I was interviewed by Luke Grant at Radio 2GB/4BC, where I broke down the immense failure of the East Coast energy market, especially pertaining to gas.
Below is an outline of the themes discussed.
The federal government made the dire mistake of approving export gas terminals out of Gladstone more than a decade ago without the requirement for any domestic reservation.
East Coast Australia became the only gas-exporting region in the world without a domestic gas reservation mechanism.
A new report from the Institute for Energy Economics & Financial Analysis (IEEFA) explains how this fateful decision not to impose domestic reservation has driven up gas prices and harmed consumers.
The IEEFA shows that while gas production across Australia has doubled over the past decade, the volume going to the domestic market decreased.
East Coast domestic gas use actually declined by 25% over the decade at the same time as production levels doubled.
Thus, LNG exports accounted for more than the increase in gas production over the past decade.
As a result, East Coast gas prices have tripled since the start of LNG exports.
Part of the reason for the fall in domestic demand use is because of ‘demand destruction’. High prices have curbed demand and also caused many heavy gas users, like manufacturers, to close down.
Indeed, the IEEFA report explicitly noted that the higher gas prices have caused the closure of major manufacturers, including Incitec Pivot and Qenos.
To add further insult to injury, Australian LNG exporters have continued to export gas beyond that required to meet their long-term contracts. They have chosen to sell gas into the spot market rather than domestically. (Spot markets facilitate quick sales of LNG cargoes, without the need to negotiate long-term contracts, at prevailing spot market prices).
Across Australia, the LNG industry accounts for about 80% of total gas consumption. LNG plants alone are a larger user of gas than any other domestic user.
The IEEFA report recommends directing some export gas into the domestic market to alleviate supply issues and save manufacturing.
“By redirecting this gas for domestic use, Australia has an opportunity to resolve the east coast supply issue with minimal impact on LNG exporters, thereby ensuring we retain gas-intensive manufacturing jobs and skills until commercially viable alternatives are available”.
The report warns that simply expanding supply won’t make a difference unless gas is reserved for domestic use.
Indeed, as noted above, East Coast gas production doubled over the past decade, but the amount supplied into the domestic market shrank by 25%.
Having abundant and affordable gas is vital to ensure the future of Australia’s manufacturing sector, to shore up electricity supply (given gas’s vital peaking role), alleviate cost of living, and reduce inflation.
If Australia has expensive gas, it will also have expensive electricity.
Australia is the second-largest gas producer in the world. Therefore, it should have a cheap and reliable supply.
Through policy failure, we have expensive and unreliable energy.
