Australia’s slow-motion energy train wreck

Debate over declining investment is obscuring the political decisions setting up the eastern seaboard for scathing gas shortages – unless urgent action is taken.

Australian energy groups are telling me that Australian industrial demand for electricity in major eastern state capital cities is falling because, outside mining, Australian companies have stopped investing.

The investment decline is being obscured by the current mining investment boom, but even in mining almost all projects that have not started, or are about to start, will now be mothballed .

But these momentous changes, along with the carbon tax debate, are obscuring an alarming longer-term set of developments in the states that should be among our industrial power houses – Queensland and New South Wales.

We are going to look back at the current energy developments Queensland and NSW with horror. Long-term investors in both states need to be on the alert.

In Queensland the past government encouraged investment in power generation and network facilities. Those making the investments expected a return on capital invested.

The current government decided to "reward” them by depressing power prices to make recent power plants like Origin’s Darling Downs giant gas fired power station uneconomic. The Queensland government is also hitting retail margins by freezing prices and brutally attacking Origin, which is alleged to have tried to get around the freeze.

At the moment this is great for Queensland consumers and everyone thinks the premier is a genius. But one way out of the Queensland budgetary mess created by the previous government is to sell Queensland’s power stations. The Queensland government has just savaged their value.

Those who invested in Queensland power, like Origin, took a sovereign risk and lost. It will not be forgotten by all those in the industry. In the end Queensland consumers, including industry, will pay more to attract power investment because of the high perceived sovereign risk.

In NSW gas is very important as a source of domestic and industrial energy. But NSW consumers and industry look headed for a shortage of gas and/or much higher prices before the decade is out. Unless preventative action is taken quickly there will be no escape for the state’s gas users.

The NSW problems start with what is happening in Queensland with the export of coal seam gas via Gladstone LNG plants.

The simple fact is that it was crazy to allow three LNG complexes each with two trains to be built at the same time. Not only did it boost construction costs but the very necessary extraction rules for the gas has meant that there is not enough gas to supply the early years of the export contracts. Only the Origin group appears to have has enough gas. Origin has even sold gas to the Santos consortium. Some of that Origin gas sold to Santos will probably come out of the Cooper basin – gas that might theoretically have gone to NSW. The Santos group is paying around double the NSW domestic price but believes it will still make a profit by exporting the gas via its LNG Gladstone plant.

Santos may also need to tap the Cooper to supply Gladstone.

All this may have been fine had NSW coal seam gas been developed. But thanks to an amazing campaign by Sydney radio talk back broadcaster Alan Jones NSW cannot develop its coal seam gas.

There are many in the gas industry who believe that the environmental problems involved in developing gas so close to a capital city would always make the development impossible.

Leaving that aside, the simple problem is that by about 2017 there are likely to be New South Wales gas shortages unless the coal gas is developed. NSW will have to try and get gas from the Bass Strait or develop Cooper Basin shale gas. These will be high cost options but even if the required gas price is paid decisions need to be made very soon if the gas is to be available.

In other words, New South Wales domestic gas is be priced close to export parity, which is currently around double the domestic price. Even if the price rises to export parity, if no action is taken now there will be shortages.

The concentration on carbon and short-term politics is setting us up for ugly long-term side effects.