This article first appeared in The Conversation.
Gas users and the incoming government describe Australia’s sudden east coast energy crisis as a “horrific” and a “perfect storm”.
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There is no doubt that a rare combination of international and domestic events, along with long-term policy shortcomings, has led to a very bad situation from which there is no easy way out.
Four events led to an immediate crisis.
1. Coal-fired generators malfunction
First, outages at coal-fired power plants have resulted in more gas being recalled than usual.
More than a quarter of coal-fired plants are out of order for much of the year so far, which is far from normal.
The system is designed so that when this happens, gas generators take their place.
2. Australia is running out of gas
Secondly, the Australian Energy Market operator (AEMO) has warned of gas supply shortfalls in the southeast for some time as conventional gas resources are declining, particularly in offshore Victoria.
Onshore gas development in Victoria has been prevented by succession of state government decisions, and input stations have either been rejected on environmental grounds or delayed due to financial barriers.
In 2012, the Gillard government rejected the idea of keeping a certain percentage for domestic consumption, as is happening in Western Australia.
Victoria’s history of cheap and abundant gas has made Victorian families and businesses more dependent on gas than other Australians, and there has been no major move toward electrification.
3. Europe wants non-Russian gas
Third, in their desperation to reduce their dependence on Russian gas via pipelines, European countries have pushed the international price of liquefied natural gas to its highest levels, buying from countries such as Australia, Qatar and the United States.
Some Australian exporters received prices four times higher than normal.
4. Suddenly, there is a cold wave
Finally, a cold snap on the east coast of Australia has led to higher demand for gas for winter heating.
The immediate effect of the combination of these four events was the looming shortage of gas on the East Coast, including gas to supply power stations.
Industrial gas consumers who are not protected by a fixed contract face potentially devastating prices.
Fortunately, there is no immediate impact on prices for households using gas, as retailers have gas supply contracts, although many households suffer from higher electricity prices because gas-fired power stations had to be paid into service to replace the stations. coal-fired.
AEMO took action, in part by imposing a wholesale price cap of $40 per gigajoule ahead of expectations, that the spot rate in Victoria was set to rise to $382.
He used “shadow price” to indicate what would have happened had it not been for the cap, which hit $800 on Tuesday.
AEMO has launched a so-called Gas Supply Assurance Mechanism to secure gas for power generators.
These measures have worked, even though the $40 per gigajoule price is causing financial paralysis for large industrial consumers, and AEMO cannot magically obtain nonexistent gas.
But there is no answer overnight
Chris Bowen, the new Minister for Climate Change and Energy, is already working closely with AEMO, state, territory and industry counterparts for complete information and advice.
But as Treasury Secretary Jim Chalmers said on Tuesday, there is no answer overnight.
The Turnbull government introduced the Australian Domestic Gas Security Mechanism in 2017 in response to concerns that LNG exports from Queensland might one day lead to domestic shortages.
She was also concerned that gas producers were selling gas abroad at lower prices than they were asking at home. The threat of government intervention ensured overall supply.
But the mechanism is unlikely to be effective in addressing the current problem for two reasons. First, there are physical constraints on getting gas waiting to be exported in Queensland to Victoria where it is needed.
And secondly, to the frustration of many gas customers, the mechanism cannot lower internationally set prices. It only deals with supply.
Fortunately, there are no false promises
The current crisis illustrates the fundamental political relationship between electricity supply, gas markets and climate change.
The decision to immediately convene a meeting of national energy and resources ministers and related agencies is the right first step, but only the beginning of a journey that will include urgent and sustainable reforms to the way Australian markets operate.
The new government has already come to power in the face of a severe storm, and there are more challenges ahead.
Her approach so far has been constructive, thoughtful, and collaborative — and he has resisted the temptation to make promises he can’t keep.
It is hoped that this new approach will enable her to navigate through what will certainly be somewhat calmer in the future.