Government’s $600 million gas plant fails on the numbers alone: Analysts

Snowy executives didn't switch on their gas plant even when prices soared.

Snowy executives didn't switch on their gas plant even when prices soared. Photo: TND

A government plan to spend $600 million on a new gas-fired power plant has been labelled an expensive and unnecessary move that flies in the face of emissions reduction targets.

Economists and energy analysts said it could even slug consumers with higher prices given the rapid fall in the cost of renewables.

Energy Minister Angus Taylor confirmed on Wednesday that the Commonwealth will build a 660 megawatt gas power station in New South Wales’ Hunter Valley.

It comes after the Morrison government tried to convince the private sector to build the plant, which it says is needed to fill a purported electricity shortfall left by AGL’s Liddell coal plant closing in 2023.

But the private sector refused to take up the gauntlet and so taxpayers are on the hook instead.

Although the government has claimed the investment will drive down power prices, a wide range of energy, climate and policy experts said the plan fails on the numbers alone.

“This makes no sense to industry, it makes no sense to the Australian Energy Market Operator (AEMO), and it makes no sense to expert commentators from a purely financial and environmental perspective,” ANU professor Kenneth Baldwin told The New Daily.

“This is a high-risk strategy, because in any future low-carbon economy, a premium will be placed on the cost of producing energy using fossil fuels … that may well result in the asset being left high and dry.”

The same day Mr Taylor announced the controversial plan the International Energy Agency (IEA) released a landmark report calling for an end to all fossil fuel investments.

The IEA said pouring new money into dirty power will make it impossible to hit net zero carbon emissions by 2050 – a target the federal government has refused to commit.

Taxpayers on the hook

Under plans unveiled on Wednesday, the government will direct the Commonwealth-owned Snowy Hydro company to build the gas plant.

It means taxpayers will own a new asset valued at $600 million by 2023, even though we’ll soon be writing down millions off that value if returns are bad.

Mr Taylor thinks the government will get a good return.

But an impact assessment about the proposal released last week suggested the peaking plant would only operate about 2 per cent of the time.

“We are committed to replacing the energy generated by Liddell to keep prices down,” Mr Taylor said in a statement on Wednesday.

“We were very clear from the start, we will not stand by and watch prices go up and the lights go off.”

In terms of financial returns, two key factors will determine our new gas plant’s success: Demand for gas power and the competitiveness of gas power plants compared to other technologies through to 2050.

‘If we needed it the private sector would have done it’

The government says there will be plenty of demand for gas power once the Liddell coal plant closes, claiming its exit will create a 1000 megawatt (MW) gap in the energy market.

Mr Taylor says that because it is difficult to ramp up renewables on short notice when demand spikes, we need more gas-fired generation to ensure prices don’t soar (known as peaking power).

But that flies in the face of advice he commissioned last year, which found only 215MW would be needed to compensate for Liddell’s closure because other probable projects would likely be “more than sufficient” to fill most shortfalls.

That’s important because supplying gas as a dispatchable power source won’t yield a good return if the market doesn’t actually need it.

Gas power has been identified as a way to support reliability as most of Australia’s coal plants close over the next two decades.

But Steven Hamilton, chief economist at the Blueprint Institute think tank, said if there was genuine demand for more gas then the private sector would have stepped in and already built the plant.

“Gas has an important role, but that doesn’t mean we need more gas plants,” Mr Hamilton told The New Daily.

“We have enough peaking capacity as it is – the AEMO is quite clear about that.

“We can support a significant increase in renewables, even beyond where it is now.”

Some experts fear the plant could actually increase power prices because gas power is more expensive than renewables.

“Gas is expensive and gas peakers that rarely run need to drive up prices to get a return,” Climate Council spokesperson and energy industry veteran Andrew Stock said in a statement on Wednesday.

“Renewables are the cheaper, smarter choice to meet future energy demand compared to gas, which is expensive, polluting and worsens climate change.”

Wholesale power prices have already been crashing lately thanks to a flood of renewables hitting the market, a trend experts say will continue.

Competition: Batteries set to eat into taxpayer returns

The government also argues new gas generation is needed to step in when the wind isn’t blowing and the sun isn’t shining.

Like coal, gas is known as a firming power, because it is always ready.

But the numbers on using new gas as a firming power over the coming decades don’t stack up – at least not according to the AEMO.

In a report published last year, the AEMO said batteries will be a cheaper way to ensure energy reliability by the 2030s, a fact that will limit the effective lifetime (and expected return) of the new gas plant.

In other words, gas power stations won’t be competitive for very long.

“For [gas-powered generation] to remain a competitive investment as battery costs reduce (to $922/kW by 2030), gas prices need to be as low as $4/GJ in the long run, while charging costs need to remain relatively high at $30/MWh,” the AEMO concluded.

“Even in 2019-20, four-hour batteries would have been able to charge at an average price below $30/MWh in all regions except NSW.”

Gas prices haven’t been $4 a gigajoule (GJ) since 2014-15 and the AEMO said increasingly scarce supply will continue pushing up prices.

The AEMO did say on Wednesday that the Hunter gas plant would contribute during the energy transition, including by assisting with reliability, but stopped short of explicitly supporting the investment.

A step backwards on climate

The biggest risk associated with our new gas plant though is that we’re investing in new fossil fuel generation as the climate crisis worsens.

Although gas power is less carbon-intensive than coal, estimates about the environmental impact of gas are often understated because the production process releases lots of methane, a potent greenhouse gas.

On Wednesday the IEA said developed economies like Australia should be setting more ambitious emissions reductions targets to hit net zero sooner than 2050, which will require stopping new fossil fuel investment.

“Net zero means huge declines in the use of coal, oil and gas,” it said.

“This requires steps such as halting sales of new internal combustion engine passenger cars by 2035, and phasing out all unabated coal and oil power plants by 2040.”

The government has argued the $600 million plant will be built for conversion to hydrogen in the future, which could use renewable energy combined with emerging carbon capture technologies.

But this technology is still in its early days and hasn’t been tested at scale.

“Green hydrogen is a really long way off,” Dr Hamilton said.

“If you compare the cost of hydrogen as a fuel source to gas it’s not even close.

“It’s going to take a long time to bring that price down to a point where it would make sense.”

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