AUSTRALIA: ENERGY CRISIS
MELBOURNE ENERGY INSTITUTE
THURSDAY, 13 APRIL 2017
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I was reminded when the first mic wasn’t working of a recent insight into how low energy policy has gone in Australia. It rose out of the Adele concert my daughter attended in Adelaide. 70,000 fans were there and Adele had a revolving stage, which I’m told was designed in Bendigo. At some stage the movement of this revolving stage grabbed a power cord and pulled it out of its socket, interrupting the show for several minutes. And, blitzkrieg like, a whole lot of News Limited journalists got onto twitter and started abusing South Australia’s renewable energy policy. Chris Kenny got onto Sky News and announced that there was a power blackout in South Australia. That’s just a little anecdote to give some insight into quite how ‘peak stupid’ energy policy debate has become.
Can I thank the Melbourne Energy Institute for hosting us tonight in this debate that I hope will be thought-provoking and will give you the opportunity to ask us some very probing questions. What I want to do is give a bit of a sense of Federal Labor’s perspective on this emerging gas crisis. It is now impossible to deny that Australia is in the throes of a very major energy crisis. This is not like some crises we saw in past decades which resulted from external shocks not within the control of a nation’s governments or a nation’s industry, such as we saw in the 70’s throughout Europe and Japan. This overwhelmingly is a self-inflicted energy crisis; we need to be honest about this. We all share some responsibility; all levels of government, all political parties, industry, and certainly the media for reasons I outlined in my Adele analogy. We are in the throes of a very serious crisis that requires some urgent action but also requires an honest discussion to learn the lessons of what has happened over the last couple of decades.
I think it is fair to say that, along with housing affordability, energy policy has been the most serious public policy failure over the last 20 years. If it is not rectified, if there is not some serious approach to dealing with the immediate but also the medium and long-term consequences of this crisis, the nation is going to be very much worse off.
As I think the opening remarks indicated, this has largely been seen as an electricity crisis for some years. That is a well understood area of policy that has been well-traversed in these venues and in newspapers, and among business and consumer groups. It has also been a long time coming. We now have very serious price pressures in electricity. I’ve been travelling around the country over the last couple weeks talking to manufacturing companies about their power price pressures. Households across the country have been reporting for many years that they’ve really reached the pain threshold from a household budget point of view with their power bills. And we know where that pressure came from. It came from an extraordinary amount of investment in the network system, in the poles and wires, that in hindsight, has yet to justify in economic benefit terms the huge economic cost involved. It smashed capital productivity and it took us from a position of having some of the lowest retail energy prices in the world to having some of the highest. Against all of the rhetoric that says price rises were all about renewable energy, you only have to look at the data that shows that the price rises were highest in the Eastern States, particularly in New South Wales and Queensland, which also have the highest levels of coal penetration in the market. If anything, South Australia narrowed the gap between average South Australian prices and average National prices considerably over the past decade. But what we have seen more recently, and this is very much connected to the gas question, is wholesale prices rising dramatically as well. Over the course of the past summer, prices have pretty much doubled on average across the NEM if you compare the past summer to the summers during the Carbon Price Mechanism era. During that time we saw relatively low wholesale prices, even with the impact of the carbon price, because of a very significant supply overhang, running to some thousands of megawatts. That over-supply has largely all receded because of the closures in coal over the last few years.
Now, we have the pain threshold reached by consumers, households and businesses, because of network investment, compounded by wholesale prices starting to rise because of an investment strike in the industry reflecting the lack of a policy framework to underpin investment, like an emissions intensity scheme.
What has been much more of a surprise, perhaps not to some of the big gas users in the manufacturing industry, but to people more broadly in the community, is the scale of the gas crisis. Someone described it to me as akin to being run over by a steam roller. There had been some people in the industry, in the finance sector, Credit Suisse and a number of other banks, saying that this was going to be a very significant problem; and had actually nominated 2017 as being the year when the supply crunch would hit.
I thought I would say a bit about the history of this, about how and why we got ourselves into this mess. As I think is relatively well known, we’ve had a nice, stable, cheap gas market in Eastern Australia for many years, gas that has largely been supplied out of Victoria and the Cooper Basin, in South Australia, supporting on average a pretty steady demand of 700 petajoules of gas every year. Around 200PJ to the power sector, 200PJ to households and small businesses, and about 300PJ a year to big energy users; manufacturers that employ many thousands of workers across the country, particularly in New South Wales and Victoria. And we had good supply that would keep that gas price at about $3-$4 a gigajoule.
