Decarbonising, Natural Gas and the Australian Economy. Where are we, how did we get here and what is a way forward?
Josh Stabler graduated with first class honours as a computer engineer from the University of Queensland and has worked in energy all of his life. He has been a spot trader in the electricity market and was involved in the commissioning and operational control of the 517MW Braemar 1 Gas Turbine. He has also been market operations manager for gas and coal fired power stations in Queensland, NSW and South Australia. He has been with integrated energy advisory firm, Energy Edge, since 2013 and has been Managing Director for 9 years. His Gas Market Analysis Tool is relied upon by 80% of the market participants from every aspect of the sector. His firm also generates a regular Gas Market Report, assists potential acquisitions with due diligence and has a Trading Capability Development tool. Tuesday Dialogues would like to thank Josh for a very interesting and enlightening presentation, evidenced by the fact that no one wanted him to stop.
Overview
We are told we have abundant energy but in the same breath are told we suffer from gas shortages. We suffer huge increases in our energy prices. Our switch to renewable energy demands a way to provide energy when the sun does not shine and the wind does not blow. Josh canvassed the role of gas in this transition to a carbon free energy system, some of the challenges we face with our gas supply and alternative energy systems.
Key Points Made
Transition to Renewables
In recent years we have seen a huge reduction in emissions. Last year renewables were 39% of energy used in the market in the East Coast grid and this was primarily as a result of Mum and Dad solar panels on the roof.
The underlying electricity demand has one of its peaks at midday and fortunately this is the time of most supply of renewable energy. In fact in the middle of the day there is an issue of too much supply. Last year renewables provided more than 100% of the electricity demand in the middle of the day. Additionally, on the weekends, we will have a huge amount of excess capacity.
We have the situation that when we use coal fired generators the consumer will get charged whereas using renewables the consumer will get paid. If you get paid for producing electricity and this costs you nothing, there will be negative pricing.
There needs to be incentives to encourage the use of renewables, a carrot/stick approach.
Coal fired power stations have the problem that they must operate every hour of the day. If a coal fired power station trips off it costs a large amount of money to restart.
As coal power stations need to keep operating, in the middle of the day there is a problem as to who will produce the power, coal or renewables. This competition has meant that, as it is more expensive, coal is leaving the market.
Every one of the “top 20 countries” has increased their use of renewable energy substantially.
China has increased its capacity for all energy sources, renewable, nuclear and coal. It has built 50% of the world’s renewables and 100% of the world’s coal power stations. Their carbon emissions have however declined as they have built so many renewables.
The need for baseload
Every night the sun sets and solar exits but there is another peak demand between 6pm and 8pm.
Current solutions to providing back up power –
Storage - hydro, but we have seen the problems of Snowy 2.0.
Storage – battery, with these you can use your own energy at night, but the capacity of batteries is limited, 2-4 hours is OK but current batteries can’t do days or weeks. To build sufficient storage to deal with the capacity needed would take huge amounts of money. Additionally, in winter you will often be in an energy deficit position (wind does not blow, sun does not shine enough) emphasising the need for some form of storage.
Coal is the most economic answer to fill this deficit but power stations are getting older, coming offline, and are not good for emissions.
Gas, but how do we find and deliver it.
The role of gas
It was suggested the best answer to provide this baseload energy is gas.
However, gas has scarcity pricing so when it is dark, cold and there is a wind drought, the price can go from $50-$100 per MWH to $17,000 per MWH as it did in one situation in the last few years. There is a wind drought in the first part of winter and mid-winter is dark and cold. Of course if this large price increase became a regular event it is anticipated that new power stations would be built to take advantage of this high price and this in turn would reduce the price of electricity, a feed back mechanism.
Gas is mostly underground in aquifers. We do not have enough supply of this.
The other problem with gas is that it comes out of the ground in what is called “flat supply” but our own use peaks, producing varying energy needs at different times. For example there is a large difference in the need for gas in winter and summer, you need 2½ times more gas in winter than you do in summer, so you need to buy gas in summer and sell it in winter.
Gas also suffers from the tyranny of distance. Wallumbilla is in Western Queensland and Moomba is in Northern South Australia. These pipelines not only supply Queensland they also supply the Southern States. They produce excess gas but how do you move it? The pipelines built some time ago are too small, need to be upgraded and so more pipelines need to be built but this is hard. The only way to deliver enough gas is to deliver it early and put it into storage but once the storage is full no further movement of the gas to where it is needed is possible. So you need to predict how much you will need.
