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Natural gas has taken centre stage as Australia’s energy grid continues to wean itself off energy produced by coal. The Federal Government has announced its gas-fired recovery plan to “reset the east coast gas market and create a more competitive and transparent Australian Gas Hub by unlocking gas supply, delivering an efficient pipeline and transportation market, and empowering gas customers”. The plan has outlined the Government’s willingness to “step in” and back gas projects if the private sector fails to “step-up” and make timely investments in the gas market.

The announcement has led to considerable debate around the economic and environmental feasibility of using natural gas to underpin the nation’s energy grid.  For instance, on 9 November, the Menzies Research Centre released Powering out of pandemic: Unleashing the potential of gas, an encouraging research paper written by Dr Brian Fisher AO PSM on the potential for natural gas to “back-up” a national energy grid which is expected to be powered predominantly by renewables in the future. Just six days later, the Grattan Institute’s Flame out: the future of natural gas argued that natural gas has a very limited role to play in the future of Australia’s energy system. This article will explore the main points of contention between Brian Fisher and the Grattan Institute on natural gas.

Variability and instability of electricity supply

The rise of renewables, mostly in the form of solar and wind, in Australia has significantly impacted the nation’s energy grid in terms of operational dynamics and variability.

Operationally, renewables have altered the energy output composition of the energy grid. Renewable energy sources tend to produce the most energy during the middle of the day when the least amount of energy is demanded. This means that generators, particularly in South Australia, are forced to offload energy – increasingly at negative spot prices.

Given the unpredictability of most renewable energy sources, Australia’s energy grid has also become much more varied and uncertain. When the sun doesn’t shine or the wind doesn’t blow, the grid requires an injection of energy from another generation source to respond to drops in output from renewables. As we explored in another article, Queensland’s energy leaders convinced fossil fuels have a role until 2050 at least, coal is not suitable for quickly responding to these shortfalls in energy supply.

In his paper for the Menzies Research Centre, Brian Fisher argues that natural gas is probably the best solution for addressing short-term drops in renewable energy output. In Fisher’s view, large-scale batteries are infeasible, hydro is expensive and topographically limited, nuclear faces regulatory issues, hydrogen is showing potential, but natural gas is a mature and flexible energy source that has the “lowest capital cost and fastest development time”.^[1] Indeed, Fisher views natural gas as:

…the only technology capable of firming renewable energy at the scale that is now required on the timetable determined by the retirement of coal generators. (Powering out of pandemic, p. iii)

Grattan agrees that gas will have to play a “backstop role” in Australia’s energy grid but contends that such a role does not require large-scale gas production. Natural gas, Grattan says, should not be used as a “transition fuel” (i.e. replacing coal as a baseload power source with less emissions) due to economic and environmental considerations.

Economic considerations

Grattan argues that neither investment into gas generators nor proposed government intervention in domestic gas markets – including underwriting new production, underwriting new pipelines, domestic gas reservation and export restrictions, use it or lose it provisions, reforming pipeline regulation and providing market information – will result in material reductions to electricity prices for businesses or households. As such, Grattan is sceptical regarding what the Australian Government’s gas-fired recovery plan can achieve, saying that:

…The Federal Government may wish for lower gas prices, but the increasing costs of production mean that these measures are swimming against the economic tide. (Flame out, p. 15)

The buoyancy of high natural gas prices, Grattan contends, is likely to continue given the increasing costs associated with natural gas production. New fields have been recently opened but are relatively expensive, as is the case with Santos’s Narrabri coal seam gas field in NSW, or incur significant transportation costs because they are too far from major markets, like the Beetaloo Basin shale gas fields in the Northern Territory.

In contrast, Fisher believes that there is room for a supportive policy environment and a justifiable return on investment on natural gas generators due to recent technological advancements. To Fisher, a supportive policy environment entails the removal of obstacles to investment, incentivises investment in critical infrastructure, intervenes only in cases of anti-competitive behaviour, and increases transparency in the energy market.

