The golden age of gas is over before it started

The golden age of gas is already over – eaten by solar and wind and its own soaring costs. AEMO says gas-fired production could fall by two thirds over the next five years, as export parity prices it out of market and it is displace by renewables. The one bright spot might be the potential of gas to replace coal generation in a decade’s time.

So much for the “golden age of gas”. The Australian Energy Market Operator predicts that gas-fired generation in this country will be almost obliterated over the next five years, falling by two thirds as export parity prices it out of the electricity market, and as renewables such as wind and solar take a greater share.

AEMO is forecasting dramatic falls in the amount of gas-fired generation in the country’s electricity market, with falls of up to 27 per cent predicted in some states. In its first gas forecasting analysis – says overall gas production in Australia will rise because of the LNG export boom in Queensland. But the price surge that this has caused means domestic gas consumption (including in homes and businesses) will fall by at least 5.2 per cent a year, and gas-fired generation will fall at least 16.8 per cent a year.

AEMO gas state by stateIn some states, the fall in gas-fired generation will be up to 27 per cent a year of soaring gas prices and competition with renewables. In Tasmania, gas-fired generation could virtually disappear altogether. In South Australia, it will also fall dramatically despite a high reliance on wind and solar.

energy australia new capacity

Just a few years ago, the energy industry was predicting a “golden age” of gas, which they said would be the main transition fuel from coal to renewables. This prompted a huge rush of investment in gas-fired generation, which has been the main cause of the current over-capacity in Australia (and not renewables as some suggest). See table above, base-load gas is the red, peaking gas is the green. Together, they add up to more than half the capacity added in those five years.

AEMO gas state by state

But these new generators are already being sidelined. AGL is closing nearly one half of its Torrens Island gas-fired generator in South Australia, Origin has relegated its new Darling Downs base-load generator into an occasional peaker, Stanwell is going to mothball gas capacity, and EnergyAustralia is taking write-downs on its gas-fired portfolio.

The change has been prompted by several developments – the Abbott government’s removal of the carbon price, which makes coal more attractive, the soaring price of gas, and the massive rollout of rooftop solar PV, which has stolen much of the high-priced generation peaks that used to underwrite gas generation (and the revenues of many of the coal-fired generators too).

aemo gas forecast long termUnder AEMO’s low case scenario, the fall in gas-fired generation may be even more dramatic, an average 18.8 per cent decline over the next 5 years. This would take total production to just 70.5 petajoules, a fall of 65 per cent from current levels.

In South Australia, an interesting case because of its high levels of variable wind and solar – currently at 40 per cent and tipped by many to increase dramatically in coming years – gas production has already fallen by more than 10 per cent over the last three years.

AEMO says this is because of the “increased rooftop PV uptake, and commissioning of new wind farms”, which have reduced the dispatch of gas generation plant in the NEM (National Electricity Market).

It sees another halving in gas-fired generation over the next five years in that state because of “rising forecast gas prices which reduces the competitiveness of GPG plant in the NEM. This includes the withdrawal of a Torrens Island GPG plant from 2017.”

If overall energy consumption is at the low end of forecasts, gas-fired generation could fall by another third, even as more coal-fired generators are taken out of the market.

aemo gas victoria

In Victoria, the amount of gas-fired generation in place in a decade’s time will depend on electricity consumption and the retirements of coal plants

“Lower electricity consumption results in substantially more modelled retirement from existing brown coal-fired power stations (2,500 MW compared to 300 MW in the medium scenario).”

In Tasmania, gas-fired generation may disappear entirely, with the mothballing of the Tamar Valley station. Already, since 2010, Tasmanian gas fired generation has declined by 12.2 per cent a year from 11.4PJ. In one scenario, it may fall another 64 per cent year to a negligible 0.4PJ by 2019.

aemo gas tasmania

Comments

32 responses to “The golden age of gas is over before it started”

  1. Rob G Avatar
    Rob G

    Wonderful news! In the end no fossil fuel will be able to compete with cheap solar and wind. Hockey will need a big re-think on the budget, he had been banking on big $$ coming from Iron Ore and fossil fuels.

    1. michael Avatar
      michael

      you do realise those two things aren’t linked? “in the end” and the current budget cycle are completely different time frames… but hey, chance to take a swing eh?

      1. Giles Avatar

        Why wouldn’t they be linked Michael? “in the end” relates to the long term impact of the trend we are now seeing and identified by AEMO and others, and budget woes are the short term impact. Same trend, just different time zones.

