Soaring gas prices take toll on generators as well as consumers

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Soaring gas prices will clip $100 million from the profits of Australia’s biggest electricity supplier, and are causing big jumps in electricity costs.

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It appears that electricity and gas consumers are not the only victims of soaring gas prices. Australia’s biggest generator of electricity, AGL Energy, on Thursday said it would take a $100 million hit to its profits in the 2017 fiscal year because of rising gas prices.

AGL says it has been forced to buy gas on the spot market because of its own supply shortfalls – blamed on problems with third parties – and gas prices in Australia have soared in recent weeks in response to growing demand from a new LNG export facility and a cold snap in the eastern states, as well as supply issues.

gas prices june july 2016Last week, gas prices soared to $29 a gigajoule in Sydney, and have soared well above $20/GJ in Adelaide. They are still trading between $11/GJ and $18/GJ at various trading hubs in the eastern states market.

This price jump has had a major impact on wholesale electricity prices, because gas generation – mostly used to respond to swings in demand, and supply – sets the marginal cost.

In recent weeks, average prices have been treble their normal price across the market. But in South Australia, they have soared even higher. On Wednesday, the average wholesale price in the state was more than $525/MWh.

Historically, gas prices in Australia have hovered around the $4/GJ mark. This table below highlights the impact of rising gas prices on the cost of gas generation. The light blue lines show the cost at $3.90/GJ, indicating gas generation costs of between $30/MWh to above $60/MWh.

 

agl gas merit order

At a price of $9/GJ, the short run marginal cost of gas generation jumps to between $70/MWh for the most efficient gas generators to more than $140/MWh for the most inefficient.

At that price, the Torrens gas generators that AGL operates in South Australia cost around $110/MWh to $120/MWh ro tun. But with gas prices at twice the price, the cost will likely be closer to $250/MWh.

That at least partially explains South Australia’s soaring electricity prices, particularly with one of the most country’s most efficient and cheapest gas generators, the Pelican Point plant, not operating. A spokesman for Pelican Point owner Engie said that “in the current market conditions, including high gas prices, Pelican Point is unable to capture value.”

That leaves essentially two suppliers, AGL and Origin Energy, in control of the market. At these prices, it means that alternatives such as solar towers with storage are an obvious and cheaper option.

AGL Energy said the gyrations in the spot gas prices would cost it $35 million, while a further $60 million in anticipated profits would be lost because of reduced margins in the Queensland gas spot market.

“The company expects the total pre-tax contribution to margin from its Energy Markets gas portfolio in FY17 (2016-17 fiscal year) to be lower than FY16 by at least $100 million,” it said in a statement to the stock exchange, an announcement that knocked its share price down by more than six per cent.

AGL said it needs to source more gas for its Torrens Island gas generators, which have been running hard in recent months, particularly since the closure of the Northern Power station. Recently, it said it had abandoned plans to close some of that capacity in 2017.

But it’s not all bad news for AGL Energy. Deutsche Bank estimates that the extra output from Torrens Island, and the high electricity prices, will translate into a net profit gain of more than $16 million to partially offset lower gas margins.

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40 Comments
  1. Barri Mundee 3 years ago

    So much for any suggestion that gas could be a good “bridging” fuel whilst we wean the country off coal.

    • stalga 3 years ago

      This was predicted to happen by the Gratton institute in 2014. The Abbott government chose to have the domestic price linked to the world market rather than introduce a “reservation policy” the same as that employed by the US and Canada for years. This is the result. To what extent profiteering may be occurring and where I don’t know but it seems an unnecessarily complicated system.

      I’ve been looking at the world price and trying to look learn about the function of the AEMO and short term gas trading but I’m none the wiser at present.

      • Don McMillan 3 years ago

        We have a default reservation policy. Huge tracks of natural gas exploration acerage. All of Tasmania, Victoria and NSW.

        • stalga 3 years ago

          That’s not a policy. I read more on the Grattan Istitute website and they don’t actually advocate a reservation policy. However they strongly advocate more transparency in the gas market to prevent this occurring.

          Gas, be it coal seam, “natural”,LPG, LNG or whatever you want to term it, is still a fossil fuel and only has a medium term future. It also needs to be phased out.