It is a big problem to predict how much you will need, how much you buy and sell. Last winter was not a cold winter so not much was required. You rely on BOM weather predictions to purchase and sell only the amount you need but these predictions are very difficult to get right and in fact can often be remarkably wrong.
Victoria had enough reserves to supply 68.7% of the Southern market from Longford, but in 8 years time Longford will supply zero gas as these reserves are depleting. This prediction is accurate as how much is in the ground can be very closely determined by geologists. The market will be more reliant on the Queensland hub but as mentioned the pipelines are too small.
What can be done:
Find more production, find a different production facility, Moomba tried to find more production but every hole they drilled was of lower quality. With this new gas we had a 10x increase in price and a 10x reduction in the gas produced. The conclusion is that no new gas that we know of is coming on line.
Import offshore gas? Firstly, the gas that comes in has to be the right sort of gas. We have a system that is heavily methane so we need imported gas that is high in methane. Offshore gas can be gas that comes from another country or gas that comes from another part of our own country, eg Western Australia. Essentially it is gas that is put on a boat. The longer the boat is at sea the more the methane content decreases. Secondly boats that move interstate from one Australian port to another (generally) need to operate under a general licence which means that they must be an Australian registered ship operated by a totally Australian crew. We no longer have Australian boats so have to use foreign boats. These boats need to go to (eg) Singapore before they then can come back to an Australian port. If we only need them 3x per year it is not worth it to invest in this mode of transport. Thirdly once you buy from the international market it is not about the volume you are purchasing but about the price. You no longer have a price competitive advantage. Fourthly, we need to remember that if you import gas it is another barrier to encouraging people to move away from gas and to electrify.
Build more pipelines. This solution is difficult and expensive and the need has to be there. Noone will build if they believe gas will be phased out. You will only build into a market that wants it. It is also expensive to build pipelines as they are not used all of the time. As mentioned, gas usage peaks, usage is not flat all the time.
Substitution, with what? Burn wood as we did 2000 years ago?
What if we reduce export of gas? We still don’t get any more gas out of the ground. 85% of LNG production goes overseas and LNG is 15% of our own gas utilisation. LNG is becoming more of our market. History has shown that intervention always has unintended consequences. Egypt, for example, subsidised its use heavily, making it so cheap that now, despite having an incredible amount of sunshine it is very low in solar. They have made gas so cheap with their subsidies that it is uneconomic for any producers to move into the solar market. This is now a problem for Egypt as their reserves of gas ran out and now they are forced to import, costing the government large amounts of money.
Gas is our third biggest export, iron ore being number one.
By transitioning to electricity you can save 50% of gas usage. The gas price is going up so it is becoming more economic to electrify. Moving away from gas does reduce emissions, somewhere around 25%, but the change is not as significant as moving away from coal, which brought a large decrease in emissions. You do however remove winter capacity if you no longer use gas. Victoria’s gas usage in summer is around 25% but in winter the gas usage is around 100%.
It is impossible to get off gas completely as it is needed for some processes, chemical reactions and processes that require high temperatures, eg making bricks.
If mortgages were allowed to include the electrification of a home it would hasten the transition to electricity and benefit householders as their energy bills would be less. This would benefit the mortgagor as the householder would have more capacity to repay the mortgage.
Question was raised about the Narrabri gas project which is to deliver gas to NSW. There is so much green tape/red tape, it was supposed to achieve 500petaJ by 2025 but it is still zero and is still 5 years away. It has been five years away for years! The community was not engaged with the well at Narrabri as they were in Roma, communication was not as well managed, with the result that farmers in Narrabri are scared that the gas extraction will cause a problem with their water supply. Because of fear of legal issues, Santos refused to categorically deny that there would be a problem, even though the problem is unlikely to occur.
If we push people to convert to using gas as a backup will there be enough? When the consumption is flat it is fine but with peaking there could be a problem. There was a wind drought last year, necessitating an increase in non-renewable energy production, said to be a 1 in a 1000 year event, but in fact these events seem to happen every four years.
Better gas storage is needed but intervention policies such as price caps remove the market signal to build more gas storage. Instead of the cap operating as a price cap, the prices after intervention simply narrowed towards the cap so many operators in fact increased their price, resulting in an overall increase in price. Every turbine has made more money since the price cap was introduced. Intervention does this everywhere in the world.
