{"id":15154,"date":"2017-09-26T17:35:59","date_gmt":"2017-09-26T07:05:59","guid":{"rendered":"https:\/\/www.solarquotes.com.au\/blog\/?p=15154"},"modified":"2024-01-25T12:14:09","modified_gmt":"2024-01-25T02:44:09","slug":"turnbull-gas-prices","status":"publish","type":"post","link":"https:\/\/www.solarquotes.com.au\/blog\/turnbull-gas-prices\/","title":{"rendered":"Turnbull Twisting Arms Over Natural Gas Is A Zero Sum Game"},"content":{"rendered":"
\"malcolm

Don’t believe the hype. Domestic gas prices have very little effect on retail electricity prices. Someone should tell Turnbull.<\/p><\/div>\n

According to the<\/a>\u00a0mainstream media<\/a>, Prime Minister Malcolm Turnbull has been busy twisting the arms of natural gas producers. He wants Australians to pay less for Australian gas. Specifically he wants us to pay less than overseas customers pay for Australian gas.<\/p>\n

This has upset gas producers because, like most companies, they would prefer to sell stuff for more money rather than less.<\/p>\n

If Turnbull succeeds in cutting domestic gas prices, either through a voluntary agreement or forcing compliance through regulation, it will reduce electricity prices, but not by a lot.\u00a0 They may fall by a couple of cents per kilowatt-hour. But these days prices are so high that’s only about 5% off a typical electricity bill here in Adelaide.<\/p>\n

If it represented a genuine reduction in cost then even a tiny decrease would be better than nothing.\u00a0 But the problem with Turnbull’s approach is there are no real savings for the nation as a whole.\u00a0 It’s not making the country any money, it just redistributing it.\u00a0 It’s a zero sum game that does nothing to address the basic problem that gas powered generators often determine the wholesale price of electricity.\u00a0 By keeping the price of natural gas down, Turnbull’s approach will weaken market forces. \u00a0It will discourage energy efficiency and less renewable generation will be built1<\/a><\/sup>.<\/p>\n

Turnbull has already partially nationalized<\/a> the gas industry by forcing them to supply as much gas for domestic use as they export.\u00a0 Now he’s insisting gas producers lose money on gas sold domestically.\u00a0 I’m not surprised export restrictions were introduced, but I am surprised that the Coalition is now openly acting against the interests of a large resource extraction industry that may soon eclipse the coal export industry in size<\/a>.\u00a0 I don’t know what this means for the future, except that we live in interesting times.<\/p>\n

It’s A Zero Sum Game<\/h2>\n

If Turnbull lowers domestic gas prices, either through persuasion or regulation, then Australians as a whole will benefit from slightly lower electricity prices and gas using industries2<\/a><\/sup> will certainly benefit.\u00a0 But if one gigajoule of gas is sold in Australia for $4 instead of the $7.30 or so it is currently worth in China or Japan, then we miss out on the extra $3.40 we could have got from selling it overseas.\u00a0 So overall, what the country gains in lower domestic gas prices, it loses in lower foreign revenue.<\/p>\n

Lowering the cost of natural gas is more likely to smear the benefits over the whole country than if gas producers are allowed to keep charging high prices in Asia, but it still means wealth is being redistributed rather than created.<\/p>\n

A Gas Shortage Merely Means It’s Expensive<\/h2>\n

The Coalition introduced gas export restrictions in June in order to prevent a gas shortage, but a gas shortage does not mean it is unavailable, it just means it might get really expensive.\u00a0 Since we now produce far more gas than we consume:<\/p>\n

\"Gas

Eastern Australia’s natural gas production has increased over 250% in the past three years. (Image Source: Australian Energy Regulator.)<\/p><\/div>\n

We can’t really run out provided provided we are willing to pay more for it than countries such as China, Japan, and South Korea are.\u00a0 Unfortunately for our wallets, they are willing to pay a lot.\u00a0 Early in 2014 gas was being sold in Asia for over $25 a gigajoule, which is more than three times its current price.\u00a0 It is unlikely to reach that price again, but it is still possible.<\/p>\n

While I am not surprised the Coalition introduced export restrictions, since the cost of electricity is likely to be a major issue in the 2019 Federal election, I have to admit I am not entirely comfortable with gas companies being required to sell at below market prices, even though I’m not especially fond of that bunch of seamy frackers3<\/a><\/sup> that run our gas industry.<\/p>\n

It Won’t Lower Electricity Prices By Much<\/h2>\n

Lowering gas prices should definitely lower electricity prices.\u00a0 But it won’t lower them by much. Currently the price of natural gas is around $7.30 a gigajoule in Asia.\u00a0 But because gas consumed in Australia doesn’t have to be compressed into a liquid and shipped, I’ll use a nice round figure of $74<\/a><\/sup>.\u00a0 Australian natural gas used to cost roughly $3.50 a gigajoule<\/a>.\u00a0 So let’s say Turnbull forces the price down to $4.\u00a0 Even if Australian electricity was entirely produced from gas, which it’s not by a long shot, that 43% decrease would only lower the price of electricity by around 3 cents a kilowatt-hour.<\/p>\n