          • Don McMillan 3 years ago

            I agree that is not a policy. I believe that if you ban something then you should not import the stuff e.g shark fin soup. So I advocate NSW to ban the importation of Natural Gas. This would improve the gas supply issues in SA & QLD. What concernes me is that Incitec Pivot warning that they are to close their fertiliser plant. Inevitiably we’ll import fertiliser and in doing so lose control on its quality. Once this fertiliser is spread across the land you cannot take it back.
            I doubt if natural gas will phase out because how to you make fertiliser, plastics, steel, solar panels, wind farms, batteries without fossil fuels.

  2. Brunel 3 years ago

    90% of new houses in Vic should have been banned from installing ducted gas heating 12 to 60 months ago.

    It has been clear for the last few years that heat pumps are cheaper to run and you also avoid having extra ducts from which air can escape.

    • Island fisher 3 years ago

      Minister for envioromental destruction has managed to arrange for gas connections to all houses on Phillip Island, never been any gas other than LPG here, so most people have done there own thing and insulated, double glazed, installed solar, and HE heat pumps, what an absolute wast of tax payers money

      • Brian Tehan 3 years ago

        Which minister is that? State or federal? Of course, with the increasing price of gas and the much higher efficiency and lower cost of heat pumps, you’d be mad to put in ducted heating now, instead of heat pumps. I’ve lowered my own heating costs considerably by installing a heat pump and leaving my ducted heating off 95% of the time. I use it occasionally when it’s very cold – probably should have installed a slightly bigger heat pump – but I could actually do without it, really.

        • Brian Tehan 3 years ago

          Of course it’s the one and only minister for the mining industry, Greg Hunt, who seems to be unaware of heat pumps and induction cooktops.

        • Island fisher 3 years ago

          It was the federal minister, promised all sorts of things during the election most of them state issues, anything but what he can do in his portfolio

      • Brunel 3 years ago

        What about exhaust fans in bathrooms and kitchens.

        We ought to be able to shut the vents electronically to stop the heat escaping.

        • Angus 3 years ago

          Draftstoppas do a pretty good job at this. No wiring necessary.

        • Angus 3 years ago

          Dratstoppas do a good job of this without any wirirng

          • Brunel 3 years ago

            Good.

        • neroden 3 years ago

          Three words: Energy recovery ventilator.

          • nakedChimp 3 years ago

            Yeah, just go the full mile and build passive. The savings over the years will make it worthwhile.

      • Brian Tehan 3 years ago

        Excellent article, Tim. It’s just amazing how new home owners are being dudded by poor builds, resulting in 2 or 3 star houses. I see it all over around my suburb where mcmansions are being built with brick veneer with the pathetic building wrap having holes in it and large parts flapping in the breeze, little or no double glazing. The answer is pre and post build testing for air gaps. Also, you shouldn’t be able to get 6 stars with gas ducted heating.

  3. Stewart Rogers 3 years ago

    ….and people want to close down Hazelwood and Yallourn when they provide some of the cheapest power in the country. Consider the fact that wind isn’t blowing and solar obviously doesn’t work very well at this time so if Hazelwood wasn’t there we’d be relying on diesel based alternative costing an absolute bomb.

    • Giles 3 years ago

      So, for the last three years all the coal generators, and the energy ministers, have been saying that there is between 7,000MW and 9,000MW of excess base load capacity in the grid. Then all of a sudden, with no increase in demand, but a quadrupling of gas prices, their wholesale price soars. Blame gas, not renewables.

      • Stewart Rogers 3 years ago

        LNG projects up north, some plants in maintenance and the shutdown of other baseload. You can’t call closed baseload powerplants excess power. It’s only excess if it’s economically viable to operate. I realise you have a high bias to renewables but realise that the outcome of wind power production is pretty disappointing. Unless batteries become ultra cheap at a grid storage level, nuclear may be one of the best options even at $150 MWh.

        • Giles 3 years ago

          So is there 7,000MW of excess base load or isn’t there. Are you calling out the big generators on this one? That’s been their main argument against any more renewables.

          • Stewart Rogers 3 years ago

            I don’t believe there is 7000MW of excess base load and I’d agree with you the big generators are being dishonest to try and slow down renewables. I’m not biased towards any power generation method. I’d rather we have a cost effective supply.

          • stalga 3 years ago

            I have letter from my local (Nat) federal politician, who stated that renewable energy was not being supported because there was 7000gw of excess capacity in the system.

          • stalga 3 years ago

            Sorry, MW.

          • Giles 3 years ago

            Yeah, and the market operator has said previously 9,000MW. but there are all sort of things they can do to make prices go up – bidding, rebidding, taking capacity offline. As i wrote last week, Loy Yang B suddenly withdrew capacity in June because it didn’t have enough coal!. There is a great frigging coal mine at the front door! Must have lot batteries for the torch.

