'Crazy', 'mad' and 'insane' gas market blamed for nation's power bills


May 17, 2019 05:02:55

Australians are reeling from electricity prices that have soared more than 130 per cent since 2015. Among the reasons for the rocket-rise: profiteering by wholesalers and the so-called ‘gold-plating’ of the electricity distribution network. But the real culprit? Gas.

Key points:

  • Analysts say gas prices determine the marginal cost of electricity on the east coast, meaning it is responsible for recent price rises
  • Gas prices in Australia were $4 a gigajoule in 2015 before spiking to nearly $20 two years ago, and $10 now
  • Asian gas prices for imports are now cheaper than Australian domestic prices, leading to the idea of importing Australian LNG

“It’s the gas price that determines electricity price on the east coast, but neither [political] party wants to own up to that because they’ve both been culpable in allowing this situation to develop,” MacroBusiness economist David Llewellyn-Smith said.

Gas is a vital part of the electricity generation market.

But the “situation” Mr Llewellyn-Smith is referring to is that Australia is on track to overtake Qatar this year and become the world’s largest gas exporter.

Australia is now exporting so much gas there is not enough available at a reasonable cost to create electricity domestically or for it to be used by industry. That is causing huge problems for anyone who pays a power bill, as well as local manufacturers.

Electricity price ‘set by gas’

As ageing coal power stations have closed and renewables been subsidised to help them grow in strength, gas-fired power plants have played a vital role in what is called “smoothing” demand for energy, and meeting the fluctuating daily needs of the national electricity market.

But massive projects begun a decade ago to export liquefied natural gas, or LNG, have meant domestic prices have risen to meet global ones, so the price of producing power using gas has soared.

“Since 2014, 2015 all the price rises we’ve seen in both gas and electricity have resulted from this crazy situation where we’re exporting gas,” Mr Llewellyn-Smith said.

“Gas sets the marginal cost of electricity in the east coast power market. So when you switch on your light you’re paying a price that’s set by gas. If the gas price goes up, your power price goes up.”

It has. Gas that was $4 a gigajoule in 2015 spiked to nearly $20 two years ago. A flooded market in Asia means gas sells for $7.50 in Japan but $10 here.

Manufacturers lay off staff because of power price surge

Exacerbating the problem, locked-in contracts to ship gas to Asia have meant scant supply here and steep price rises for companies such as petrochemical manufacturer Qenos.

Chief executive Stephen Bell said the power bill at just one of its plants, at Port Botany in New South Wales, provided a sense of the problem.

“In 2016 we paid $8 million dollars for electricity and in 2018 we paid $18 million dollars,” he said.

“That’s just for the commodity; that doesn’t include network charges and other costs.

“We’ve taken more than $60 million of cost increases over that time. We can’t pass a dollar of that on to our customers because our competition, who all come from overseas, don’t have any of those increased costs.”

The gas shortage is a long way past being a theoretical problem. Qenos has let go of 15 per cent of its workforce in just the past year-and-a-half.

“If we don’t address the issue we’re going to see a lot of jobs and a lot of industrial manufacturing disappear off the east coast of Australia,” he said.

“It’s a consequence of a failure of government policy at all levels — state and federal, Liberal and Labor — over a long period of time.

“We have plenty of gas in this country, we have an abundance of hydrocarbon, we’re blessed and there’s more than enough of those domestic and export customers.”

The Australian Workers’ Union said it was dealing daily with companies looking to cut employee numbers, pay or conditions because they could not secure gas.

“They can’t get decent long-term prices and decent long-term contracts and, as a consequence, they’re making some dire sacrifices which ultimately destroy Australian jobs and put further pressure on households,” national secretary Daniel Walton told The Business.

“Australia has now become one of large largest exporters of gas in the world. But we’re the only nation in the world that does not have a mechanism in place to keep a proportion of our gas here.”

Gas reservation working for WA

The gas shortage is not an issue in Western Australia. Its state government reserved 15 per cent of the output from its new gas projects for domestic use.

It is now wooing companies on the eastern seaboard to set up their manufacturing bases in the west.

Economists, unions and manufacturers are demanding the Federal Government reserve gas for the rest of the nation.

In April 2017, then-prime minister Malcolm Turnbull imposed restrictions on exports, but the companies which export are ignoring the price they are meant to sell at.

Asked about policies on gas reservation, the Government said its restrictions had worked, and new gas projects would help further.

It is investing $8.4 million to fast-track fracking in the Northern Territory’s Beetaloo Basin.

Labor said it would assess new gas projects on the basis of their contribution to domestic supply, and introduce a price trigger to stem exports if prices rose too high.

‘Insane’, ‘mad’, ‘crazy’ plans to import local LNG to Australia

The situation has become so dire there are now proposals for LNG import terminals in both New South Wales and Victoria. If they are built, a mind-boggling situation might occur.

Gas drilled offshore in the Bass Strait or onshore in Queensland would be refined and piped to Gladstone. There it would be frozen to -162 degrees Celsius, transforming it from a gas to a liquid for export.

Loaded on to a ship, it would exit Australian through the Great Barrier Reef and travel to Japan, where it would be taken onshore and turned back into gas.

Then it would be frozen again, shipped back to the new import terminals in Australia, turned back into a gas and re-inserted back into the national gas grid. Gas from WA and the USA may also use the import terminals.

“It’s absolutely insane,” Mr Llewellyn-Smith said, exasperated by the situation.

“The proposition is mad,” Mr Walton added.

Like the others, Qenos boss Mr Bell has been warning about the issue for a decade, to no avail.

“Well it seems crazy a country like Australia, with so much hydrocarbon, is in a situation where we’ve got boats going out of Gladstone loaded up with LNG and they’re passing boats coming into Australia loaded up with LNG to meet our domestic market requirements,” he said.







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