The reason why is Australia’s gas power stations range in efficiency from 25% at Quarantine Island to 50% at Pelican Point.\u00a0 If the average efficiency of gas generation is assumed to be 33% then it will take 10.8 megajoules of gas to generate one kilowatt-hour of electricity.\u00a0 So a $3 decrease in the cost per gigajoule will reduce the cost of one kilowatt-hour of electricity by 3.2 cents.<\/p>\n

Normally this kind of decrease would be wonderful, but as mentioned, it’s not a real saving and comes at the cost of getting less money from China and other countries.<\/p>\n

In reality a $3 fall in the cost of gas won’t result in a 3.2 cent per kilowatt-hour fall in the cost of electricity.\u00a0 This is because gas only provides around 9% of Australia’s grid electricity.\u00a0 While natural gas punches far above its weight when it comes to setting wholesale electricity prices, it does not entirely control them.<\/p>\n

Why Isn’t Turnbull Attempting To Lower The Price Of Coal?<\/h2>\n

Last financial year 9% of Australia’s electricity was produced from burning natural gas while 77% was produced from burning coal.\u00a0 So you may be wondering why Turnbull isn’t twisting the arms of coal producers to lower the cost of electricity.<\/p>\n

There are three reasons why this isn’t happening:<\/p>\n

    \n
  1. Natural gas has a stronger influence on raising wholesale electricity prices than coal.<\/li>\n
  2. Even if Turnbull somehow managed to halve the domestic cost of coal it would only lower electricity prices by a little over 1 cent a kilowatt-hour.<\/li>\n
  3. The Coalition has a toxic love affair with the coal industry.<\/li>\n<\/ol>\n

    Gas And Hydro Often Determine Electricity Prices<\/h2>\n

    Gas has a big influence on the wholesale price of electricity because, along with hydroelectric power, it is dispatchable<\/a>.\u00a0 This means it can easily be switched on and off as needed.\u00a0 In addition, most gas generators can operate at a small portion of their total capacity without a problem.<\/p>\n

    But coal power is very inflexible.\u00a0 Australia’s ancient coal power stations can usually only operate from 60% to 100% of capacity and their operators are loathe to shut them down because the resulting changes in temperature and pressure causes significant wear and tear that shortens the life of the power station and increases the need for expensive maintenance.\u00a0 Shutting down is so costly coal power stations will often continue producing electricity even when its price is negative.\u00a0 This means they have to pay for each kilowatt-hour they supply to the grid instead of being paid.<\/p>\n

    Because coal power is inflexible its owners often bid in a low price to make sure its electricity will be used, while hoping their low bid won’t be the one that determines the actual wholesale price of electricity.\u00a0 They do this because bids are accepted from the cheapest to most expensive with the highest priced electricity that is used setting the price for all those who bid less.<\/p>\n

    But gas and hydro are flexible which lets them bid in higher prices than coal and sit out periods of low electricity prices.\u00a0 So when other generation can’t meet demand they end up setting the wholesale price.<\/p>\n

    In the case of hydroelectricity, which provided 8.1% of Australia’s grid electricity last financial year, if they bid too high the water remains in the dam and can be used later.\u00a0 As the dam approaches its maximum capacity they will lower their bids and increase generation, but generally hydro charges around the same as gas generation for its electricity.\u00a0 This is because if it tried to charge more, gas would be used instead and eventually the dam would overflow.<\/p>\n

    Gas generators will obviously bid in a price high enough to cover the cost of natural gas they have to burn.\u00a0 But neither gas nor hydro power aim to just cover their costs.\u00a0 Their goal is to charge as much as they can get away with to maximize their profits.<\/p>\n

    Normally competition means that at current gas prices they can’t bid in more than 7 to 10 cents a kilowatt-hour if they want to sell their electricity at all.\u00a0 But when demand is high and there is little spare generating capacity, they can bid in and receive prices of over $10 a kilowatt-hour.\u00a0 Under the rules which our National Electricity Market operates, it is perfectly fair and reasonable for them to do this.<\/p>\n

    So while a 3 cent decline in the average per kilowatt-hour cost of gas will lower the average price both gas and hydro generators bid in, it will have no effect on electricity prices when neither of them set the price, and it will have an insignificant effect when demand is very high and bids go over $1 a kilowatt-hour.<\/p>\n

    The frequency with which gas and hydro set electricity prices varies.\u00a0 In the past coal would often set the price, but with the shutdown of a considerable amount of coal capacity including the permanent closure of the large Hazelwood brown coal power station in Victoria, combined with the Coalition’s doing all it can to slow investment in renewable energy, gas and hydroelectricity are now setting the price of wholesale electricity most of the time.<\/p>\n

    The Fuel Cost Of Coal Is Low<\/h2>\n

    The fuel cost of coal is low, so even if Turnbull forced down its price it would have little effect on electricity prices.\u00a0 In Victoria the cost of stranded brown coal5<\/a><\/sup> is only around 0.3 cents per kilowatt-hour and most of that is royalties to the Victorian government, while in NSW and Queensland the price of black coal is quite high at the moment at $95 a tonne, but that still comes to only around 3.4 cents per kilowatt-hour.\u00a0 Because brown coal is so cheap and coal now supplies less than 77% of grid electricity generation, lowing its price won’t provide much relief.<\/p>\n