In the early 2000s a whole range of discoveries were made that meant our reserves of proven and probable gas went from about 12-14 years of reserves up to 60-70 years of reserves. This came largely because of new technology in extracting unconventional gas, particularly across the coal seams on the Eastern seaboard. Probably unsurprisingly the companies involved in that said to governments that they wanted to find a way to monetise that gas. They weren’t going to make extra money over 70 years by selling 700 petajoules a year - they wanted to create an export industry. So they built LNG trains, six of them, in Gladstone, that have started operating over the last few years and are now pretty much fully operational. The scale of this is quite awesome. Each of those six fridges, or trains, can use about 275 petajoules. So, we went from a position of a nice, pretty steady demand of 700PJ per year in Eastern Australia, to a demand of about 2200PJ per year.
I think what we are finding now, although there is still some contest about this, is that we didn’t get enough gas out of the ground to satisfy that new demand. There were assurances given; some of them implicit, some of them are seen in documentation like the environmental impact statements, indicating that the gas that was to be refrigerated and sent overseas would be effectively new gas. It would be gas that came from these new, largely CSG reserves in Queensland and wouldn’t impact the domestic market. Or at least it wouldn’t impact the domestic market over and above the importation of the Asian price. There were very clear statements about that. You would have seen this in some particularly excellent commentary the Fin Review has been running through Angela Macdonald-Smith’s journalism. What we now know though is that those assumptions were in hindsight wrong.
Now you can say that they assumed that they were going to be able to get gas out of the Northern Rivers or Narrabri in New South Wales, or that the wells in Queensland would have performed better then they ended up performing. At the end of the day, though, they haven’t got the gas out of the ground that they need both to supply the domestic market with 700PJ and the overseas contracts running to something like 1600PJ. How much we are short we don’t really know, which I think says something about the opacity of the gas market. I haven’t come across a market that involves the public good that is as opaque as the gas market. Having worked as the Water Minister, with the water market, and now with the electricity market, this gas market is very opaque. Still, this morning I’ve seen in the press some contest about whether or not these trains are in fact taking old gas, or what the industry describes as third party gas. We don’t really know how much the gap is but it may well run to as much as more than 100PJ. That is a very substantial amount of gas that is being taken out of the domestic market, sent to Gladstone, refrigerated, and sent overseas.
Now what does that mean? Well, we know the power sector is already short of gas. We’ve seen the consequence of that over this past summer where some of the gas generators, particularly in my electorate of Port Adelaide, didn’t run because they didn’t have access to gas. Gas-fired generation we think was probably down as much as 37 per cent, over the 12 months to quarter 4, 2016; causing very significant price impacts because the gas they are getting is so expensive, but also impacting the reliability of the system. The biggest impact, though, without a question is on manufacturing. Manufacturing plants that are gas heavy, making fertiliser, ammonia, a lot of the food processing areas, Qenos and others in that industry, have built their operations on gas prices being about $3 or $4 a gigajoule. We’re told, and I’ve spoken to a lot of these companies myself, they are now getting gas proposed to them at more than $20 a gigajoule. In the space of 3 or 4 years we’re seeing the price, quintupling or even sextupling, as these trains have started operating fully. That is an existential question for these factories and it is a crisis that is happening right now. It’s not an issue that you are going to be able to kick down the road, saying we’ll just get through the next election and look at what the Parliament looks like then to see if we can resolve it.
There are two pathways that confront us this year. One pathway is what economists call ‘demand destruction’ which would see further losses of gas generation in the power sector and large numbers of manufacturing plants potentially shut down with thousands of jobs lost. Demand destruction is utterly unacceptable. It is utterly unacceptable as a consequence of public policy failure. The second alternative, as difficult as it is to get your head around, is re-diverting some of that gas back from Gladstone into the domestic market. Fortunately, in a tale that is full of woe, we have some glimmer of hope in an apparent clash of cycles. While gas is short and very expensive in Australia, it is plentiful and relatively cheap on the international spot market. There is a whole lot of gas on the spot market because America is starting to export, and it is relatively cheap because gas is tied to the oil price. There are many people proposing in the manufacturing industry, AiG, a whole bunch of others, that there is the prospect of re-diverting gas from Gladstone back into the domestic market and finding a way to put gas from the international spot market into these three consortiums, or GLNG in particular, to satisfy their contracts. That has been the discussion over the last couple of weeks. It is one that one would hope could be reached consensually, although that is easier said than done. But if we don’t do this swap, we are left with only one alternative, the unacceptable pathway of demand destruction.
