For retailers and pipeline businesses, this is a concern. Higher prices, particularly in NSW where the penetration of gas is relatively low, could push the gas sector into a cycle of lower demand and higher network charges.
EnergyQuest’s assessment of future gas demand suggests domestic consumption will decline across a number of key sectors over the next 20 years (see Chart 1).
The beleaguered manufacturing sector has been suffering under the weight of global economic conditions for decades, and an unavoidable adjustment will reduce demand from this sector over time. That we know.
Gas demand for power generation is also likely to be subdued. Once earmarked as a key transitional technology on the path to Australia’s low emissions future, state of the art gas-fired generation is currently suffering under the weight of a multitude of factors.
Demand for electricity is low, government policy is pushing renewables into an already oversupplied market and low wholesale prices don’t actually reflect the true cost of supply (see Chart 2).
Throw in high gas prices and gas-fired generation quickly slides down the merit order, largely confined to playing a balancing role in the market. The Australian Energy Market Operator’s (AEMO) latest modelling for the east coast market suggests gas demand for power generation could fall by 16.8 per cent per annum over the 2014-19 period.3
Residential consumption could take a hit as well. Rising gas prices will continue to put pressure on residential gas consumption, with AEMO forecasting limited growth of around 1.1 per cent per annum to 2019.4
For those consumers with different heating and cooling options, the decision to persist with gas is largely a flick of the switch depending on price relativities. While this will have a more immediate impact on residential usage, the biggest change in consumption patterns is likely to come further down the track. As the efficiency of electric appliances continues to improve, a gradual transition away from gas appliances is not out of the question.
How these dynamics play out on the east coast remains to be seen. But let’s be clear, market intervention to force domestic outcomes is not the answer. The key to balancing export and domestic growth on the east coast is resource development.
Unfortunately for consumers, we seem to be chasing our tails in this space.
Despite work underway at a national level to reduce regulatory burden (e.g. implementing a “˜one-stop-shop’ for environmental approvals), for a number of reasons it’s difficult to see real progress.
Resource development in NSW continues to be stymied by political uncertainty and overly restrictive planning laws and regulatory frameworks. Victoria has maintained its restrictions on exploration for coal seam gas. And in a bizarre move, Tasmania recently decided to extend a ban on fracking despite an independent report failing to identify any actual risks.
For NSW in particular, it’s the high level of public misinformation that is causing most of the delay. Anti-gas activists pretend development presents an either/or proposition between drilling and the environment. That’s not the case. Gas development can – in Australia and around the world – happily co-exist with agricultural, residential and other land uses.
The upshot here is that developers see less risk in exploring for unconfirmed resources in the Northern Territory than trying to develop gas we’ve already found in NSW. This is unprecedented in the oil and gas industry. And for a state with close to 20 years’ worth of relatively low cost indigenous supply, this is a very poor outcome.
At its core, Australia’s environmental planning and regulatory framework for resource development has numerous overlapping, excessive and inconsistent requirements that cause unnecessary project delays and costs. It serves as an excellent example of a regulatory framework that would benefit from being evaluated using the Commonwealth Government’s recent “˜Ten principles for Australian Government policy makers’.
Overcoming this will require governments at all levels to establish environmental and planning processes that appropriately balance the social, environmental and economic costs and benefits of resource development.
Regulations should be based on sound scientific principles and assessment, maintain high environmental and safety standards and provide regulatory certainty and consistency across all jurisdictions. Above all, they should provide a stable and predictable regulatory foundation for the development of gas resources.
Achieving this will ensure the east coast market is well placed to adjust to the new market paradigm. It will also keep opportunities alive for Australia to exploit its resource potential globally.
But gas fields take years to develop.
If we are to have any chance of boosting domestic supply and keeping a lid on prices in the immediate future, this rationalisation of planning and regulatory frameworks must take shape now.