Winner – Best News Website or Mobile Service | Asian Digital Media Awards 2019

All bets are off in the race to replace Australia’s coal

It’s gas versus renewables in a two-horse race to replace coal-fired generation in Australia. While many commentators are betting on the former, research from carbon and clean energy analytics firm RepuTex indicates that although natural gas is viewed as a key transition fuel for the Australian energy market, its future is far from secure.

RepuTex’s latest Research Insight, Will Gas or Renewables Usurp King Coal forecasts the impact of rising gas prices and the introduction of the Australian Carbon Price Mechanism (CPM) on the shape of Australia’s National Electricity Market (NEM) through to 2020. It examines the question of which fuel sources are likely to benefit most in the move away from coal generation.

The future of gas generation in Australia will be determined largely by gas prices and the carbon price beyond 2015. Although gas will continue to play a key role, it is not a clear-cut winner.  In a best case scenario, gas generation across the NEM could increase from 10 per cent to just over 30 per cent - however the growth of export markets from 2014 and the expected increase in gas price levels may mute that win.

The rapid growth of new LNG export markets from 2014 is set to link gas prices in Australia with those internationally, leading to a spike in the domestic gas price. Any price rise is likely to counter the intended effect of the carbon price, which would otherwise be favourable to the sector given its lower emissions intensity relative to coal.

In order to better understand the possibilities, RepuTex worked with Standard & Poor’s Ratings to explore three gas and carbon price scenarios to show the likely effect on the fuel mix of the NEM.

Crucially, only one scenario predicts a surge in gas generation. A static gas price combined with a high carbon price would drive a rapid rise from today’s 11 per cent of total NEM fuel mix to around 31 per cent by 2020.The other two scenarios, both of which forecast higher gas pricing, paint a more mixed picture.

In both instances, gas still gains market share, but mostly at the expense of highly polluting brown coal. Using a higher carbon price, lower carbon-intensive black coal use does decline, but by less than 3 per cent; and gas’ share rises to just over 20 per cent by 2020.

With higher gas prices anticipated, the price of carbon unsurprisingly becomes the crucial factor determining the future of gas. With a fixed carbon price until 2015, new base load gas generators will have to wait for price levels high enough to spur investment. Moreover, the government’s 80 per cent carbon abatement target is only presently in play until 2050. That provides a narrow window for investors to see returns on the enormous capital required to build new power plants.

So what does this mean for renewables?

Weak wholesale prices and the surplus of renewable energy certificates (RECs) have hindered recent investment in renewables. Installed wind capacity needs to increase by between 4,750MW to 5,000MW to reach the ’20 per cent by 2020’ target set by the Australian government. If wholesale electricity prices and REC prices remain low, retailers may prefer to simply pay the legislative penalties for not meeting their 20 per cent renewable obligations instead of investing in renewable technologies that could attract large capital costs.

Power generation from renewable sources may well fall short of the government’s mandatory target of 20 per cent by 2020. However, renewable energy is likely to attract heavy investment in technology and research and development, which will drive significant advancements in its ability to provide base load capacity.

So, the prospects of gas as a transition fuel are not clear-cut. In the near term, the gas price increase will offset the impact of the carbon price, meaning that the pressure to meet carbon emission targets would hinge on renewables – and more specifically the potential improvement of renewable technology. Should this occur, we may see renewable generation racing ahead of gas sooner rather than later.

Hugh Grossman is the Hong Kong-based executive director of carbon analytics firm RepuTex.

Thanks for reading to the end of this story!

We would be grateful if you would consider joining as a member of The EB Circle. This helps to keep our stories and resources free for all, and it also supports independent journalism dedicated to sustainable development. For a small donation of S$60 a year, your help would make such a big difference.

Find out more and join The EB Circle

blog comments powered by Disqus

Most popular

View all news

Industry Spotlight

View all

Feature Series

View all
Asia Pacific's Hub For Collaboration On Sustainable Development
An Eco-Business initiative
The SDG Co