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Gas price surge sends wrecking ball through energy markets

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The relentless surge of gas prices that are bound to occur as Australia ramps up its new LNG export capacity on the eastern seaboard has barely begun, but already it is having a devastating impact on the country’s electricity markets.

Nearly all major generators are winding back or mothballing capacity in gas-fired generation as the rising cost of gas make gas-fired generators more expensive to run. Baseload gas generation – once hailed as the great “transition” fuel from coal to renewables – is now being priced out of the market.

EnergyAustralia last week admitted writing down the value of some of its gas generators. The 435MW Tallawarra baseload plant in the Illawarra – only opened in 2009 – has been written down by $94 million. The 12-year-old, 203MW Hallett peaking plant in South Australia has been written down by $13 million .  As we reported on Friday, the Yallourn brown coal generator has also been written down by $440 million ($300 million net).

It’s not just the rising gas prices that are forcing these write-downs, it is also the record low wholesale prices, caused by falling demand and the impact of renewables. Gas fired generators usually rely on peak pricing events to generate profits, but as EnergyAustralia admitted last week, the recent heatwaves in South Australia and Victoria had failed to deliver those pricing events, probably the result of the impact of wind energy and solar energy.

Meanwhile, Queensland state government-owned Stanwell Corp has closed its major baseload gas generator, the 385MW Swanbank station at Ipswich, for at least three years.

Now, it is speculated, Origin Energy is about to do the same with 630MW Darling Downs baseload gas generator in Queensland, and will likely either mothball the four-year old facility or modify it to a peak-load generator. If it moves to a peaking plant (more likely), it will slash its capacity factor from more than 50 per cent to less than 10 per cent, and only target high pricing events. Analysts say gas supply deals with Santos point to such an event.

It’s not all bad news for those with cheap supply contracts or sources written before the LNG boom, and who can sell some of that capacity on the market.

AGL Energy last week revealed it was selling gas to customers for $10/GJ – already getting towards the top end. It admitted making a hefty margin of $3.50/GJ on the sale. Just a few years ago, $3.50/GJ was the price for gas in the eastern states, not the profit margin.

Stanwell, for instance, is going to make more money by selling the gas that was to be used by Swanbank into the open market. Origin Energy may do the same when and if  it moves the Darling Downs generator to either a peaking plant, or mothball it entirely.

“It’s a crazy situation because the gas will be exported to replace coal in China,” one analyst noted.  “So coal is burned in Australia to make gas that is shipped to China to replace coal.  Of course the process is itself energy intensive.”

It’s also not good for gas users. Miles Prosser, from the Australian Aluminium Council, reportedly told a gas conference last that the industry that it was impossible to negotiate gas supply contracts. “They don’t offer a supply price.  They seek the price we could pay before we fail,” he said, warning that large users such as aluminium smelters may risk shutdown.

The situation in energy markets in Australia is broadly comparable to what is happening in Germany, where some 30GW of gas-fired generation has been mothballed or facing closure, even those newly opened. Even in the US, where gas prices are lower, plans for new gas generation have been dumped in favour of large scale solar plants purely on the basis of price, Citigroup has reported.

Solar – and more wind energy – would seem the logical answer in Australia too. As RenewEconomy pointed out in a recent article, even Saudi Arabia, Iran and other Gulf states are responding to high export prices for fossil fuels by seeking to boost the amount of solar and other renewables.

The problem is that Australia has yet to deploy solar on large scale so while the modules themselves are relatively cheap, the installation, finance and maintenance costs are more expensive.

That is unlikely to change until the nexus around renewable energy is broken. Most generators are fighting to reduce the number of renewable energy projects to be built in the country, fearful that continued expansion of wind and solar will make their coal-fired generation uneconomic.

Some already are, as Stanwell reported for the 2012/13 financial year, it was unable to make any money from its more than 4,000MW of coal and gas-fired generation. Perversely, however, the switching on of LNG plants is likely to increase demand, and prices in Queensland, although gas generation will likely continue to be priced out of the market and so it is firing up its two mothballed units at the Tarong black coal generator.  In a state with virtually no solar or wind generation, rising prices benefit mostly the coal plants.

So, how is the Abbott government likely to react? Well, given its rhetoric over pricing and green energy, and the make-up of its renewable energy target review panel, it appears beyond hope that it would seek to boost the deployment of renewables, or even to allow the current target to remain.

The problem for Abbott is that rising gas prices will more than offset any of the exaggerated savings he claims from repealing the carbon price. As Queenslanders found out a few months ago, rising gas prices are the biggest component of another 13 per cent jump in electricity bills for 2013/14. That will inevitably flow through to other states. NSW has already announced a 20 per cent jump in prices for gas used in gas appliances.

However, it is not beyond the realms of possibility that the new government will take advice and modify the renewable energy scheme to include gas, which would gain credits (in the form of certificates) that would make it more able to compete with other technologies.

Not so much a “renewable energy target” as a “low emissions energy target.”

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  • Matthew Wright

    That would be terrible advice., gas is the dirtiest of the fossil fuels, due to its countless fugitive emissions.

    • Alex

      The Abbott government sadly does not have a history of listening to sound advice, only to advice that will further their ideology..

    • RobS

      There is zero evidence that NG is dirtier than brown coal, not as clean as once touted?…yes, dirtier than brown coal?… highly unlikely.

      • wideEyedPupil

        I refer you to Howarth et al letter know as the ‘cornell letter’ and a follow up responce to critics. Then recently Harvard published a paper using direct atmospheric measurements using aircraft and ground based spectrography detectors. They say EPA USA was wrong to revise down shale gas leakage and should have instead double he previous level. Will post links when I get onto my mac

  • JohnRD

    Ahh the wonders of globalization. Somehow we have been conned into allowing gas companies to make obscene profits damaging the countryside and our water tables to so that they can use LNG exports to justify large increases in the price of gas they sell to Australian industries that really do need gas. Even worse, the LNG they sell to China will allow China do something about its smog problem without doing the desirable thing – replace coal fired with renewable power and reduce GHG at the same time. Worse still, it looks like the gas will be liquified using energy from ageing coal fired generators – So Australia’s emissions will be pushed up so that China can avoid pushing their emissions down.
    Might be smarter to leave the gas in the ground and boost our economy increasing the rate of conversion to renewable power.

  • Roger Brown

    Lucky I got Solar Hot water about 18 years ago and still going and Solar power 3Kw system 3 years ago. I had a gas heater for water and gas top stove and gas heater for qld winters. I was using 1 x 45kg bottle ($50.00 in 1991) per month for heating water and stove top. 2-3 years ago I bought a ($130.00) 45kg bottle because I thought I was getting low on the other bottle ? Still have not switched over yet , as I use my A/C (2) for heating in winter and have only paid $134.00 last winter in electricity bills for the last 3 years . Solar power is a no-brainer for people on tight budgets and my 3kw system should be payed off in 4-5 years max. Thanks to Cando forcing me to get solar power before he canned the 44 cents a kw/h scheme and signed up with Origin who added another 6 cents a kw/h .The only good thing he did.