Gas power in future grid will be “tiny” and its cost exorbitant, report finds

When the Australian Energy Market Operator forecast an increase in gas generation capacity – from around 11 GW to 15 GW – in the June update to its 25-year planning blueprint for the national grid, it was greeted as manna from heaven by fossil fuel boosters.

Australian Energy Producers quickly released a statement claiming AEMO’s 2024 Integrated System Plan “reaffirmed the critical role of gas” in energy security and the “urgent need” to invest in new gas supply and infrastructure to enable the transition to net zero by 2050.

But a new report from the Institute for Energy Economics and Financial Analysis (IEEFA) is challenging this interpretation of the ISP, and says that based on a review of the analysis underpinning AEMO’s forecasts, an increased role for gas is not supported. 

Rather, IEEFA says gas is forecast to play a reduced role in power generation for the National Electricity Market, which will source more than 90 per cent of its generation from solar – both rooftop and large scale – and wind.

Supporting solar and wind will be battery storage, hydro and some flexible gas – and while the capacity of gas generating capacity increases, its use in the generation mix actually falls significantly.

According to IEEFA, by AEMO’s own calculations gas generators would be expected to operate only 7 per cent of the time on average as their role narrows to focus on “peaking” services that are rarely called upon.

“Investors will need to look beyond the narrative of gas in AEMO’s ISP, and be mindful that AEMO’s forecasts in fact point to a declining role for gas generation,” says Jay Gordon, an IEEFA energy financial analyst specialising in Australian Electricity.

“Investment opportunities in gas power generation may not be as significant as some industry groups have suggested, and carry significant new risks for investors to manage.

“In reality, the amount of gas generation in AEMO’s forecasts is small compared to recent historic levels, and tiny compared to the increase in renewable generation and storage expected.

“It is far from being a clear signal for greater investments in gas,” Gordon adds. 

And the less gas in the mix the better, the report notes, because gas is an expensive form of energy generation – and the cost of energy from has will only get worse as plants are used less.

“When gas is needed, this tends to increase overall wholesale prices in the NEM. As a result, gas is not a preferred source of ‘baseload’ electricity, but tends to be called on only when needed – for example, to help meet evening peak demand,” the report says.

“If utilisation rates fell to 7%, as forecast by AEMO, gas generators would need to recover more of their fixed costs per unit of electricity, resulting in higher prices.

“This could result in a levelised cost of electricity (LCOE) that is 41%-81% above CSIRO’s forecast levels by 2030.”

IEEFA says that this will pose a significant challenge to the profitability of gas peaker plants, while also creating a strong opportunity for other technologies to compete, like batteries and other forms of energy storage, demand management and alternative fuels.

“AEMO’s gas generation forecasts have varied considerably between different versions of the ISP, and are sensitive to input assumptions that are rapidly evolving,” Gordon concludes.

“Perhaps most notably, the ongoing decline in costs for competing storage technologies, such as batteries, is already impacting the market share of gas in some jurisdictions.

“This is likely to impact the profitability of gas generators, which are already set to become fragile as they increasingly find themselves operating at low utilisation rates.”