Natural Gas Prices in Australia: What Factors Affect Them? (Video)
Home » Natural Gas Prices in Australia: What Factors Affect Them? (Video)
This video shows the natural gas price in Australia and what factors affect it.
Using a bunsen burner in science experiments has been a key part of the national curriculum in Australia for generations. However, that is now changing. New schools in Victoria will have their gas heating connections switched off, and students will use electric hot plates for experiments instead. The reason for this is not just rising natural gas prices, but also concern about the impact of gas on the environment.
Natural gas prices are a big deal for Australians. In recent years, as prices have sky-rocketed across the east coast, households have seen their energy bills shoot up too. Meanwhile, the government has pledged to spend more taxpayers’ money on gas to boost supply. But will that lower prices?
What is the current price of natural gas?
Homeowners in Australia are usually charged by cents per megajoule (c/MJ) for their gas usage. While the retail price of gas (i.e. your bill) can vary by state, wholesale prices are more evenly distributed. Wholesale prices in eastern Australia were around AUD $4 a gigajoule in 2015 before jumping four-fold to nearly AUD $20 in 2017. By 2020, they fell down to AUD $4 again, before rising to AUD $6 on average in 2021.
Western Australia (WA) has its own gas market regulated by a different entity to the east coast. It sets a price cap for energy companies that they can charge households. Gas bills in WA remained relatively stable until 2008, before rising steadily until 2014. Between 2008 and 2014, the typical household gas bill in WA increased by 69 per cent, before declining somewhat.
It is worth noting that the wholesale price of natural gas is a small portion of its retail price in Australia. Moreover, companies insure themselves against wild swings in prices. This means that household bills are less affected by swings in wholesale prices.
What factors affect the price of natural gas?
The price of natural gas in Australia has fluctuated over the last decade for various reasons. The three main factors are state regulation, exports of gas abroad and shocks to the system. Each factor has affected the price of natural gas in a different way.
1) State regulation
In Australia, states are allowed to regulate their own electricity markets. WA has its own industry watchdog that caps prices and requires local producers to reserve enough gas for local consumers. This has allowed the state to maintain more stable prices over the years. In contrast, natural gas on Australia’s east coast is supplied by different producers who do not face price caps or have to reserve gas for locals. As a result, the price of gas on the east coast has been more volatile.
2) Exports of gas abroad
In recent years, as Australia has started exporting more liquified natural gas (LNG), local consumers on the east coast have faced shortages. This is due to producers exporting more of their gas to more lucrative buyers abroad, rather than selling it domestically. After some state governments placed moratoriums on new gas exploration, the supply of natural gas became further restricted. As a result, prices spiked by 2017. By 2020, the price of natural gas in Australia started falling due to intense price competition, reductions in oil prices and COVID‐19 related demand reductions. In this way, LNG exports have been key drivers of the price of natural gas in Australia. As exports have gone up, so have local prices.
3) Shocks to the system
In late December 2020, natural gas prices spiked due to unexpectedly strong demand in Asia and the falling supply of coal in China. By late February 2021, prices had returned back to levels before the spike. Currently, international exports and domestic demand are the key drivers behind the price changes of natural gas.
Natural gas flaring via Flickr
What is the future of natural gas prices?
In June 2021, Australia’s top natural gas companies came together and offered a rallying cry: we must innovate or die. Industry executives declared that the gas industry should embrace the challenge of climate change and produce ‘green hydrogen’ to survive. That could happen in two ways: by adding hydrogen to gas pipelines or producing ‘green methane’. Either way, the natural gas industry knows that unless it takes climate change seriously, it could end up in trouble like the coal industry.
Gas prices are expected to rise for another reason: falling supply. Gas supply in many existing production wells is running out. Plus, new exploration in remote parts of the country will require a lot of money to develop and transport. That will almost certainly raise the price of natural gas as renewable energy gets even cheaper.
The climate challenge to natural gas
Climate change is thus the key driver of uncertainty around the natural gas industry. The Australian government is eager to replace coal with gas for power generation across the country. But many scientists say that would not significantly cut Australian emissions. Methane is far more dangerous for the climate than carbon dioxide. Moreover, renewable energy has become cheaper than gas in many parts of Australia, especially for large scale power generation.
Demand for gas faces another challenge: a record number of Australians are installing solar panels at home, generating their own electricity. That makes it cheaper for them to install electric-powered appliances, such as induction ovens and heat pumps at home.
The Australian Energy Regulator (AER) recently had this to say in its annual report, “Rooftop solar has dramatically altered the way consumers interact with the market and how the electricity grid functions. Increasingly, we will see households installing their own batteries to store energy, and joining their neighbours in creating virtual power plants.”
Yarra city, a local government area in Victoria, became the first council in the state to pledge to switch buildings to clean energy by 2030. The pledge includes pools and community centres, and it wants the state to ban gas connections in new homes too. Victoria’s Environment Minister says that a shift to electricity was part of their plan to cut gas consumption across the state. The government of Victoria has committed to the long-term goal of net-zero carbon emissions by 2050 with interim targets set every five years.
Similarly, the ACT government plans to end the roll-out of gas infrastructure in new suburbs in Canberra. “Buildings and neighbourhoods that are all-electric are now viable, cost-effective, and have the advantage of being able to use 100% renewable electricity”, said its Minister for Climate Change and Sustainability. “They are a win for consumers and the environment”.
Why is natural gas becoming unpopular in Australia?
A group of eminent Australian scientists recently explained this in a letter.”The combustion of natural gas is now the fastest growing source of carbon dioxide to the atmosphere, the most important greenhouse gas driving climate change. On a decadal time frame, methane is a far more potent greenhouse gas than carbon dioxide”. This claim is backed up by scientists in other parts of the world who say that methane is far more destructive than previously thought.
Scientists say that if Australia wants to cut carbon emissions and play its part in reducing emissions on the global stage, it cannot keep producing and exporting natural gas.