        1. michael Avatar
          michael

          Budget woes are related to traditional commodity cycles, ‘in the end’ is structural shift in deman over decades. Not linked.
          And, the contribution of coal to current budget woes are surely highly debatable, don’t most of the left/RE aligned think tanks talk down the contribution of coal to the economy? If so, then surely a downturn in that industry can’t effect the budget too much…. Can’t have it both ways

          1. Barry Avatar
            Barry

            Yes, the left/RE aligned think tanks such as Bernstein Research, Citi, Deutsche Bank, Goldman
            Sachs, Standard & Poor’s and UBS to name a few, who all think that coal is in structural not cyclical decline don’t know what they are talking about do they? Little wonder it ends up being the Qld Govt that stumps up the cash to fund infrastructure projects needed to support the Galilee Basin development – as these banks wont touch it with a barge pole.

          2. michael Avatar
            michael

            I think Posco signed up today to be part of it

            And yes, you’re correct that long term structural changes are occurring, I haven’t disputed that, the implications for the CURRENT budget period are from cyclical forces, that’s the difference. didn’t think it needed to be spelled out so clearly.

        2. michael Avatar
          michael

          So, a decrease in coal revenues is terrible for the budget… but wait, coal supposedly doesn’t contribute much, so how does any reduction in a non-critical contributor affect the overall picture?

          “http://www.tai.org.au/content/seeing-through-dust-coal-hunter-valley-economy”

          Not a stretch to suggest there is a list of things as long as your arm that contribute more to the current budget setting than any reduction in coal and iron ore prices, hence my comment. If you don’t agree, please tell me what percentage of the current deficit you believe is caused directly by coal prices being $60/tn instead of $130/tn of a few years back?

      2. Rob G Avatar
        Rob G

        Oh yes they most certainly are linked. “Australia’s open for business…” The quick fire approval of Australia’s largest coal mine in QLD. Make no mistake this is about getting a budget surplus no matter what the cost is to Australians and the environment. LNP think this will get them a second term.
        And you bet I’m taking a swing, this government, it needs more the a kick in the backside, it needs to be removed. Their wilful destruction of our growing renewable industry has us placed at the bottom of the developed world, and has cost many jobs and investment. I’m hardly going to congratulate them on that. But hey, maybe you will eh?
        Maybe you ought to read the fin review before you assume the role Iron ore and coal play in our economy is minor. Australia is one of the biggest exporters of coal in the world. The end of the mining boom has been widely recognised as the main factor to our current budget situation. And then theres our pathetic Prime minister who felt the need to tell the G20 that he is sticking up for coal.
        Remember its best to check in with reality before jumping to conclusions.

        1. michael Avatar
          michael

          ah good, I thought that coal (and I guess all of mining) has a large positive impact on the australian economy, but had recently been reading too many The Australia Institute papers and a few articles linked to green NGO’s talking down the impact of coal mining on the economy and jobs. So we agree on that one!

          We are one of the larger exporters, but a rather minor global player on a production volume, but hey, that’s beside the point. The end of the mining boom has been talked up as a contributor to the budget stress, however without all the spending going on (ie if our spend was aligned to our income) we probably wouldn’t be in such a bind. but that’s what you get linking constant spending measures to cyclical revenue (ie MRRT) and other stuff, from Howard through Rudd and on to Gillard everyone has loved throwing the cash around. Anyone who thought that iron ore prices were staying above $120 for ever or Coal above $120-130 forever were not doing very good analysis.But the pollies were all too happy to link spending to those forward estimates.
          Most of the people who want greater taxing of mining put it down to ‘giving’ money to international interests, so I assume we aren’t going to buy chinese PV panels (the reason solar PV has dropped in price so much is china flooding the market) or contract spanish/german/amercian etc firms to build wind farms…. In terms of repairing a budget, really can’t see how spending public dollars on adding more capacity to a power generation network in oversupply is the answer. Is that what is being suggested? Or is the magic of economic multipliers going to come from these ‘green jobs’ which so easily get created on spreadsheets and then that money gets circulated 5 times over in the economy creating activity and somehow a tax take. People making a moral case and ignoring economics, can’t argue with that, it’s just an opinion and everyone has the right to that.

