Two of the primary destroyers of the Australian energy markets are Tony Wood and the Grattan Institute.
Wood is a former gas executive at Origin Energy and a Grattan Institute energy analyst. Origin also sponsors the Grattan Institute.
This marvel of industry capture achieved the mass destruction of the National Electricity Market (NEM) with a straightforward policy recommendation in 2013:
“With more than $160 billion forecast to be invested in LNG production, the export industry is good for the economy. Governments should therefore resist self-interested calls from some industries to reserve gas or cap prices for the domestic market”.
“One reason that reserving gas is a bad idea is that there is no shortage of gas. The challenge is to ensure that the gas gets delivered to where it is required, and this means commercial buyers and sellers need to reach commercial terms on new arrangements”.
“Capping prices for the domestic gas market is a very bad idea. It amounts to a tax on producers and a subsidy for domestic gas users. Protectionism of this sort may provide some short-term price relief for targeted industries, but it tends to mean inefficient businesses and less investment”.
“Ultimately it leads to higher prices and damages the economy for us all”.
The rest is history. The average local gas price skyrocketed 400% to $12Gj because a gas export cartel dominated local reserves and set any price it liked at home. Electricity prices followed because gas-fired power sets the marginal cost in the NEM.
This mistake completely wrecked the energy transition because it priced out gas. Without gas, you have nothing to act as low-carbon firming power for renewables while coal exits and storage is built.
If Australia’s East Coast had domestic gas reservation holding the local price at $5Gj, today we would have the cheapest and smoothest energy transition in the world (exactly like WA has).
Instead, we have total market failure in both gas and electricity. Spaghetti bowl regulation. Slowing investment. Hollowed out industry. And such frequent gas-driven energy price shocks that inflation has been embedded in the economy.
Today, Tony Wood and the dystopian Grattan Institute return with a new report that appears solely designed to obscure its 2013 catastrophic blunder behind 45 pages of gobbledegook.
Australia’s electricity system is changing rapidly as coal-fired power stations close and new renewable ones come online. Australia must successfully navigate through this ‘coal closure era’ to be well-positioned for a prosperous future.
But there is mounting evidence that the National Electricity Market (the NEM) may not be able to deliver enough investment in low-emissions generation, storage, and transmission, when and where it will be needed.
Ministers have lost faith in the market’s capacity to do this, consumers are unhappy with high power prices, and industry players are increasingly wary about investing because they have been buffeted by frequent and unpredictable government interventions in the market.
Governments and industry now face the task of encouraging investment in decentralised, intermittent sources of generation and integrating these into the NEM, in a context of demand that is flat now but likely to rise later, and ageing, unreliable coal generators. Signs are that this is not going well.
Safety margins have been eroded, the market operator is using emergency reserves and backup tools more often, coal plants are suffering more frequent outages, and ministers are responding with greater urgency and concern by directly intervening in the market.
No shit, Sherlock. So what do we need, then?
The Climate Change Authority will advise the government on a 2035 emissions reduction target and sector pathways towards that target. As part of the government’s economy-wide Net Zero Plan, the federaldepartment is also developing a net zero plan for the electricity and energy sector.
The closure of coal should clear the way for coordination and alignment of federal and state emissions reduction targets and policies, without diminishing the policy responsibilities of the jurisdictions.
The sector plan should include a clear and enduring forward carbon signal to guide energy sector investment decisions, especially gas plant entries and exits. This is important because gas can be a low-cost way of achieving resource adequacy in a net-zero electricity system. The Climate Change Authority should advise on the form of this carbon signal, and whether it should be economy-wide or sector-specific, but it is the federal government’s responsibility to adopt the policy and coordinate implementation with the states and territories.
By crikey, we need gas! Hoocoodanode?
However, let’s say for a moment that a carbon price did achieve more gas-fired power. What would that mean? Because there is neither gas reservation nor price controls for spot market gas that feeds into the electricity market, reliance on gas power would increase the influence of the gas cartel over the grid, and energy price averages (and shocks) would commensurately increase.
Along with Origin Energy profits.
Is that really the public policy answer we are looking for?
Thankfully, this is only theoretical. The sheer idiocy of the idea will spare us from this new Tony Wood disaster. Nobody in politics will revive the carbon price, and nobody will build new gas-fired power stations because there is no security of gas supply.
Which brings us to the trillion-dollar question begged by this vacuous report. Why is there no gas security of supply?
Tones at the Gratts has the answer:
Measuring and rewarding progress in the form of the ‘renewable electricity share’ does not allow for the role of gas as a transitional, dispatchable technology. By only giving renewables a source of revenue outside the wholesale market, the Large-scale RET (LRET) makes gas as uncompetitive as coal, despite it being lower emitting. This is a problem because gas could play a crucial role in providing the last 10 per cent of generation to unlock greater use of renewables.
It’s the RET that done it! The RET stalled investment in gas-fired power from 2012!
Except it’s not the RET. It’s the big pink bars on the following chart that show three-quarters of East Coast gas being sucked offshore by Origin Energy and its mates via QLD LNG plants from 2014:
There is no gas security of supply because Origin Energy and its cartel mates – Tony Wood’s old employer and Grattan Institute sponsor – overbuilt LNG export capacity, knowing full well that it would enable them to gouge the local market via artificial supply tightness.
So tight that nobody dares build a gas-fired generator of any kind.
To sum up, this new report by Tony Wood and the Grattan Institute recommends that a giant raw prawn run the energy grid to cover their previous disastrous policy blunders.
The real answer is as simple as it would be painful for Grattan sponsors. Do what WA does.
Reserve 15% of East Coast gas exports now. Break the export contracts if needed and focus on China, which resells as much imported gas as we need to keep.
If the cartel won’t play ball, break it as well, using the ‘lose it or lose it laws’ and asset expropriation placed in a national gas company.
Sponsor that, Tony.
