The Morrison government and the mad world of fossil gas

The Australian government has added to the existing madness of the gas sector with its latest gas infrastructure ‘plan’, released in late November 2021.

This joins a long list of other government ‘plans’ designed to prop up the interests of powerful industry and fossil fuel lobby groups and donors to politicians at the expense of taxpayers, the economy and the environment.  

There are basically four separate markets for gas:

• Residential and commercial consumers, for whom most of the cost of gas is not the wholesale price – transmission, distribution and retailing, reflected in both unit prices and high fixed charges, are the big factors. And, for most of them, gas is a small component of business or household operating costs
• Electricity generation, where gas provides peaking power and, when it is the marginal generator, it can (and does) charge high prices
• Large industrials, for whom wholesale gas prices and volatility are big issues
• Liquefied Gas (LNG) exports

Unless you understand all of these markets, and the subtleties within them, you are at risk if you continue to consume gas or invest in gas production or supply infrastructure. 

The economics for most residential and commercial consumers are clear: getting off gas saves you money and cuts your emissions, as shown by studies funded by Energy Consumers Australia and others.

However, these sectors face a seasonal problem: our appallingly inefficient buildings and appliances mean we use a lot more gas (and electricity) in winter. Rooftop solar produces less electricity in winter, when we need it most for heating. 

On the demand side, we can free up winter renewable electricity supply capacity by switching from inefficient electric heating and hot water technologies, lighting and appliances to efficient electric options and upgrading building thermal performance. Heat pump technologies and induction cooking can replace gas.

For electricity generation, home heating (and cooling) is a major driver of peak demand – when gas generation is most likely to run. So energy efficiency, demand management and energy storage, including rapid response batteries, can kill much of the demand for gas generation.

Existing gas generators may be able to make some money at times – after they write down their capital value. New gas generators have no hope of being profitable. Then again, with the right financial structures and government subsidies their losses can be written off for tax deductions and subsidised by taxpayers. 

Large industrial gas consumers are in an awkward situation. Historically, they have relied on cheap gas (at $3-5 per gigajoule) to be profitable in Australia.

Many of their plants are old and inefficient, and struggle to compete with large scale global competitors. Increasing gas price volatility increases business risk for additional manufacturing investment, and high gas prices (driven by international markets), add to their woes.

Many have closed down and more will follow if they keep using gas. There is increasing interest in efficient electrification with renewables; for example the alumina industry is exploring Mechanical Vapour Recompression, a form of heat pump. 

LNG export markets are very complex, and courageous investors may expand Australian fossil gas production, though risks are rapidly increasing. Recent international gas prices have been very high, and Australian LNG producers have been able to ride this wave – at the expense of local consumers. 

A combination of factors has driven international LNG prices to crazy levels. Putin has turned down the gas supply to Europe and the UK. China has been buying up spot market LNG for several reasons, including clearing the skies for the Winter Olympics, managing serious air pollution problems and positioning itself for a low carbon future.

An unusually hot northern hemisphere summer has driven gas-fired electricity demand higher to supply more cooling of buildings, depleting storage. Investors have shifted away from gas. Civil society has sent strong messages to investors to divest from fossil gas. And governments in most countries have failed to drive sufficiently aggressive energy efficiency and renewable energy policies and programs.

Existing Australian LNG producers can capture windfall profits – after big losses in recent years. Potential investors in new developments have to make tricky judgements about how fast global economies will shift to zero emission solutions (on demand side as well as supply) instead of seeing fossil gas as a transition option.

Anyone who understands the urgent messages being sent by climate science would avoid such investments, even though recent market signals look attractive. Both the carbon emissions and the (much under-recognised) impacts of methane leakage from production undermine the attraction of gas.  

As we see in every transition, short term signals will be confusing. But the long-term fundamentals are clear to those who step back from the short-term noise.