Now Malcolm Turnbull had a summit of the gas industry three or four weeks ago in Canberra. He brought them together and told them very sternly that they would have to go away and think about a solution for this. We think that was a good start, but we also think that government, given the degree of national interest in question, should be in the room. It should be using the influence of the government to twist the arms, to do the sorts of things the Hawke Government did for example in dealing with very significant industry challenges in cars, in steel, on the water front and such like. Sitting back as a passive observer, maybe threatening that if they don’t come back with something acceptable, something might then result from that is not good enough. They should be in the room.
The gas companies come back to Canberra next week to report back progress. If you read the Fin Review this morning there is already pushback from the industry saying actually all this stuff about there being a shortage of gas isn’t right. They are saying that they are not taking gas that was previously intended for the domestic market. That is frankly, I think, pretty objectively rubbish. There is a shortage of gas. There is third party gas being taken from the domestic market, being sent from Victoria, being sent from South Australia. And there needs to be some very strong action taken to make sure we can resolve this in a way that doesn’t see the loss of thousands of manufacturing jobs, as well as damage our ability to transition the electricity sector over the coming years.
I’ll start to wind up my comments but I do want to recognise that there are also very significant medium and long-term challenges we have in this sector and I don’t want to belittle those. Some of the medium and long-term possibilities being discussed now include things that I think the average person would have thought ridiculous not too long ago. The idea that you would build an import terminal on the Eastern seaboard and import gas from Western Australia or internationally into a market that has so much gas sloshing through it would seem ridiculous, but it is now a real prospect. AGL is doing a feasibility study, spending a lot of money on this, and if it stacks up we may well see an import terminal operating as early as 2020 or 2021. Those years mean that it doesn’t present a solution to the current crisis we confront, but if we have a medium to long-term supply issue then it may well be that an import terminal will work.
There is also a furious debate, which I think in ways you are at the centre of in Victoria, about the extraction of conventional and unconventional gas from reserves that are identified around the country. We take the view that this is not a simple matter of wagging a Prime Ministerial finger from Canberra at various Premiers (usually Labor Premiers) to lift moratoria and pretending that that would make everything rosy. These moratoria are a response to very significant community opposition. I travel a lot to these regions. I have spent a lot of time in the Northern Rivers of New South Wales in recent years and I can tell you there is no way you are getting gas out of Northern New South Wales in any of our lifetimes. The opposition there is so deep, so wide, that any chance of social licence or community consent, I think is gone. Frankly, I think the industry recognises that part of the country is lost to them. We need to have a framework that nurtures community understanding and underpins consent. We tried that working with Tony Windsor and Rob Oakeshott when we were last in government, setting up independent, scientific work on water quality and water impacts through the Independent Expert Scientific Committee. And, importantly, lifting this to a Commonwealth level because particularly in New South Wales there was a lack of confidence in the State Government doing this in a way that was transparent and had integrity. Frankly, that lack of confidence reflected on both political parties, and we see some people going to jail because of that. People wanted a second level of assessment and approval to distance them from the state politics in New South Wales. We tried to rebuild that trust, but our efforts have been largely deconstructed over the last few years. If you are going to have a conversation in the communities about gas development, in whatever state or in the Northern Territory, you can’t just wag your finger. You have to realise that government has a responsibility to put in place frameworks that nurture confidence, rather than destroy it. And you need much better behaviour from the gas industry than we have seen in many parts of the country where too many of them have behaved like cowboys.
Thank you very much for coming along tonight. Can I finish by saying this; we’ve got to learn lessons from this crisis. We’ve been saying for a couple of years now in the Federal Labor Party that there should be a National Interest Test applied to gas developments. Now, we were in Government when a number of the approvals for these LNG trains happened. They do go back to Howard’s era, but a number of approvals were issued during our time when we did not have a National Interest Test. We’ve learnt from that. Other players should also learn from that and what has happened over the last little while in the gas market. And we must all also recognise that you can’t pursue gas developments without a very close eye to nurturing community consent. If you are not going to put those proper frameworks in place, you can’t then complain when communities chase industries out of their territories with pitchforks. Thank you.