The natural gas price will stay high in all states except Western Australia (WA) forecast the Reserve Bank of Australia (RBA). Gas producers sell the fuel on long-term contracts and wholesale, and prices in both markets will likely remain higher than the pre-2015 level. Therefore, it is doubtful that gas users will ever enjoy domestic prices of AUD $4 per gigajoule again.
The gas industry in Australia is troubled by more than just this high price forecast for the domestic market. Natural gas comes at a huge cost to the climate, causing about 19 per cent of the country’s greenhouse gas (GHG) emissions. The methane emissions from natural gas trap 84 times as much heat as carbon dioxide over 20 years. It is also likely that the Australian natural gas industry releases more methane than it reports.
Why is Australia’s gas price forecast so high?
Long-term contracts keep domestic gas prices high
Different factors influence domestic prices in contract and wholesale gas markets. Large gas users buy gas in long-term contracts, including companies and energy retailers. Therefore, the east coast gas market is largely contract-based. Producers have set higher prices in these contracts since 2015. This is because only unconventional sources of gas remain in eastern states, which are expensive to extract.
Exports and overseas gas demand affect Australian domestic prices
Companies and energy retailers do sometimes buy gas wholesale. They do this on days when they need more gas than is set in their long-term contracts. Wholesale gas prices have been linked to the liquefied natural gas (LNG) export prices since 2015. That is because Australian gas producers have started to sell LNG to other countries to meet the global LNG market demand. In fact, gas producers export almost three-quarters of the gas in eastern states. Therefore, east coast wholesale gas prices have increased sharply since 2015. As long as exports continue, LNG export prices will influence wholesale prices, says the RBA.
Gas prices: West coast vs east coast gas market
Interestingly, LNG export projects have not increased gas prices in WA. Here, the state government enforces a domestic gas reservation policy. This means gas producers must offer 15 per cent of their gas to local users. Therefore, this gas is not linked to international prices. The WA gas industry actually exceeds gas demand, producing more gas than local users need. This will help keep the price low.
There is another reason WA has a lower natural gas price. It still has large amounts of conventional resources. On the other hand, 90 per cent of gas reserves in eastern states are unconventional gas deposits. A common type of unconventional deposit is coal seam gas. Production costs for coal seam gas are about 35 per cent higher than conventional gas.
Australia’s gas supply
Australian federal energy policy is supportive of expanding the gas industry, claiming this gas supply increase will improve the price forecast in Australia. In reality, it is simply not possible for gas producers to provide cheap gas. The production and transport costs are too high.
Lack of competition in the east coast market
Due to these high costs, the federal government subsidises the gas industry. But, this has not brought prices down. Why? Subsidies do not address a major problem in eastern states, says Tim Buckley from the Institute for Energy Economics and Financial Analysis. In terms of gas demand, there is an uncompetitive natural gas market.
The Australian Competition and Consumer Commission (ACCC) has also highlighted this issue. In 2020, weak international demand for LNG did bring prices down in Australia. However, domestic gas prices were still expensive by international standards, says the competition regulator. The ACCC has thus called on gas producers to make the way they set local prices more transparent.
The ACCC has also urged the government to invest in more gas pipeline infrastructure. It believes gas producers should transport gas from northern projects to New South Wales and Victoria. These states have the highest demand for natural gas. The regulator also recommends that the government invests in import terminals.
Such projects would indeed increase gas supply. But again, they would cost gas producers a lot. Therefore, they would not bring prices down. They would, however, drive up climate-heating greenhouse gas emissions.
Demand for gas is down
In eastern states, it is industry that uses the most gas. However, industrial users have said their demand for the fuel is unlikely to increase. This is even the case if prices fall. Industries will likely turn to hydrogen instead.
Eastern states also use gas to create electricity. But, from October to December 2020, gas-fired power generation fell to a 15-year low. This is because the electricity grid mainly uses gas when it needs extra power quickly. Now renewable energy and storage, such as batteries and pumped hydropower, can do this at a better price.
Renewable energy to replace gas
Renewable energy storage batteries can meet this peak demand for electricity as much as 30 per cent cheaper than gas. The good news is this supply will be just as secure as coal and gas-generated electricity. Therefore, the Australian Energy Market Operator predicts that gas consumption in the grid could all but disappear by 2038.
Even in our own homes, we will use less gas. It is already cheaper to heat your house and water with a heat pump system. It is also cheaper to cook with an induction cooktop than gas.
The natural gas price forecast in Australia does not look good. Fortunately, cheap renewable energy will keep our electricity bills low. We should now focus all efforts on a rapid transition to 100 per cent clean energy.