Gas growth to slow as King Coal reigns in Australia

Research from carbon analytics firm, RepuTex, indicates that the continued operation of Australia’s highest polluting coal-fired power plants will slow natural gas growth in Australia’s electricity markets, resulting in lower profitability for natural gas-fired power generation operators and a slower transition to natural gas generation.

According to RepuTex, the withdrawal of the Australian government’s Contract-for-Closure program, which was intended to pay for the closure of five of Australia’s highest polluting coal-fired power plants by 2020, will result in only 2% growth in natural gas generation between FY2016 and FY 2020, down more than 6% from previous estimates.

Hugh Grossman, RepuTex’s executive director, noted that the removal of the Contract-for-Closure program will restrict a long-term shift from fossil fuel generation in Australia. “The continued availability of cheaper coal-fired generation will slow the uptake of alternative types of low carbon generation such as natural gas, particularly given the sensitivity of gas-fired power generation to fuel input costs and carbon prices”

Grossman said, “Once upon a time, the high carbon floor price and the Contract-for-Closure program was favorable for gas-fired power generation. However, the removal of these two mechanisms, combined with the expected rise in natural gas prices, is now likely to slow growth in gas generation to just 2% over 2016-2020, down from 6% growth should two gigawatts of emissions-intensive generation capacity be removed from the NEM (National Electricity Market).”

According to RepuTex, the removal of the Contract-for-Closure program, combined with the lower carbon price trajectory as a result of the Australian carbon market linkage with the EU ETS, allows for Australian coal-fired generators to keep operating profitably, with lower than anticipated abatement costs.

“As a result of the EU ETS linkage, we forecast the Australian carbon price to trade at an average of A$12 (US$12.48) per tonne of CO2 from FY 2016-2020, well down from Treasury estimates. To force most emissions intensive power generators, including Hazelwood, to close, carbon prices would need to reach between A$70-80 (US$72.80-83.20) per tonne, so over the lifetime of the asset, the lower carbon price will mean significantly lower abatement costs for brown coal operators,” said Grossman.

For the government, the outcome means the avoidance of compensation payments to operators.

Said Grossman, “Cost-effective abatement through the carbon market should see Hazelwood and the other large brown coal generators remain profitable until the end of their project lifetimes. For the government, this represents value for money in terms of least cost abatement but it does not represent a long-term shift from fossil fuel generation to clean energy sources in Australia.”

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