Gas advantage at the mercy of government renewables policy
THIS is a good news, bad news year for the domestic natural gas industry. While the Rudd Government’s emissions trading scheme offers gas suppliers the support they need to build market share in electricity generation, the proposed large increase in compulsory use of renewable energy threatens to rip away much of the advantage.
With billions of dollars in income at stake over a quarter century, this is no small issue for the gas industry. The arithmetic is straightfoward. Electricity suppliers and the government commodity economics agency ABARE both predict that power consumption will continue to rise strongly over the next 25 years. A ballpark estimate is that demand in 2020 will reach 300,000 gigawatt hours — from 220,000GWh at present — and that it will pass 350,000GWh by 2030.
The Energy Supply Association says that meeting this growth will require generation capacity to be expanded from 50,000MW today to 59,000MW in 2020 and 77,000 MW in 2030.
The Australian Petroleum Production & Exploration Association, on behalf of the gas suppliers, has an ambition to see 70 per cent of this extra capacity fuelled by natural gas ( ethane) and coal seam methane, which is now available in abundance in Queensland.
The proposed emissions trading scheme can only help this ambition — the added cost burden will make it harder for generators fuelled by black and brown coals to maintain existing market share, let alone grow it.
The sales values at stake are massive. A gigawatt hour of electricity currently carries a wholesale price of around $ 35,000 and an extra 60,000GWh in the 2020 marketplace, at today’s prices, would be worth $ 2.1 billion.
Achieving the APPEA goal would therefore deliver the gas producers and generators more than $ 1.4 billion a year in new revenue by the end of next decade — and this is before factoring in what they might gain from a reduction in coal- fired power output. Allowing for continuing growth in power demand, meeting the gas industry’s target could deliver it more than $ 15 billion in revenue between 2020 and 2030.
Unfortunately for the gas sector, the Rudd Government’s need at the last federal election to ensure that it benefitted from the lion’s share of Green preferences led it to commit to introducing a 20 per cent mandatory renewable energy target.
The existing MRET, legislated by the Howard Government, requires electricity retailers to buy 9,500GWh of power from new renewable resources by 2010 and provides the renewable generators with a $ 40,000 per GWh subsidy.
The Rudd Government’s plans will see a total of 60,000GWh of power supply provided by the renewable generators in 2020.
A substantial chunk of this supply already exists in the market — in addition to the 9500GWh requirement of the Howard MRET, long- established hydro- electric generators ( who are barred from receiving the subsidy) provide about 15,000GWh a year at present.
The Rudd Government policy will make a present of 35,500GWh a year of market share to new renewable energy generators by 2020. How the policy will be phased in and what the subsidy will be remains to be seen — but, allowing that the subsidy will continue to be $ 40,000 per GWh and that the wholesale price of power stays at $ 35,000 per GWh, the policy presents the renewable sector with a windfall worth more than $ 2.6 billion annually from 2020.
The big losers — apart from energyintensive manufacturers, who will bear a third of the subsidy burden — will be gas suppliers and the generators using their fuel. They stand to lose 40 per cent of the prize to more expensive, but non- emitting, fuel sources.
On modelling carried out for APPEA by consultants CRA International, the big winners will be developers of wind farms, who stand to pick up almost half the renewable sector’s extra power sales flowing from the effects of emissions trading plus the new MRET.
CRA says pursuing the enlarged MRET rather than sticking to a ‘‘ pure’’ emissions trading scheme will cost the economy $ 1.5 billion a year and put up power prices by another six percent.
APPEA chief executive Belinda Robinson argues that achieving greenhouse gas abatement at the least cost should be the central plank of government policy — and this can be best pursued through a well- designed emissions trading scheme, with the renewables sector being supported by measures to accelerate development of new technologies, not subsidies for existing ones like wind power.
The Clean Energy Council responds that the enlarged MRET needs to be in place by the beginning of 2009 to drive along renewable project development. Australia needs the MRET as well as technology innovation support to take full advantage of the renewable resources available, it argues. CEC and the environmental movement would like to see the MRET subsidy indexed to inflation to provide an ongoing incentive at the current level.
Options: Policy should be for cheapest cost, argues Belinda Robinson