Will the Coalition's gas reservation policy equal cheaper electricity? || Insiders On Background

Key Concepts

• East Coast gas reservation
• Gas statement of opportunities
• Net back price
• Marginal cost
• Walla Merah (WMA) reference point
• Gas pipeline capacity
• Wholesale vs. retail gas/electricity costs
• Renewable energy intermittency
• Subsidies and resource costs
• Nuclear energy as baseload power

East Coast Gas Reservation Proposal

• Main Idea: Peter Dutton proposed an East Coast gas reservation policy to lower domestic gas prices. This policy would require gas producers to sell gas at a cheaper price within Australia instead of exporting it all.
• Origin: The idea isn't new; Danny Price wrote about it in 2022. Western Australia has had a gas reservation scheme since 2006.
• Mechanism: The policy aims to ensure Australian consumers get a better deal. Gas producers currently prioritize higher-priced international markets, leaving domestic consumers to pay near export prices.
• Producer Profits: Gas producers are currently making "king's ransom" profits due to high export prices, significantly above their production costs. The policy aims to reduce these "super profits."
• Gas Statement of Opportunity: The modeling was finalized after the release of the Australian Energy Market Operator's (AEMO) updated gas statement of opportunities on March 20th.

How the Gas Reservation Would Work

• Export Impact: The policy is not expected to reduce gas exports; in fact, exports might increase.
• Price Determination: The target domestic price of $10/GJ is based on the marginal cost of the highest-cost gas producer on the East Coast. This price still allows producers a healthy return on investment.
• Regional Price Differences: The $10/GJ price is referenced at the Walla Merah (WMA) hub in southwest Queensland. Transport costs to other regions, like Victoria (approximately $2.50/GJ), are factored into the final price.
• Pipeline Capacity: Concerns about pipeline capacity are addressed by noting that pipeline companies (like APA) have projects ready to increase capacity if needed. The Coalition's policy included $1 billion for pipeline upgrades.

Modeling Results and Impact

• Wholesale Cost Reduction: The policy is projected to result in a 23% average reduction in wholesale gas costs at WMA.
• Industrial Customer Savings: Industrial customers are expected to see a 15% reduction in gas prices due to lower wholesale costs.
• Household Savings: Households with gas connections could see a 7% reduction in gas bills.
• Electricity Price Impact: The modeling also projects an 8% reduction in the wholesale component of electricity prices (which makes up 40% of the bill), leading to a 3% reduction in overall electricity bills.
• Assumptions: The electricity price impact is based on the assumption that "all other things being equal." Factors like coal-fired power plant closures could offset these savings.

Timing and Implementation

• Immediate vs. Gradual Impact: Some customers on new contracts might see price reductions almost immediately. However, most customers will see the benefits over the course of 2025-2026 as existing contracts expire.
• New Sales Only: The policy would only affect new gas sales, not existing long-term contracts.

Industry Concerns and Investment

• Supply Slowdown: Gas producers argue that the policy will reduce their profits and lead to a slowdown in gas supply.
• Investment Spooking: Some companies, like Amplitude Energy, claim the policy will deter investment in new gas projects.
• Counterargument: Danny Price argues that projects relying on short-term high export prices are not economically viable in the long run. The policy aims to encourage lower-cost gas projects.

Renewable Energy and Gas

• Renewable Investment: The gas reservation policy is not expected to negatively impact renewable energy investment.
• Renewable Intermittency: The system is approaching the limit of how much renewable energy it can handle due to intermittency issues.
• Batteries: Government subsidies for household batteries are seen as an expensive solution to stabilize the grid, primarily benefiting wealthier households with solar panels.

Nuclear Energy Discussion

• Net Zero Costs: Achieving net-zero emissions will be costly, regardless of the energy source.
• Nuclear as a Cheaper Option: Danny Price believes nuclear energy could be a cheaper way to achieve net-zero compared to a purely renewable energy system.
• Renewable Limitations: Renewables only operate a third of the time, requiring three times the capacity, storage, and backup, making them more expensive than baseload power sources like nuclear.
• Gas Dependence: A renewable-only system requires gas for backup "forevermore," while nuclear can eventually replace gas entirely.
• Power Prices: While the modeling showed that the costs would be 44% lower with nuclear, it's impossible to know if the bills will be cheaper.

Conclusion

The proposed East Coast gas reservation policy aims to lower domestic gas prices by ensuring Australian consumers benefit from the country's gas resources. While the policy is projected to deliver savings to both industrial and household consumers, concerns remain about its potential impact on gas supply and investment. The discussion also touches on the broader energy landscape, highlighting the challenges of renewable energy intermittency and the potential role of nuclear energy in achieving net-zero emissions at a lower cost.