    The Coalition’s Toxic Romance With Coal<\/h2>\n

    Strangely enough, the Coalition is still in love with coal.\u00a0 I thought by now they would have seen it has no future and their thoughts on it would be similar to those of rats towards sinking ships.\u00a0 But the Coalition is still calling for new coal power plants to be built.<\/p>\n

    They are so well known for for being head over heels in love with toxic rocks that when I first heard Turnbull wanted to lower the cost of domestic gas I assumed he was doing it to delay the construction of renewable generating capacity in order to benefit the coal industry.\u00a0 But because coal power has been massively benefiting from higher gas prices thanks to increased wholesale electricity prices, Turnbull is actually doing something that is against the interests of the coal industry, despite the fact he was just recently saying he wanted a new coal power station to be built and a crap old one to be kept open.<\/p>\n

    Just to be clear, proposed new coal power stations in Australia are complete fantasy.\u00a0 The Coalition is building castles in the smog.\u00a0 New coal power stations can’t compete on price with renewable energy, banks won’t touch them, Australia’s major power generators say renewables are the future, and with every country in the world that isn’t in the Middle East producing less greenhouse gases per head than we do, building more coal power stations puts us at risk of trade sanctions in the future.<\/p>\n

    Part of the Coalition’s delusions about the future of coal is an attempt to convince other nations to build more coal power stations so there will continue to be an overseas market for Australian coal.\u00a0 But convincing other countries they should do something that kills people so we can make money is not something I think Australia should be doing.\u00a0 I’d even be of this opinion if I thought it would actually work, rather than just make us look like villains from an episode of Captain Planet.<\/p>\n

    Reducing Gas Prices Does Nothing To Reduce Its Influence<\/h2>\n

    To me it seems clear Turnbull’s goal is to get a voluntary concession from the gas industry so he can call it a victory, regardless of the actual effect it has, and boost his chances of winning the next election.\u00a0 Or, more accurately, simply increase his chances of still being Prime Minister when the next election rolls around.<\/p>\n

    The gas industry may try to take the easy way out and offer him a superficial victory that has little real effect on either electricity prices or their bottom line.\u00a0 Alternatively, they may spit the dummy and refuse and hope this weakens the Prime Minister enough for him to be replaced by someone more gaseous who would never harm the interests of a fossil fuel industry, even if it’s one that doesn’t involve digging up coal.<\/p>\n

    But let’s say Turnbull has a clear victory and either extracts a major voluntary concession from gas producers or regulates it into submission and there is a clear reduction in the price of natural gas in Australia.\u00a0 This will do nothing to change the frequency with which natural gas sets the price of wholesale electricity and it will do nothing to reduce the CO2 released from burning natural gas that causes climate change that kills people6<\/a><\/sup>.<\/p>\n

    By keeping the price of natural gas low, Turnbull is blocking market forces from reducing the amount of natural gas Australia uses through\u00a0 improved energy efficiency and the construction of additional renewable generating capacity.<\/p>\n

    Increasing Renewable Capacity Reduces Electricity Prices<\/h2>\n

    Increasing the amount of wind and solar generating capacity will reduce the amount of time that power from gas and hydroelectricity are required, which will reduce the amount of time in which they can set the wholesale electricity price.<\/p>\n

    In addition, while wind and solar capacity cost money to build, they have zero fuel cost.\u00a0 As a result they are willing to accept any price the market offers, no matter how low.\u00a0 This is very effective at putting downward pressure on wholesale electricity prices.<\/p>\n

    Rooftop solar has managed to lower average wholesale cost of electricity during the day throughout Australia, and we can see the effects of wind and solar generation in South Australia when their output is high.\u00a0 South Australia recently had a prolonged period of low wholesale electricity prices thanks to high renewable output when demand was low due to mild spring time weather.\u00a0 On the 17th of this month rooftop solar supplied 48% of all electricity use<\/a> at around 12:30 Adelaide time.<\/p>\n

    Because large industrial users pay electricity prices based on its wholesale price, increasing renewable energy will lower what they pay for electricity, which is something that is apparently very important to politicians.<\/p>\n

    What Turnbull Could Be Doing<\/h2>\n

    Malcolm Turnbull has decided to put his effort into reducing gas prices, and that’s his choice to make.\u00a0 But we should be aware that regardless of how successful he is at achieving this, it will:<\/p>\n

      \n
    • Not create wealth but only redistribute it.<\/li>\n
    • Only have a small effect on electricity prices.<\/li>\n
    • Do nothing to reduce the ability of gas generation to set wholesale electricity prices.<\/li>\n<\/ul>\n

      I would much prefer it if he spent his energies acting to reduce the influence gas has on electricity prices and by expanding renewable generating capacity, but until I perfect my mind control technology, I guess there is nothing I can do about it.<\/p>\n

       <\/p>\n","protected":false},"excerpt":{"rendered":"

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