          1. Rob G Avatar
            Rob G

            This goes beyond the moral case, it makes economic sense. Banks know this and that is why they don’t invest in coal anymore. The world bank stopped that a year or so ago, many banks have followed suit. Converting over to Green power has already caused economic booms in some US states (Multi-millionare Warren Buffet was in part, responsible for one of those booms) and we were well on the way to doing so here too. Thanks to Abbott that boom has died. In the US there are already more people working in renewables than both fossil fuel and car manufacturing industries combined and that has happened in the space of 5 years.
            We do have an over supply of power, which means shutting down coal forever is a must. The maths is simple and proven – Renewables promise more jobs and create employment across local communities – something coal cannot do. You could argue that needing to employe more workers to maintain renewables is more expensive, but that would be ignoring the huge cost of extraction, freighting and burning that comes with coal and gas. To set up renewables (wind and solar)is significantly cheaper than building power station – especially the nuclear kind.

    2. roscoe Avatar
      roscoe

      How could they not be linked. The budget is framed around commodity pricing and revenue.

  2. michael Avatar
    michael

    How do you decide which source, Gas or Renewables, is the cause of overcapacity? by which was installed first?

    1. sendai Avatar
      sendai

      By how much was installed. Over half the capacity additions to the NEM over the past eight years has been from gas.

      1. michael Avatar
        michael

        By volume? So, if I read that correctly, if I put in 6 units of gas, then a year later 4 units of something else and end up 2 units over supplied, it’s the original 6 units causing oversupply? Interesting analysis. I would think the last supply to be added is the culprit

        1. Martin Avatar
          Martin

          Perhaps by who stands to lose by the investment. If gas fired generation stands idle or is running below capacity then it is the one in over supply. Poor power companies! They must have miscalculated in building them. It is just great that renewables are hitting the curve – I become more optimistic with every report like this, still a ways to go obviously…

        2. Jonathan Prendergast Avatar
          Jonathan Prendergast

          I see where you are coming from. There is an oversupply. Depending from your perspective, you could say it is new gas, new renewables, or even old coal that should be retired. But I would say gas fired is the cause of oversupply to a larger extent than renewables, as the RET was in place, so it was legislated that reneawables would be installed.

  3. Penny Osterhaus Avatar
    Penny Osterhaus

    Wonder what happened to geothermal?

  4. Michael Seagle Avatar
    Michael Seagle

    Ummm…..are you sure you understood what the report is saying? There will be less gas fired power generation in Australia because overseas buyers will pay more for the gas than producers are currently receiving – even at the artificially higher prices caused by restrictions on CSG development ie globally there will be more gas fired power produced.

    1. michael Avatar
      michael

      That would be too big picture to comprehend for some… Increased demand leading to higher prices, ie more being consumed globally

      1. Giles Avatar

        Gosh, you’re so clever! But this story is about the Australian market, and it is the grid operator making the predictions. Let’s see how this plays out in the international market. If the price falls, so will supply, because most of these CSG wells are not economic at much less than current export parity prices. That is what the oil market is discovering. That’s the big picture.

        1. Barry Avatar
          Barry

          I realise the story is about the Australian market, but if what plays out here plays out in the jurisdictions to which we export LNG there are big implications for Australia. There is plenty of discussion about the end of coal but maybe the end of gas is closer than we thought and economic rather than policy drivers will results in sizable volumes of fossil fuels remaining unburnt.

          1. Giles Avatar

            barry, i agree with you. my clever comment was directed elsewhere.

          2. michael Avatar
            michael

            “the price surge that this has caused (to gas) means domestic gas consumption (including in homes and businesses) will fall by at least 5.2 per cent a year”,
            now you’re talking about falling prices causing gas to be uneconomic to produce. The article says high gas prices are causing it not to be used, so if the price falls, doesn’t that remove the driver for lower consumption? there’s some crossed lines of logic going on here.

          3. Jonathan Prendergast Avatar
            Jonathan Prendergast

            The local (Australian) wholesale gas price will rise to meet the international (net back) price, leading to home, businesses and gas fired electricity generation falling. But if the international price falls, some CSG wells internationally will become uneconomic.

          4. Miles Harding Avatar
            Miles Harding

            Impressive how one troll can mess up an otherwise clear and simple concept!

        2. michael Avatar
          michael

          the oil market is discovering if you ramp up supply you depress prices (classic economics). are you suggesting supply is decreasing in the oil market?? the whole reason prices are falling is OPEC producers NOT decreasing supply and the US moving to being a net exporter due to Shale production.

