Power Up: Safeguard Mechanism likely to bite, but it ain’t the end of the world

There’s little doubt that the deal struck between the Greens and Labor to pass the changes to the Safeguard Mechanism is likely to make life interesting – to say the least – for fossil fuel companies trying to get new projects over the line.

As part of the deal ensuring the Greens’ support needed to pass the legislation, which is an instrumental part of the Government’s pledge to reduce carbon emissions by 43% by 2030, the changes include a hard cap on emissions and a freeze on issuing carbon offsets associated with the controversial “Human Induced Regeneration” methodology.

The changes are likely to make it that much harder for the 116 new coal and gas projects in the pipeline to secure approvals with Greens leader Adam Bandt saying that half of them would no longer proceed while the others would have a fight on their hands.

New gas fields will be required to have “zero reservoir carbon” while companies looking to develop tight gas in the Northern Territories’ Beetaloo Basin will be required to offset their Scope 1 emissions.

Gas players operating in the Beetaloo are already feeling the pinch with shares in Tamboran Resources (ASX:TBN) losing more than 19.5% of their value over the past week, prompting the company to declare that it was already targeting net zero Scope 1 and Scope 2 emissions from the start of commercial production.

Unsurprisingly, oil and gas lobby group the Australian Petroleum Production & Exploration Association (APPEA) was quick to criticise the changes saying it would make meeting Australia’s climate change targets harder and most too costly to meet, sticking to its oft repeated stand that gas supported the transition away from coal.

However, Woodside’s giant Scarborough LNG project is expected to clear the new restrictions with Western Australian Premier Mark McGowan saying that it would not be affected barring legal challenges.

This is due to advice that its direct emissions are currently offset.

Coal companies such as Whitehaven, New Hope, Bowen Coking Coal and Peabody Australia have also voiced their concerns that the Safeguard Mechanism changes will impact their operations and – allegedly – make it harder and more expensive to reduce emissions.

The real impact on power?

So just how will the changes impact on Australian fossil fuel projects and our country’s power sector?

There is little doubt that for some projects, the changes will be just too onerous for them to be viable and we will see them fall by the wayside, though there is reason to believe that many of these wouldn’t have made it anyway.

Despite this, it is likely that some projects – and gas more so than coal – will manage to cross the line due to a combination of factors such as low CO2 content, access to offsets, and – ironically enough – the use of renewable energy and storage to power pumps, site equipment, etc.

This essentially favours projects which already have a lower CO2 footprint in the first place, while those with higher emissions will have to do considerably more to offset the extra CO2.

Grattan Institute energy analyst Tony Wood believes this is unlikely to result in any significant impact on power prices, telling the ABC that most affected projects are export oriented.

Small scale projects – again mostly gas – could also slip past given that the mechanism only applies to projects that emit 100,000t or more of CO2 each year.

Taken together, even smaller projects could help alleviate the expected gas shortages on the east coast, which will in turn serve to cap power prices.