Australia / Coronavirus Insights
Gas-Fired Recovery Plan Heats Up the Energy Market

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by IBISWorld
Sep 23 2020

The Federal Government has announced a stunning intervention in the National Electricity Market this month, by championing natural gas as the fuel for an economic rebound from the COVID-19 outbreak. Several significant policy interventions have been announced across the energy supply chain, with major ramifications for operators in the Oil and Gas Extraction, Electricity Retailing, and Fossil Fuel Electricity Generation industries. These policies are purported to lower gas prices across the Eastern seaboard, assisting homes, businesses and a range of manufacturing industries that use the resource as a feedstock.

Funding ultimatum

Chief among the new policies is an ultimatum to major players in the Electricity Retailing industry. The Morrison Government has called upon the private sector to deliver 1,000 megawatts of new dispatchable electricity generation by April 2021. Dispatchable capacity can be activated quickly to meet demand during peak periods, and may take the form of battery storage, pumped-hydroelectric dams or gas-fired peaking plants.

If the market fails to deliver 1,000 megawatts, the government will intervene through the publicly-owned Snowy Hydro Corporation, funding the construction of a new gas-fired power station in New South Wales’ Hunter Valley. In Australia, one megawatt of capacity can typically be used to power close to 400 homes.

According to the government, 1,000 megawatts of generation capacity is required to replace AGL’s Liddell coal-fired power station, which is set to close in early 2023. However, the Australian Energy Market Operator, which oversees the national energy market, has released forecasts stating only 154 megawatts of new capacity in New South Wales will be required to replace Liddell. The New South Wales Government has already allocated funding for 170 megawatts of new capacity, including a gas-battery hybrid, two large-scale lithium batteries and a virtual power plant. The virtual power plant will use small-scale battery storage installed across a large number of households. The combined capacity of each battery will be deployed to the market to increase supply during peak periods.

The funding ultimatum from the Federal Government is expected to have a damaging effect on private investment in energy infrastructure. Several upheavals of Australia’s energy and climate policies over the past decade, such as the defunct National Energy Guarantee proposed by the Turnbull Government, have lowered private sector confidence in future regulatory outlooks. Confidence in regulation stability is vital to spur private sector investment into energy infrastructure, which generates returns on investment over a span of decades. Despite this uncertainty, technological advancement and improving efficiency have supported a rapid expansion in wind and solar investment. Revenue in the Solar Electricity Generation and Wind and Other Electricity Generation industries has grown at an annualised 42.3% and 6.6% respectively over the five years through 2020-21.

Market reforms to support gas buyers

The Federal Government has also unveiled a range of policy initiatives to lower gas prices. Energy costs have become a major threat to manufacturers over the past five years, as gas prices have risen by 76% over the four years through June 2020.

Plans have been commissioned to pursue new gas basin developments, focusing on the Beetaloo Basin in the Northern Territory, and the North Bowen and Galilee Basin in Queensland. The Federal Government has also announced plans to set new gas supply targets with the state and territory governments, providing significant assistance to the Oil and Gas Extraction industry. However, sufficient supply of gas has not been the key factor influencing domestic prices over the past five years. Notably, domestic gas markets only accounted for 24.7% of revenue in the Oil and Gas Extraction industry in 2019-20, whereas gas export markets accounted for 59.4% of revenue.

Rather, the main driver of gas prices has been supply chain bottlenecks in the Gas Supply industry, where gaining access to pipeline capacity has proved difficult for some players. A 2018 review of the Pipeline Transport industry by the ACCC found that access to pipeline capacity appears to be a barrier to entry for gas producers in Queensland that seek to supply to the southern states. Several key pipelines have little spare capacity, making it difficult to negotiate access for smaller firms.

To rectify this problem, the government has announced a National Gas Infrastructure Plan to identify new projects in the Pipeline Transport industry. In addition, new reforms to the pipeline capacity market are likely to improve competitive pressure and transparency, rectifying market failures identified in the ACCC review.

The government is also considering the imposition of export limits for operators in the Liquefied Natural Gas Production industry, ensuring sufficient supply for domestic operators. Similar regulation already exists in Western Australia, and has successfully ensured affordable gas prices for domestic manufacturers.

Viability of gas

A major question mark hangs over the government's gas-fired recovery plan, being how gas investment in 2020 can align with the accelerating global push towards addressing and stopping climate change. The government’s latest push for natural gas may conflict with market forces. Suncorp, a major player in the General Insurance industry, pledged in August to stop insuring and investing in oil and gas projects by 2025, and cease investing directly in fossil fuels by 2040. BP, a global heavyweight in the oil and gas market, released modelling this month that suggests global gas consumption may decline rapidly in line with the pursuit of a net-zero emissions target.

Other energy sources, such as hydrogen, may serve as better investment choices for the Australian economy over the long-term. The New South Wales Government is pursuing large-scale hydrogen production as part of recovery plans from the COVID-19 economic crisis, with approval for its first hydrogen project finalized in August 2020.

IBISWorld company reports used to develop this release:

IBISWorld reports used to develop this release:

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