Home / In transition to renewable energy: back Elon Musk

Comment by Patrick Liddy*

The last few weeks have witnessed an interesting debate on energy reliability in Australia, although this debate is also happening around the world. It has exposed the inconvenient facts around renewables, regulation and market failure. And provided us with a bit of political entertainment in the process.

It has also brought into the argument some very interesting personalities – Malcolm Turnbull, Jay Weatherill, Josh Frydenberg and Elon Musk (Iron Man). Now I’m siding with Elon Musk, not just because he founded Tesla, has his own space agency or is the inspiration for the comic ‘hero’ Iron Man, but for the fact he invented the first robot personal assistant.

It is worthwhile to delve into the nuances and bring into play some macroeconomic facts that in both the short and long run will impact all the other variables, and in particular the prices that we pay for energy. Some of these facts are:

1. Less than 5 per cent of all gas and oil reserves have been exploited. So there are huge volumes coming on line and these ‘swing’ producers have had and will continue to have a large impact on the prices we will pay – especially in the medium and long run.
2. The US is set to become a dominant exporter of fossil fuels at a much lower price than Australian producers, especially given the recent activity by local provider Santos. This will impact on us and the investors into Australian producers.
3. Renewables, although still only generating 7 per cent of the world’s electricity, are now the fastest growing energy source and their falling costs are making them competitive with fossil fuels. What’s more they have negligible or zero running costs.
4. Governments around the world have supported renewable energy on a market that was designed for a completely different era and economic circumstances. Thus at peak times there are shortages and government intervention will be required. And that’s exactly what is happening in South Australia and the rationale behind the Prime Minister’s Snowy Mountain battery scheme.
5. Power markets in Australia and around the world are not designed to reflect flexibility in supply and demand – fix this and fix the problem.
6. Accordingly, if we want energy certainty and the majority of us do, there needs to be a short-to-medium fix involving batteries, gas fired plants and slower decommissioning of coal plants.

South Australia’s laudable market intervention is to build a liquid natural gas-fired plant to guarantee their peak needs. They are also looking to couple renewable energy sources to batteries. Both these options are intended match supply and demand by bringing extra supply on line when it is required. One of the recent issues driving the popular press has been both the supply and the cost of LNG. Especially given Santos’ decision to ‘back-end supply’.

However, there are a number of other factors that are likely to affect the dynamics of the Asia-Pacific LNG market in the medium term. US LNG supply is expected to increase considerably as technological advancements and a period of high energy prices have led to a dramatic increase in assessments of recoverable resources of natural gas and oil from unconventional sources. This has spurred a rapid surge in unconventional natural gas and oil production, which is expected to result in US natural gas production exceeding domestic consumption by 2017.

Since the scale of natural gas reserves became apparent, US producers have commenced construction of four projects which are expected to gradually ramp up production between 2016 and 2020.

The rise in US natural gas and oil supply has a number of implications for the Asia-Pacific LNG market. Oil prices (and hence LNG prices) have declined sharply over the past year, and additional supply from US unconventional production has been cited as a key factor.

Additionally, these developments mean that the United States could potentially become the world’s largest LNG exporter, adding considerably to market supply. Moreover, US exports of LNG based on Henry Hub pricing will substantially reduce the costs of LNG for Asian importers and diversify their energy mix, while providing flexibility for customers. Major US advantages in LNG include:

1. US Natural Gas has been and always will be priced lower than oil, therefore an oil-linked price will be inherently more expensive
2. Capex requirements 50-70 per cent lower for equivalent gasification capacity
3. existing markets and infrastructure already in place due to existing robust petrochemical export industry
4. relatively close proximity of natural gas fields to ports which can accommodate LNG facilities
5. lower capex costs for the production of additional natural gas to meet demand
6. robust national-level futures market in natural gas makes it highly liquid, and
7. US LNG can be shipped to Europe as easily as Asia, thus mitigating the risks of being single-market dependent.

Concerns about Australian LNG include:

1. Dependent on high oil prices for profitability
2. dependent on voracious and growing demand for LNG in Asia, particularly China and Japan
3. already high Capex exacerbated by cost overruns on existing projects
4. natural gas fields are remote and lack infrastructure for quick increases in capacity, and
5. national commodity market in natural gas still in its nascent stages.

All this simply means that the market failure for energy in Australia, and the world in general, has happened as we are unable to manage the transition to greener solutions properly. Governments have been forced to step in with gas-fired generating stations. The price of gas is moving up in the short term. However, the US is coming on stream in a big way and will disrupt the world market, and also Santos’s plans. This is the same as they did to other market players in the oil industry.

*Patrick Liddy is principal of consultancy MSI Group.