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Energy Insights

The Gas Paradox: Australia's Export Boom Amidst Domestic Shortages

The Paradox of Plenty

Australia is a country with abundant natural gas reserves. In fact, they are the world’s largest exporter of liquefied natural gas (LNG). Despite this, the country is struggling with domestic gas shortages and rising prices. This paradoxical situation is often referred to as the “Gas Paradox.” It is a result of Australia’s export-oriented gas policy, which led to significant portion of its gas being shipped overseas.

The liquefaction and export of natural gas were made possible by the liberalisation of the country’s gas industry in the 1990s and technological advancements. As a result, Australia's gas prices started to follow those of the international market, where prices are higher. Due to this change, Australians now often pay more for their gas than customers from other countries.

Key Insights: Navigating the Gas Labyrinth

  • Australia is the world's largest exporter of LNG. However, domestic consumers and businesses, particularly on the east coast, are grappling with high gas prices.
  • The high cost of gas is impacting manufacturers and contributing to higher electricity prices, affecting households and businesses alike.
  • The gas paradox is also undermining Australia's efforts to transition to a low-carbon economy. This is because the high price of gas makes it less attractive as a 'transition fuel'.
  • There is ongoing debate about whether Australia should implement a gas reservation policy on the east coast, similar to the one in Western Australia.
  • The Australian government has so far resisted calls for a gas reservation policy. They're opting instead for measures aimed at increasing transparency and competition in the gas market.

The Impact on Domestic Consumers and Businesses

This paradox has significant domestic ramifications. Due to the skyrocketing price of petroleum, Australian companies and people are feeling the pressure. The impact of the crisis is particularly felt by manufacturers. For instance, the cost of gas has increased by up to four times for Steritech, a firm that sterilizes medical devices. Consumers will unavoidably pay more because of this cost increase. This will then also raise the cost of health insurance and raise overall healthcare spending.

The nation's electricity market is affected by the gas problem as well. Since gas sets pricing in the National Electricity Market, rising gas prices have also raised the cost of power. The fact that certain gas power plants can't generate gas for less than $500 per megawatt-hour, which is much more expensive than the previous wholesale price of electricity, which was approximately $80 MWh, makes the issue even worse.

Seeking Solutions

Government involvement has been called for in response to the gas paradox. Critics argue that the government needs to implement export restrictions or price limitations on east coast gas, similar to the Western Australian policy that mandates businesses to reserve 15% of gas for local consumption. Others support a windfall profits tax, which would eliminate the incentive for LNG companies to sell all of their extra gas at inflated rates to Australian consumers while exporting it all overseas.

The industry, however, disputes the necessity for a reservation policy or pricing restrictions, claiming there is no supply issue. They think the answer lies in continuing investments that will increase the market's supply of gas.

The complicated issue of the gas paradox calls for a careful balancing act between retaining Australia's status as a top LNG exporter and guaranteeing domestic energy security. The government's answer will be essential in determining how Australia's gas sector develops in the future. More importantly, how it affects businesses and consumers at home.

The Impact on Domestic Consumers and Businesses

The effects of the gas paradox go beyond the purely abstract realms of international trade and energy policy. The lives and livelihoods of Australians are impacted directly on the ground by them. The cost of the high gas prices is mostly being carried by domestic consumers and companies, notably those on the east coast.

Manufacturers, whose operations rely significantly on gas, are feeling the pinch. Businesses that sterilize medical equipment, like Steritech, are now paying up to four times as much for gas as they did previously. This cost rise is more than simply a balance sheet item. It has practical ramifications, raising the price of medical operations and eventually increasing Australians' health insurance rates.

The electricity market is also impacted by the rising gas costs. More often than any other energy source, gas determines the price of electricity in the National Electricity Market (NEM). The wholesale cost of electricity also increases in tandem with the price of gas. A significant rise from the prior average wholesale price of about $80 per megawatt-hour has left some gas power plants unable to provide energy for less than $500 per megawatt-hour. Both homes and companies are affected by this price increase, which raises power costs.

The economy is not the only thing that's suffering from the gas paradox. Australia's efforts to transition to a low-carbon economy are also being undermined by it. Gas is frequently promoted as a "transition fuel" that can make the switch from coal to renewable energy sources easier. The high cost of gas, though, is making it less desirable as a coal alternative and might impede Australia's progress toward its climate targets.

The Search for Solutions and the Future of Australia's Gas Policy

The gas paradox has triggered a fierce debate about the future of Australia's energy policy. The issue of whether or not the East Coast should be covered by a gas reservation policy similar to Western Australia's is central to this debate.

In order to ensure a stable supply for both consumers and businesses in West Australia, the country's model reserves some of the gas that is exported into domestic use. The policy has been successful in keeping gas prices relatively low within the State, even if it exports a large volume of LNG.

In particular, the advocates of such a policy on the East Coast argue that it would be in the national interest for consumers and enterprises to have sufficient and affordable supplies of gas. The difference in gas prices on the eastern and western coasts, they argue, is an indication of possible benefits from this policy.

Opponents of the idea, however, caution that it would discourage investment in new gas projects. They argue that it might reduce production and exacerbate the supply issue. They contend that there should be no interference from the government in the market.

For the time being, the Australian government has rejected requests for an east coast gas reserve strategy. Instead, they chose a number of measures targeted at enhancing market transparency for gas and fostering more supplier competition. These measures include Australian Domestic Gas Security Mechanism (ADGSM). ADGSM provides the government the authority to limit LNG exports in the event of a domestic supply shortage.

Conclusion

The gas paradox is a challenging issue with no simple answers. It serves as a harsh reminder of the difficulties Australia must overcome as it attempts to preserve energy affordability and security while navigating the shift to a low-carbon economy. It is hoped that as the discussion progresses, a fair and long-term solution to gas policy will emerge, one that is in the best interests of all Australians.

To keep up with the latest on gas pricing, check out our monthly Energy Market Wraps.

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