Report

Gas at the crossroads: Australia’s hard choice

19 Oct 2014
Description

This report argues that huge changes in Australia’s gas market will push up the average household bill in Melbourne by more than $300 a year, and in Sydney and Adelaide by more than $100 a year.

Overview

For some time the price of natural gas has been rising well above the cost of living. As with electricity, rising network prices are the main reason for a 36 per cent increase in average gas bills over the past five years. But in the next few years, huge changes in the gas market will push up prices even more sharply, adding more than $300 a year to the average household gas bill in Melbourne and over $100 a year in Sydney and Adelaide. The increases will mean tough decisions for many households and businesses.

Natural gas is one of Australia’s main sources of energy. We use it to cook, heat water and heat our homes. It is an important fuel source for businesses such as dry cleaners and commercial food processors. Some large industries, such as explosives and fertilisers, use it heavily as a primary material in production. It is also used to produce electricity, and produces fewer CO2 emissions than coal does, while being more affordable than most renewable energy sources. Gas has always been commercially competitive, with heating qualities that most prefer to electricity.

But Australia is about to undergo changes that will have a major impact on how we use gas. Gas producers have been building Liquefied Natural Gas (LNG) facilities, mostly in Queensland, since 2010, and will start exporting as early as this year. By 2018 east coast gas, added to growing Western Australian supplies, could create the world’s biggest gas export industry, worth $60 billion a year. The economic benefits that will flow as a result represent an opportunity too good to miss.

The downside is that domestic gas prices will increase to compete with the higher prices that other countries are prepared to pay for our gas. As a result, many households will reconsider the benefits of gas against electricity. Some will replace gas appliances with electrical ones and won’t return any time soon. Most may just cope with higher prices, because they still prefer gas for cooking or heating, or they aren’t able to justify the immediate cost of switching or they are just confused by the competing choices.

Business gas users may be able to pass costs onto customers, or be forced to consider alternative energy sources. The implications for manufacturing output and jobs in gas-intensive sectors are bad indeed. Electricity produced by gas (gas-fired power) is likely to be priced out of the electricity market, except to meet short-term peaks in demand. A shift away from gas means a shift back to coal. Such a trend is already being seen, and is bad news for the climate. Australia’s 2020 emissions target will be harder to meet.

Many affected groups will demand protection from price increases. Since household users make up a large share of voters, and the gas industry has failed to prepare its customers for the shift to higher prices, the pressure on governments to keep gas cheap is likely to be strong. They should resist it.

Consumers face higher prices, but the economic benefits of the change will be overwhelmingly positive. Governments should avoid poorly designed intervention. Instead, they should remove barriers to a healthy market, and ensure that all Australians share in the value of our gas revolution.

Publication Details
Published year only: 
2014
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