Gas cartel a clear and present danger to every government

The AFR is upset about the death of the NEG:

Labor will take the National Energy Guarantee or something similar to the next federal election as business and industry clamoured for certainty and new data showed power prices had jumped since the NEG was scrapped.

It is understandable that markets would bid up electricity futures given the uncertainty. But note that this was within a rising trend that was underway while the NEG was in fulsome discussion so it can hardly be to blame.

The real driver is, as usual, overlooked. Power futures have been rising because gas prices have been rising all year following China’s plunge into Asian gas markets over the northern winter.

The Australian notes the implications:

East coast domestic gas markets are likely to remain tight next year and spark political intervention as gas production runs below the most recent official forecasts, consultant EnergyQuest says.

The report comes as gas producers prepare to meet with Federal Resources Minister Matt Canavan tomorrow to discuss the state of east coast gas markets and the flow of gas from Queensland’s big export operations to southern domestic markets.

In EnergyQuest’s September quarter report, widely accepted as the most detailed regular report on the Australian oil and gas sector, managing director Graeme Bethune cast further doubt on the Australian Energy Market Operator’s surprise May report that domestic gas markets should be well supplied through the next decade.

Pull the lever he should. But that is only temporary relief. The lesson here for pollies is as clear as it is ignored: the eastern gas cartel is now a clear and present danger to every elected government. The top priority of any and every newly elected government must be to break it before it breaks them.

History tells us so. Energy policy hurt Kevin Rudd. It toppled Julia Gillard, damaged Tony Abbott and, as the power shock arrived in earnest, it destroyed Malcolm Turnbull. So long as energy shocks ripple through gas and electricity markets every government is at risk of being pulled down by angry households and industry already struggling with weak income.

Australia had an excellent long term plan for decarbonisation. It was to let low-emissions gas replace coal base load while renewable storage prices caught down in prices. The only thing that went wrong with it is that it was every other country’s plan as well. As demand projections for Asian gas consumption soared before and after the GFC, a bubble of investment formed in QLD where three LNG plants were built. The cheap gas that was supposed to decarbonise Australia was literally siphoned off under our noses to Asia. The local gas price was attached to Asian prices even though we’re a producer not consumer. Gas sets the marginal cost of electricity in the National Electricity Market (NEM) and so here we are with an endless rolling power price shock to boot.

This problem cannot be fixed by LNG imports. That will make it worse because they are, by definition, the same as the Asian price.

It cannot be fixed (though could be capped) by more local east coast production. All of the cheap gas is in the hands of the cartel.

East/west pipe lines would likely help but rely on WA domestic reservation to keep prices down and there is no saying that it would hold under such pressure.

The only solution that definitely works is permanent east coast gas reservation, with a fixed price and quotas if necessary. This may seem draconian but there is no gas market left to break. We would simply be forcing the private gas oligopoly to not charge us at discriminatory prices.

If it is not done then rolling energy shocks will topple eastern and national governments for decades to come.