What role does a suddenly expensive fossil fuel – gas – have to play in our energy future?

A constellation of problems – some foreseeable, some not – have landed the eastern half of Australia with skyrocketing electricity costs and no clear solution just as a colder and wetter-than-usual winter hits.

At the centre of the fray is gas (sometimes called natural gas, or fossil gas).

“Global gas prices are hyper-sensitive to external changes in supply like the Russia-Ukraine conflict,” says Professor Ariel Liebman, director of the Monash Energy Institute.

“This, together with a cold snap and significant unexpected electricity outages, have combined into a perfect storm – pushing many small innovative electricity retailers to the wall or even bankruptcy, increasing the cost of generating electricity and resulting in stark rises in gas and energy prices.”

So: what’s going to happen in coming months, and – importantly – where can we expect gas to go over the next decade?

How did we get here?

While the price shock is sudden, its causes have been building over the past decade.

“Gas is a transition resource, particularly in Australia, because we’ve taken so long to integrate renewables and to develop policy and market mechanisms for the integration of renewable energy,” says Professor Samantha Hepburn, research director of the law school at Deakin University, and of the Centre for Energy and Natural Resource Law.

“The reason that gas is important is because as our coal generators age and retire, we’re not able to ramp them up quickly.”

Renewable energy is cheaper than coal (or gas), but calmer, cloudy conditions – like those we’ve been seeing over much of the east coast recently – mean that it can’t supply enough electricity to meet demand on occasion.

“The one big question, which has been raised and came from decommissioning of coal is, how do we replace baseload generation? And there’s no simple solution to this,” says Dr Alexandr Akimov, director of the Sustainable Energy Policy Cluster at Griffith University.

While batteries and offshore wind developments both have promise, gas was the cheapest and most practical option to quickly meet that demand.

“All of this sounds good if gas is there, and if it’s reasonably priced – and it was reasonably priced for a long period of time,” says Akimov.

Except that, now, the war in Ukraine has caused international markets to shift, making gas more expensive.

“What we are therefore seeing is a situation where supply is short; everyone’s trying to grab a container or cargo of LNG,” says Hepburn.

Australia is a net exporter of gas, and Western Australia has a reservation policy that requires that 15% of the gas mined there must remain onshore. The east coast grid doesn’t have this protection, and plays on international markets instead.

“It’s astonishing that we don’t have protection in place for the domestic market, given that gas is a public resource and carries with it public interest obligations,” says Hepburn.

“This would all have been preventable if successive governments had paid proper attention to rigorous monitoring and regulation of all the key energy markets in Australia,” says Liebman.

“This is a policy failure a long time in the making and it will be very hard to remedy it quickly.”

Is there a way out of it?

The federal and state energy ministers have just met to discuss the rising energy costs. They agreed unanimously to both grant the Australian Energy Market Operator (AEMO) the power to hold some gas in reserve, and develop a clear transition plan for the grid.

“That won’t work today, but it will give us the capacity and the tools necessary to manage this crisis going forward,” said federal energy minister Chris Bowen, at a press conference.

What other tools are available?

“The best immediate solution would be to pull the so-called ‘gas trigger’ to requisition supplies of gas intended for export,” says Liebman.

“In addition, the government should also seriously consider a full gas reservation policy for the entire country, similar to the one in Western Australia and the United States.”

The gas trigger (officially, the Australian Domestic Gas Security Mechanism) was introduced by the Turnbull government in 2017. This trigger needs to be declared by October in any year and gives the government the ability to place restrictions on exports from 1 January the year following.

The federal government has ruled out pulling the gas trigger, with Bowen saying it’s not the answer to a short-term crisis.

Hepburn is of the opinion that the trigger “appears to be little more than a rhetorical flourish”.

“It’s unlikely to have any sort of impact on price really given the current international framework,” says Hepburn.

“So I suspect that the government’s decided not to trigger that because probably isn’t going to have much impact.”

Akimov says that the logic behind not having a reservation policy, like WA’s and the US’, made sense when global gas prices were cheap.

 “The Western Australian policy at that time looked like a barrier which would maybe put off some of the investors,” says Akimov.

“Now of course, with the security concerns, it’s a different kettle of fish and I don’t know whether it will be possible to redesign the policy and reintroduce it.”

Where does gas go next?

If it’s so expensive, and a polluter, does gas have a future in the grid at all – or will it go the way that the more emissions-intensive coal is going?

“Gas is an interesting type of fossil fuel in Australia, and is probably the subject of most debates,” says Akimov.

“We get more or less a consensus, with some rare exceptions, that coal has to be phased out at some point.”

But gas is a field filled with differing opinions. Dr Roberto Aguilera, an energy economist at Curtin University, for instance, thinks that new gas mining developments “seem like a sensible option” in the coming decade.

“The issue with renewables is that they are not ready today to capture the market share of natural gas and coal,” says Aguilera.

“Even though the renewables have grown very fast in recent years – and that growth will probably accelerate now – they still account for a relatively small proportion of Australia’s overall energy mix.”

Renewables accounted for 24% of Australia’s electricity generation in 2021, while gas accounted for 20%.

AEMO has a range of scenarios mapped out for the transition of the grid to renewables to 2050. The Step Change scenario, judged most likely by AEMO’s stakeholders, sees all brown coal and two-thirds of black coal gone by 2032, largely replaced by renewables. But the scenarios see a phased reduction in gas over the next two decades, with the rate of change being affected by the speed of take-up of other options, including full electrification and hydrogen implementation.

Even in the most ambitious scenarios, AEMO still estimates that at least a small amount of gas generation will be needed past 2035, to account for peaks in demand when renewable generation is low. These gas generators would have carbon capture and storage to manage their emissions.

Gas’ presence, however, will be in a very different grid.

“All of these concerns in Europe, the concerns we’re having now, are because we’re so dependent on the extractive sector,” says Hepburn.

“Once we get independence from that, which is important for our climate imperatives anyway, we won’t have that issue. But that comes at a cost to the government, because of course you don’t have royalties [being paid] from the renewable sector, because there’s nothing that they own. So it’s a different framework.”

Hepburn says that “transition” isn’t entirely the right word for this process. “It’d be a complete revolution.”

The decarbonisation of the grid requires even bigger investments in renewable energy and storage, extensive new infrastructure to manage it, and a clear federal plan to oversee it.

“All that needs to happen before we can start thinking about becoming independent from gas. Until that happens, we’re going to have to deal with these kinds of concerns at the global level,” says Hepburn.

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