by energy and the second largest exporter as measured by tonnes. Including gas, Australia is about the world’s third largest exporter of thermal energy behind Russia and Saudi Arabia and ahead of Indonesia. So what we do does matter – not just morally, but in terms of global carbon emissions.

Just look at what happens to gas prices when Russia cuts off Europe. Prices rocket, consumption falls and substitution happens. That substitution is only partly new gas. The medium- and long-term impact will be a permanent reduction in Europe’s gas consumption and carbon emissions as gas is replaced by wind and solar.

Finally, Albanese was also incorrect and misleading on two grounds when he said that carbon emissions were measured and managed in the country where the emissions occurred.

The first error is straight out factual. As well as emissions in country of production we also measure and manage Scope 3 emissions, that is the emissions produced from consumption of the product based on where the product was produced and no matter where it was consumed.

Big miners like BHP and Rio Tinto increasingly manage on a Scope 3 basis because that is what their investors, the smart people in the business, want them to do.

On a scope 3 basis, Australia is perhaps 4% of global emissions, not bad for a country representing perhaps
0.35% of world population.

Secondly, Australia’s coal and gas exports are major contributors to Australia’s own domestic emissions. Exports are about 40% of domestic emissions. I have yet to do the work to separate out what coal and gas and perhaps oil represent of that 224 million tonnes, but it’s likely 20%-25% of total emissions come from production and exports of coal and gas.

Lao Tzu: “Those who would lead, should walk behind”

The real reason that Albanese doesn’t support a ban on new coal and gas is that there isn’t enough political support for it.

The vested interests are too big, even within the ALP from the ETU and other “hard heads”. Banning them would open the ALP up to massive attacks from the Liberal and National Party and the conservative and often poorly thought out editorials of the major business media, eg the AFR.

Right now the mood is: Let’s make “steady” progress and not rock the boat too much. Perhaps it will always be so. Albanese, in my opinion, would do better to be straight with the people, rather than coming out with such easily disprovable comments.

Meanwhile, back in the jungle

Australian producers of energy are all having lots of fun and making money largely as a result of war in Ukraine. Perhaps the biggest beneficiaries are wind and solar producers that are selling at merchant prices (spot). Their costs have barely changed but revenues go through the roof.

Coal and gas producers are also doing exceptionally well, but coal costs have increased dramatically and supply was and is restricted by flooding.

Consumers are losing but not as much as they should be. Expectations are for electricity prices to go down, but not as much as they eventually will:

At a $150/MWh base, a retailer needs to add maybe 30% to cover hedging and other costs of buying power, so lets call it $200/MWh. And then we need to add $190/MWh for network, transmission, environmental and retail margin; so we are up around $390/MWh.

For the 2023 financial year where the futures price is currently at $323/MWh, they probably need about $600/MWh to cover costs if they are paying that $323. Any retailer that hasn’t hedged, bad luck. Yet small retailers can on average not afford to fully hedge, and nor can big retailers.

The problem with electricity retailing is that the retailer doesn’t know either the price or the quantity which has to be hedged. Even with a stable customer base there can be demand spikes which are just not worth hedging out on average. Equally, if consumption is trending down then over-hedging into a falling price is not a great place to be when talking to the boss.

For a growing retailer, then, this problem is exacerbated by the uncertainty over customer numbers, never mind volume per customer. So this is why, in my opinion, retailers generally want to end up in generation.

In the meantime, gas prices go through the roof and given that Russia is restricting exports to Europe through the Nordstrom pipe to 20% of capacity, physical rationing will take place and prices will reflect that, ie scarcity pricing.

Domestically, this means gas prices have no chance of falling and the use of gas for power generation is a waste, or it would be if we had enough storage and lots more bulk energy.

The gas price in Europe is about $A80/GJ – and that’s in the European Summer. It’s a lot less in the USA, but the export potential from the USA is limited, whereas Australian gas can mostly get to the international market.

It’s likely that countries like China and Japan buy the gas at LNG contract prices, largely reflecting the oil price – so about A$15/GJ – and then on-sell some to Europe.

China can do without the gas, as their economy is coal based and gas is a luxury. China may import some extra gas from Russia but I have read that the major Russian producer, Gazprom, has seen a decline in volume of say 30%.

If prices are are up from A$20 to A$80 and volumes are down 30% then you are still ahead, in the short term. In the long term, as stated above, Europe’s trust in buying gas from Russia will never ever be fully restored.

Lower coal generation in NSW and Victoria is partly driving high electricity prices. NSW coal availability is an issue, but Victoria, that’s largely on AGL.

But coal costs redefine the notion of nosebleed.

Even VRE generation, although above last year, is not showing thrilling growth.

Wind has dropped off a touch and it is interesting to see, from a NEM perspective, utility solar picking up in front of rooftop.