Why Aren’t We Talking the Nuclear Option?

Wednesday, 15 September 2020
Melbourne, Australia
By Greg Canavan

 

Yesterday, the federal government announced its ‘Gas Recovery Plan’.

It’s an attempt to lower the cost of energy for businesses and households, and promote a post-COVID recovery for the Aussie economy.

Sounds good in theory, but like most government attempts to ‘improve things’, it’s going to have many unintended consequences.

From the government’s press release yesterday:

Gas will help re‑establish a strong economy as part of the Government’s JobMaker plan, making energy affordable for families and businesses and supporting jobs as part of Australia’s recovery from the COVID-19 recession.

Prime Minister Scott Morrison said the Government would reset the east coast gas market and create a more competitive and transparent Australian Gas Hub by unlocking gas supply, delivering an efficient pipeline and transportation market, and empowering gas customers.

The Government will get more gas into the market by:

  • Setting new gas supply targets with states and territories and enforce potential “use-it or lose-it” requirements on gas licenses
  • Unlocking five key gas basins starting with the Beetaloo Basin in the NT and the North Bowen and Galilee Basin in Queensland, at a cost of $28.3 million for the plans
  • Avoiding any supply shortfall in the gas market with new agreements with the three east coast LNG exporters that will also strengthen price commitments
  • Supporting CSIRO’s Gas Industry Social and Environmental Research Alliance with $13.7 million.
  • Exploring options for a prospective gas reservation scheme to ensure Australian gas users get the energy they need at a reasonable price’.

The announcement certainly put a rocket under the share prices of some of the smaller gas companies yesterday. One of the stocks in my Crisis & Opportunity portfolio soared nearly 30% on the news.  

A few of the gas stocks in the Australian Small-Cap Investigator portfolio jumped 6% and 8%. Not bad for a day’s work.

While on the surface the government’s aim seems pretty bland — increase gas supply to get prices down — it’s actually a continuation of Australia’s long running transition from fossil fuels to renewable energy.

Ever since the 2007 election, when Kevin Rudd defeated John Howard in part due to climate change; politics, energy policy and climate change have been inextricably linked. It has led to numerous changes of governments, confused and ineffective policy, and a divided electorate.

This is just the latest round.

In recent weeks, Woody and I have been writing to you about Australia’s ‘new energy’ future. Whether you agree with the politics of climate change or not, Australia’s energy infrastructure IS changing.

The electricity grid was built for a country with abundant reserves of coal. But the last coal-fired power station on the east coast was built in Queensland in 2007. That was 13 years ago. And let’s face it; it’s highly unlikely another one will be built, despite coal’s low cost and reliability in terms of generating base load electricity.

But it’s political poison.

No one will want to commit to an investment in the age of climate change and always moving goal posts on energy policy.

And given the government’s statement on gas yesterday, and other announcements, it suggests the age of coal is over.

For example, Morrison also threatened to intervene in the energy market by building a gas-fired power station in the Hunter Valley if the private sector didn’t make investments to replace the 1,000MW of power that will exit the grid with the closure of the Liddell coal-fired power station in NSW in April 2023. 

In other words, gas is the new coal. In addition, the government wants gas to be Australia’s transition energy while we continue to shift to renewables.

As John Durie writes in The Australian today:

The federal government is playing a game of bluff with big energy, but the not so hidden message behind the gas plan is an admission that the future is renewables and gas is simply a transition mechanism.

Scott Morrison didn’t shout this from the rooftops, but that is the reality, with the government accepting the baseload power will be renewables.

AGL and EnergyAustralia are both talking about new east coast gas plants, the former due for final decision early next year and the latter by year’s end, but the Prime Minister is sick of the talk and, if neither is committed by April next year, he will get Paul Broad from Snowy Mountains Hydro to build it.

The reason why the two companies have talked about the plan but are yet to commit is because they can’t see the investment case and the 2024 futures price at $58 a megawatt hour suggests one is not mandatory. But the government’s case is based on figures from Danny Price at Frontier Economics, who says on the simple law of supply and demand, when Liddell goes the price increases to $80.

Clearly, the government wants to avoid an energy price spike due to the removal of a large chunk of supply in the years ahead.

But is holding a gun to the industry’s head the way to do it?

It never usually is.

But the problem with energy policy, as we transition to an increasing amount of solar and wind powered electricity, is that the future economics of gas are unknowable.

For example, renewable projects need to be ‘firmed’, to enable a regular output from an intermittent power source like solar or wind. Right now, gas is the most economic way to provide this back up power.

But as technology (battery storage) and more hydro sources come online in the future, gas will potentially lose its economic advantage. Then what? An investment made today could look a lot different in 10 years’ time.

No wonder the private sector is uncertain about committing hundreds of millions of dollars to these large-scale projects.

All this makes me wonder why we’re not seriously discussing nuclear energy. Australia has abundant uranium reserves. Nuclear energy is zero emission energy. It provides reliable base load power. Yes it’s expensive to build the plants, but they last for decades.

How many wind and solar farms will need to be rebuilt/replaced during the life cycle of a nuclear power plant?

It’s a question for another day. But one we’ll continue to explore as we track Australia’s transition to a low carbon economy.

Cheers,
Greg