          Are you suggesting that falling gas prices won’t encourage gas generators to run? won’t their main operating cost, gas, be cheaper and allow more profits?

          if this isn’t the case, then why put a price on carbon and increase cost of FF? if falling cost of FF doesn’t increase likelihood of it being used, how does increasing cost of FF reduce it’s use…

    2. Barry Avatar
      Barry

      yes, but if gas-fired generation struggles to compete with renewables in Australia then it will struggle to compete with renewables overseas. Over time as more renewables is deployed overseas the growth in the demand for gas will slow and it may even fall.
      Given we are ramping up gas production to export, there is a clear risk that before these facilities have recovered their capital costs the market, and price, for their gas falls away.
      This is similar to what we are seeing in the iron ore and coal markets. Thre was a global ramp up in supply capacity, due to high prices, that is now confronting a decline in demand leading to a significant fall in price – putting strain on the vaibility of many projects.
      I am raising the possibility that Australian LNG producers could find themselves in a similar situation – which has big macro economic implications for Australia.

  5. Barry Avatar
    Barry

    Let me get this,
    * the driver behind rising Australian gas prices is that they need to match the higher gas prices in the Asia/Pacific region, less transport costs, as companies with LNG facilities can choose who to sell their gas to
    * renewables, esp solar, and energy efficiency is reducing the demand for electricity generated using gas
    * similar trends in the cost of renewables and energy efficiency is likely to occur in the countries to which Australia exports LNG
    * over time the demand for gas in the Asia/Pacific region will not grow as fast as expected, and may even fall
    * this will put downward pressure on Asia/Pacific gas prices which will flow through to Australian domestic gas prices
    * by the time this happens the cost of renewables will have fallen further, meaning it is possible that gas might still not be competitive
    * the gas facilities being built might not have anyone to sell their gas to – ie they become stranded – unless they diversify into other uses, such as compressed natural gas for transport and/or making fertilizer
    * the uncertainty is over how much coal will still be used in Australia and whether gas will fill in the gaps and be able to capture the value associated with its high degree of flexibility in ramping up and down to meet the overall demand net of intermittent generation, demand response and storage
    If this is correct, then gas producers could be in a riskier place than assumed in their business cases.

  6. Nathan Lim Avatar
    Nathan Lim

    I would not be so quick to dismis natural gas’ future given the Safe Guard mechanism in the government’s Direct Action legislation. The specific rules and ultimate price of carbon could dramatically change the economics of gas versus coal. I believe the final rules for the mechanism are due next October.

  7. Ben Rose Avatar

    Informative article Giles but you omitted the gas story in the biggest LNG producing region- the NW shelf in WA – currently 6% of world production and soon to double when Gorgon and others come on line. WA is no longer insignificant in terms of population either with 2.5 million.

    Some big issues here. What effect will this industry expansion have on domestic prices in WA? More importantly how much will it add to Australia’s CO2e emissions burden and who will foot the bill for that?

  8. James Ray Avatar

    Hooray! A win for sustainable development.

  9. stucrmnx120fshwf Avatar
    stucrmnx120fshwf

    Oversupply of carbon, is crashing up against falling prices of 2 types of PV, solar energy and LED’s, a fifth of Aussie household rooftops. LED light bulbs, LED TVs, LED smartphones and tablets, LED monitors. Lightning alone, accounts for what, a quarter of all global power consumption, solar power costs 1/100th the price per kWh, that it was in 1977. For every barrel of oil from facking, it takes 1/3 of a barrel of oil to extract it, mind you we might briefly use solar power, to energy subsidize liquid hydrocarbon production. Due to the installed base of hydrocarbon vehicles, even there, things are changing, tesla is soon going to be pumping out, a gigawatt of battery power, for vehicles per year.

    Electricity is much cheaper than liquid petrochemical energy, induction charging, rapid charge super parallel batteries, using automatic payment. Carbon fiber chasis/aluminum body cars both extend range and lower battery costs for electric cars, as with BMWs CF/Al electric cars made in China for $17,000. Households will have Manganese batteries, go off grid, solar farms will become gigawatt, then terrawatt. Your website title says it all, industrial revolution, but like the last one 1915-25, where it only took a decade to go from steam and horsepower to cars, trucks, electricity, radio. This one will also take a decade, in a firestorm feeding frenzy, where sub prime energy, will demand bail out of the carbon industry,

Get up to 3 quotes from pre-vetted solar (and battery) installers.