The Morrison government has landed its first bilateral agreement on energy policy, securing a commitment from the New South Wales government to ramp up its fossil fuel industries in return for chipping in funds to support “emissions reduction” activities as part of a $2 billion funding deal.

The federal and New South Wales governments say they have agreed to contribute funds for investment in new renewable energy projects, in return for expanding the use of both coal and gas throughout the state.

It is already being described as a “climate deal with the devil”, and an effective bribe. It’s a clear signal of the Morrison government’s determination to push the development of Australia’s fossil fuel resources, and it is prepared to use the eagerness of state governments to receive funding for new zero-emissions electricity projects to leverage support for the coal and gas sectors.

In this deal, the NSW state Liberal government has vowed to “remove barriers” to increase the supply of coal to the Mount Piper coal fired power station, which has operated well below its maximum capacity for several months due to supply quality issues from its primary source of coal. This will secure the operation of the Mt Piper station for at least another two decades.

“This plan makes perfect sense to us. It’s a good balance and Mount Piper will be in operation until at least 2042. So we rely on that as a critical energy source,” NSW Premier Gladys Berejiklian said.

Morrison has also secured a commitment to expand gas production in NSW, with the Berejiklian government committing to supply an additional 70 petajoules worth of gas into the east-coast gas market each year, most likely through the controversial and highly contested Narrabri proposal.

This sum of represents around 4.5 per cent of Australia’s annual gas consumption, or just 1.5 per cent of Australia’s annual gas production, once exports are taken into account.

What has New South Wales got out of the deal? The Morrison government says will provide $960 million in funding for “emissions reductions initiatives”, with as much as $510 million of that funding being provided in the form of loans. The NSW will have to more than match that, committing $1.01 billion of its own funds.

While the emissions reduction activities remain unspecified, it is likely to include the development of NSW’s first Renewable Energy Zone, flagged late last year by NSW energy minister Matt Kean, with up to 3,000MW of wind and solar projects to be clustered around the central-west township of Dubbo.

“Our agreement with the Commonwealth today will ensure we continue to strengthen and diversify our energy sector here in New South Wales – securing traditional energy sources whilst growing renewable energy investment across the state,” Berejiklian said on signing the deal.

The announcement also reaffirms the co-investment being made between the Federal and New South Wales governments in new transmission infrastructure, confirming support for the previously announced Queensland-NSW interconnector, as well as HumeLink that has become necessary to deliver the network upgrades necessary to support the Federal government’s investments in Snowy 2.0.

While both of these transmission upgrades are necessary, they are not new commitments and will likely consist of the Federal government “underwriting” transmission network infrastructure investments that will still ultimately be paid for by consumers through electricity bills.

The NSW government will also support the federal government’s investments under the Underwriting New Generation Investments (UNGI) program, which shortlisted three potential projects in the state; an expansion of the Vales Point coal-fired power station, a pumped hydro energy storage project in Armidale and support for establishing a gas import terminal at Port Kembla.

The UNGI program has been developed under federal energy minister Angus Taylor, who was notably absent from today’s announcement, a fact not lost on opposition leader Anthony Albanese.

“His position is untenable, which is why the Prime Minister is embarrassed to have him standing up at announcements,” Albanese said in a press conference following the announcement.

As has been long argued, Australia’s gas market challenges are not due to a shortage of gas. Australian gas production has surged in the last decade, but the “crisis” is the result of the domestic market being deprived of gas as supplies are redirected into export markets.

Morrison has revived the now out-of-date mantra of ‘gas as a transition fuel’ to secure an expansion of New South Wales’ gas industry in return for funding for renewables projects, with calls to support Australia’s gas industry featuring heavily in the prime minister’s speech to the National Press Club earlier in the week.

“I want households and businesses paying less for their electricity and I want to continue to get emissions down – this deal does both,” Morrison said.

“There is no credible plan to lower emissions and keep electricity price down that does not involve the greater use of gas as an important transition fuel.” Yet, as RenewEconomy editor Giles parkinson pointed out on Thursday, there is a credible plan that does not assume greater use of gas. ITK analyst David Leitch agrees.

The bilateral deal completes an about-turn for the Coalition government in their approach to energy policy.

Taylor’s predecessor as energy minister, Josh Frydenberg, demanded that states and territories sign on to the ill-fated National Energy Guarantee, saying that different policies in each state distorted the energy market and that a consistent national policy was crucial.

Now, the Morrison government has signed a bilateral deal with the NSW Berejiklian government, flagging that it will be the first of many deals struck with individual states who are willing to play ball.

“I’d like to see other state governments make similar commitments. I’m happy to work with them to achieve it. We’ve got to get the gas because that’s what gets prices down,” Morrison added.

The assertion that expanding New South Wales’ gas production would lead to lower electricity prices was questioned by energy market experts from the Institute for Energy Economics and Financial Analysis (IEEFA).

“Producing yet more high-cost gas is no panacea to Australia’s problem of high domestic prices in a low-priced gas world currently suffering a supply glut,” IEEFA gas market analyst Bruce Robertson.

“The ACCC has clearly shown that price fixing by gas producers has been occurring over recent years. The cartel of gas producers will ensure prices stay well above international prices.”

The Australian Greens labelled the agreement as a ‘deal with the devil’, saying that a commitment to expand NSW’s gas extraction activities would undermine efforts to reduce greenhouse gas emissions.

“This ‘new deal’ is nothing but a green light to expand coal seam gas and dangerous fracking that threatens NSW’s land and water. Extracting this polluting gas will keep us on the dangerous global heating trajectory, no matter what spin the Prime Minister puts on it,” NSW Greens senator Mehreen Faruqi said.

The agreement was also slammed by the Climate Council’s CEO Amanda McKenzie, who said a deal to increase gas use in Australia would further exacerbate climate change and the effects of bushfires that have already devastated large parts of the state over the summer.

“Every dollar toward fossil fuel projects is a dollar toward making heatwaves worse and fires more damaging. It is just crazy, given everything we have lost this summer to even suggest opening new fossil fuel reserves,” McKenzie said.

“More gas isn’t a climate policy it is a pollution policy. While fires are still threatening lives and properties – why is the Government investing in making the problem worse.”