South Australia is leading the world in looking at the gas requirement to keep its 3000 MW system running. It regularly produces 200% of its needs so it sends the excess to other places but there are times when gas backup is needed. Four years ago 240MW of gas was needed, then 180, then 60. Noted that South Australia’s system is still connected to Victoria’s electricity generation system. The question was raised as to the problem South Australia had recently with the outage in its electricity supply. This was in fact due to the weather taking out transmission lines. Obviously it would be better to put the transmission lines underground but the cost is prohibitive.
There is a moratorium in Victoria on certain types of gas exploration, fracking and coal seam gas exploration. Victoria uses and explores offshore conventional gas.
Some of the gas explorations are not yet online and the concern is that once they are ready to come online they may no longer be needed. This is a disincentive to investment.
We are currently in a position where we are consuming our future supplies.
Discussion re other means of supplying energy
We cannot reach net zero through solar panels alone. (There is a difference between net zero and absolute zero.) 50% of oil is petrol and 50% is diesel. These are used for manufacturing, farming and agriculture.
How do you reduce the emissions from coal generators. There are three types of carbon capture and storage systems (CCS). These require a lot of energy to process.
CO2 is injected into underground rock, into an existing oil well where it is used to force out the remaining oil and then is left underground.
CO2 is put through a power station where it is extracted.
Direct air capture, CO2 is 400 parts per million of the atmosphere.
A question was asked about the potential role of nuclear.
In the 70s 80s and 90s there was an energy boom in the OECD countries and many power stations were built. Then from 2000 – 2020 there was an efficiency boom. With not as much energy needed there was no longer the need for this number of coal and nuclear energy plants. In the US 50% of the power stations are more than 40 years old. In ten years 80% will be more than 40 years old. The life of a nuclear power station is around 60 years. Coal stations, having a shorter life span are also reaching the end of their lives.
Does nuclear solve any problems. They are inflexible in their use, they have no emissions, they can provide base load power, they are expensive though cheaper than coal but not cheaper than solar and wind. They operate 24 hours per day so compete with renewables in the middle of the day.
Nuclear has a use in countries where there is little sun and where there is not much wind.
The question was raised whether green hydrogen could replace gas. The response was that it was both expensive and inefficient.
Reference was made to generating power from nuclear fusion, in particular an article from the New York Times, but these systems are largely experimental.
Most turbines are dual fuel, eg oil/gas. Coal turbines use oil just to start up.
Other solutions for baseload in Australia?
The Wivenhoe power station for Queensland.
The storage capacity that is found in electric vehicles. However with regard to electric vehicles it was noted that, in order to plan, it is easy to ask a small number of large corporates ie those delivering energy, what is the situation re their capacity for delivering power, but it is almost impossible to ask and coordinate a large number of EV owners.
Solutions that work for Australia do not work for other countries. 42 degrees South passes through Hobart but many countries and huge numbers of the world’s population are above 42 degrees North where the sun does not always shine and the wind does not always blow.
Thinking out of the box
The issue of the large amount of energy that will be needed by data centres and AI was raised. The solution could be to look at the time differences in different parts of the world. For example when it is 8pm and dark in California with little renewable energy being supplied, it is the middle of the day and sunny in Australia with abundant renewable energy. The need for data manipulation which did not require instant response could be transferred to Australia, in the same way as when US radiologists are asleep in the middle of the night the expertise of Australian radiologists is used to read X-rays. We need to shift the demand rather than the supply.
The point was made that the idea of a power line using renewable energy as its source, from Darwin to Singapore is crazy as Darwin and Singapore are in the same time zone.
We also need to rethink the way we build batteries. Batteries to store our power do not have to be light, cool, long lasting, in the same way as lithium batteries need to be in iphones. Different purposes need different characteristics. The primary factor is that they need to be cheap.
We need to rethink how we operate. We need to build assets that have demand in the middle of the day.
Other
The electricity market was introduced in 1998. Prior to this we had state based tariffs. The total cost of supplying the electricity was worked out and then a margin was applied.
In fact the margin for electricity supply is very low in some instances, in the retail market it is 0-1%, for coal it is 0%, and for the gas market it is 10% margin. The money is made in the distribution and transmission infrastructure and it is this that has gone up in price. The operator is supposed to have control over this but in fact what they do is simply ask the people who own the transmission lines what their costs are and pay them the cost plus a margin.
In Queensland we get about 4 hours from our home battery. We don’t get a tariff benefit from having a battery so there is no price signal or incentive to buy this capacity.
We are not allowed to be off grid in Queensland.
There will be a difficult transition ahead of us particularly, as once an energy provider realises it will not be needed in the future, it shuts down and reduces or stops investment.