LNG: renewable energy's best friend
On Wednesday Climate Spectator hosted a webinar on the implications of LNG for eastern Australia's electricity market, delivered by Ross Gawler and Richard Lewis, energy market analysts from SKM-MMA. What they had to say was quite incredible in terms of the likely future of the National Electricity Market, but also the WA market.
To put it simply, if the International Energy Agency's middle of the range forecast for oil prices is right, according to Gawler, we'll step right past gas and onto renewables as the replacement for coal. Longer-term he sees that coal might remain part of the mix as our controllable power supply source, provided we can manage to get carbon capture and storage to work economically.
Gas will not be the white knight “transition” fuel that leads us into a clean energy future. Instead it remains as the bridesmaid of Australian electricity generation, playing a support role for peaking power, and balancing out variation in wind and solar output.
The reason why is due to the emergence of gas liquefaction plants in Gladstone, Queensland. These provide the potential to export gas to Asia where prices are tied to the oil price, and this will ultimately drive Australian gas prices too.
According to Lewis and Gawler, at an oil price of about $120 per barrel – which is what the IEA forecasts in its latest World Energy Outlook – gas producers would require $10 per gigajoule (GJ) from Australian buyers, otherwise they'd be better off exporting it overseas.
At such a gas price, even without support from the renewable energy target, wind starts to look like a better, less risky bet than gas – costs are equivalent and it has no carbon price exposure. And further out in the 2020s, other sources of renewables might also play into the mix if they can deliver on cost reduction expectations.
The economics and policy driving the shape of the NEM are now in an incredible state of flux. Over the next five to 10 years we find ourselves in a complete investor no man's land, due to Abbott's blood oath to rescind carbon pricing, and the emergence of LNG pushing-up gas prices.
Based on the current carbon price outlooks and expectations for gas prices, coal stands out as the best bet for new power generation. But if we were serious about addressing climate change it shouldn't, and everyone in the power sector knows this.
At the same time, would you be willing to sink a half a billion dollars into a baseload gas-fired power plant? Such a plant could end up out of the money as early as the mid-2020s, due to a combination of a high gas price, dropping costs of renewables and a half serious carbon price.
In many respects we should probably thank our lucky stars that a major drop-off in energy demand, in combination with the RET, means we have little need to build new baseload fossil fuel plant until after 2020. This should save investors from sinking money into power plants that they might live to regret later. Or most likely, lobby like hell to keep alive by forestalling any serious attempt by government to contain carbon emissions.
It also suggests that the renewable energy sector should be joining with the gas industry to loudly cheer the Energy White Paper rebuff of a call for a domestic gas reservation policy, that would act to subsidise gas prices.