Australia must cut role of gas and end climate war to fix power prices, business group says

Australia needs to resolve the decade-long war on climate and energy policy, and also decrease the role of gas in the electricity system, if Australian households and businesses are to experience durable reductions in their power bills, according to an influential business group.

With the Coalition’s internal brawl on the national energy guarantee bubbling away as the policy reaches its critical stage, the Ai Group has produced a new report on the outlook for energy prices that notes that resolving the current political stoush would “help to ease electricity prices by unblocking investment in new supply and reinvestment in existing assets”.

The same report also notes that the role of gas in the system remains a significant challenge with or without an ultimate resolution of the Neg, and it says power prices will not ease in eastern Australia unless the reliance on gas generators in the system can be reduced.

The new report, to be released on Thursday, says transitioning away from gas is not a straightforward challenge, because gas generators are needed now to meet demand in the system, and they produce energy with considerably less emissions than coal.

It says if there’s an imperative to shift away from gas for price reasons, the main alternative is wind and solar photovoltaic power. “These sources are growing fast in Australia and around the world – much faster than other low-emissions options – because the combination of production scale and learning effects has slashed their costs below alternatives.”

It says the costs of the technologies are likely to fall further and “the combination of falling generation costs with Australia’s exceptionally large and high-quality solar and wind potential raises the possibility of a new global competitive advantage in electricity prices over the long term”.

But it says wind and PV are variable power sources that cannot “on their own” play the role in the system that gas currently plays, so there may be a need to upgrade existing coal plants – an option favoured by some government MPs as the price of entry for supporting the Neg – as well as bringing on more pumped hydro projects, increasing the use of batteries and demand response.

The report concludes that new coal plants “are unlikely to be built given high costs, high emissions and high risks of being stranded, and the extreme controversy and cost to the public purse of the public funding or guarantees needed to ignore these risks”.

Malcolm Turnbull and the energy minister, Josh Frydenberg, are under internal pressure to give coal a taxpayer-funded boost as part of any shift to the Neg, with Queensland Nationals at the forefront of the push – but there is a problem.

Any additional support for coal could imperil an agreement on the Neg from the Labor states and territories in early August.

Any individual jurisdiction can sink the policy because it requires consensus among the participants in the national electricity market to change the rules. The ACT’s climate minister Shane Rattenbury has already warned Frydenberg against providing new support for coal during any transition.

In mapping out recent developments, the new Ai Group report says that, after a spike in wholesale electricity prices in 2017, spot electricity prices have dipped in New South Wales, Queensland and Tasmania, while holding slightly higher in South Australia and Victoria.

It says electricity futures prices will decline significantly over the next two years, and wholesale gas prices have fallen from their extreme peaks, but “both gas and electricity prices remain far above the historical average”.

While the government has pointed to recent power price reductions as proof its interventions in the market are working, the report says business is pessimistic about the power price outlook.

It says once fully passed through, the recent electricity and gas price increases will cost energy users $9.4-$11.7bn per year.

“Households will pay up to an extra $3.4bn a year, and business up to $8.4bn a year,” the report says. “Within business, more energy intensive manufacturers will be particularly hard hit, paying up to $3.9bn a year.”

It says the high power price outlook “will worsen margin pressures for business, with some manufacturers questioning their ongoing viability as a result”.

The government is facing significant political pressure over high energy prices, and Turnbull has moved in recent days to argue the Neg will help lower prices for business and households.

The former prime minister Tony Abbott this week has urged the government to quit the Paris climate agreement as a precursor for dumping the Neg.

The latest Guardian Essential poll suggests voters are not convinced that the government’s national energy guarantee will provide any relief from high power bills. The latest fortnightly survey of 1,030 voters shows only 15% think the Neg will help reduce energy bills, 22% think it will increase them, and 38% believe it will make no difference.