More broadly, Fisher recommends that government policy be “motivated by a desire to increase competition, not the concept that governments know best”.^[2] This position appears to oppose the federal government’s arguably heavy-handed approach of threatening to intervene in the market itself if the private sector does not “step-up” to invest in the gas market. Ultimately, however, there is substantial alignment between the Morrison Government’s intentions to stimulate infrastructure investment in the natural gas market and Fisher’s recommendations to make “the domestic supply of gas… an immediate national priority in the post-pandemic recovery period”.^[3]

In terms of technological advancements, Fisher indicates that hydraulic fracking, which allows for the safe and profitable extraction from tight rock formations, and the development of LNG supertankers have significantly reduced the cost of natural gas. LNG supertankers are triple the size of tankers 20 years ago, leading to substantially lower transportation costs.

Beyond price reductions, Fisher notes that broader benefits of stabilising a renewables-oriented energy grid and reducing gas prices will flow into the manufacturing sector, particularly for energy intensive products like aluminium. Grattan, however, describes the benefits to manufacturing as “overstated” given that gas uses in manufacturing is highly concentrated in three sub-sectors: polyethylene, ammonia and related chemicals, and alumina. Grattan notes these sub-sectors:

…contribute only about 0.1 per cent of gross domestic product, and employ only a little more than 10,000 people. And much of this gas-intensive industry is in Western Australia, which enjoys low gas prices already. (Flame Out, p. 3)

In summary, Grattan and Fisher disagree strongly on the future economic benefits and costs associated with a larger gas industry, and the potential for gas prices to respond favourably and in a cost-effective manner to policy measures and additional investment.

Environmental considerations

Fisher observes several environmental advantages that natural gas holds over coal, including its significantly reduced carbon dioxide, sulphur dioxide, nitrous oxide, and mercury emissions. Considering these benefits, Fisher maintains that Australia:

…cannot squander the opportunity to reduce carbon dioxide emissions immediately in the hope there will be a better solution in the future. (Powering out of pandemic, p. ii)

Grattan also recognises the relative environmental benefits of gas when compared to coal, but contends that large-scale gas production may complicate, not facilitate, Australia’s attempt to achieve the net-zero emissions reduction by 2050 target outlined in the 2015 Paris Agreement.

Grattan points out that natural gas contributed 19% of Australia’s greenhouse gas emissions in 2019, which is less than petroleum products and coal, but still substantial (Figure 1). If Australia is to reach its greenhouse gas reduction target, then the relative advantages of natural gas over coal should “not distract from the fact that Australia, and the rest of the world, must consume less gas over time to reduce the effects of climate change”.^[4] Carbon Capture and Storage, Grattan mentions, could make sense if seeking to offset a very limited amount of emissions.

Figure 1: Share of energy consumed, and greenhouse gas emissions emitted, by fuel type, 2019

Source: Flame out: the future of natural gas

Instead of natural gas, Grattan recommends that other energy sources should be explored further. Given the expected buoyancy of natural gas prices and environmental considerations, Grattan also urges the NSW, Queensland, South Australia, and ACT governments to “impose a moratorium on new [household] gas connections as a prudent, no-regrets option”.^[5]

Ultimately, natural gas possesses noteworthy qualities as an energy source in terms of its efficiency, cost, and relative environmental advantages. That said, the future role of natural gas in Australia’s energy grid as it transitions to greater renewable generation is currently unclear and is subject to intense debate.

[1] Fisher, B. (2020) Powering out of pandemic: Unleashing the potential of gas, p. ii.

[2] Ibid. p. i.

[3] Ibid., p. viii.

[4] Wood, T. and Dundas, G. (2020) Flame out: The future of natural gas, p. 9.

[5] Ibid. p. 3.

This article was prepared by Ben Scott, Research Officer and Gene Tunny, Director at Adept Economics. Please get in touch with Ben (ben.scott@adepteconomics.com.au) with any questions.