          • stalga 3 years ago

            Cheers big fella. I’m on quite a learning curve since discovering your site. Ive wanted to become more economically literate on the topic.

            I didn’t bother replying to the Hon. M McCormack, figured I was wasting my time. At least he replied.

          • Chris Fraser 3 years ago

            Ha what’s a few orders of magnitude between the climate denying Nats ?

  4. Tim Buckley 3 years ago

    Entirely predictable that opening a massive gas export ‘pipe’ to Asia twice as big as the entire domestic gas market would drive domestic gas prices up. What a great forwarding thinking energy policy – working entirely against the interests of every citizen in Eastern Australia. Who was to benefit? Supposedly Origin, Santos and the global fossil fuel giants, but then they flooded the Asian market with excess supply and drove the LNG price through the floor. Give their CEOs yet another bonus for value-destruction!

    • Don McMillan 3 years ago

      Australia is geologically a gas continent. There is plenty of gas for the domestic and export market. Rightly or wrongly the activists have been successful in deterring investment and creating regulations that make extraction difficult or uneconomic. Today, if you like it or not, fracture stimulation is critical for oil and gas production. The activists have won, so now we can now enjoy the unintended consequences.

      Have you noticed that there has been insignificant oil exploration on the east coast for over two decades? Even at plus $100 per bbl no-one was investing. Consequence is that we have been closing down our refineries one by one.
      The result is that our economy and military are reling on refined production from Singapore. In a strange twist of fate our military is going to rely more and more on the good will of Malaysian and Indonesian and the Arabic governments.

      • nakedChimp 3 years ago

        It’s been a political decision for special clientele to keep riding the dead horse that is fossil fuels and tying the renewable horse down wherever possible.
        We could enjoy stable electricity prices now if they did what they were supposed to do.

    • Fred Smith 3 years ago

      Current low prices for LNG in the export market relate to the price being linked to the international oil market. Many international energy commodities (except Coal for a short while) are at historically low levels but the cause is Macroeconomic – nothing more nothing less. If Australia wants more stable domestic gas prices, it needs more local delivery infrastructure and supply. If anything export markets have seen investments in domestic gas generation.

  5. JHM 3 years ago

    I don’t understand how natural gas prices can get so high, when the import price of LNG is about USD 5/mmbtu or about AUD 6.5/GJ. Why export LNG at a lower price than can be fetched domestically?

    • Tim Forcey 3 years ago

      The answer to your question JHM is “long term supply contracts”.

      • JHM 3 years ago

        I see. So the power producers don’t believe they need their own longterm contacts.

        This could be yet another reason to lose market share to rooftop solar with storage.

    • Giles 3 years ago

      because the geniuses that run this industry invested $200 billion in LNG plant thinking they could make a motza, and now find themselves locked into contracts delivering gas at barely break even prices. Some of them also forgot to check if they got enough gas to meet these contracts, or just simply assumed they could turn up anywhere and start drilling. Didn’t turn out like that. So local supply is impacted, particularly with this latest undisclosed issue over “safety” matters at some unknown location. Nothing like a transparent market!

      • JHM 3 years ago

        Lovely! Any opportunity to import LNG on some of these impacted areas? I hear there’s a glut.

        • JHM 3 years ago

          Reimporting LNG is a solution not unlike the wisdom of the NRA gun lobby in the US. They tell us the only solution to so much gun violence is more guns. I guess it keeps gun makers in business.

  6. Don McMillan 3 years ago

    Natural Gas prices will continue to rise until demand decreases, that is, factories shutdown [83,000 jobs]. The anti-gas activities have been successful as Tasmania, Victoria and NSW has effectively banned natural gas exploration. Their activism has deterred investors. Even with these extraordinarily high gas prices the investment community [Funds managers] view sovereign risk as too high. Right or wrong it does not matter with over 3 billion dollars of investment evaporated in NSW it is unlikely they’ll return for a very long time.

    If you want low gas prices you must create an oversupply and historically it is small producers that cause oversupplies not the big guys. Oversupply was the
    predicted in the early 2000’s with NSW CSG entering the market. This is why NSW and other DOMgas users delayed renewing contracts. Specially NSW as pipeline tariffs would be negligible for locally produced natural gas. The proposed pipeline to the NT or sourcing gas from QLD would incur pipeline tariffs affecting NSW manufacturers competiveness. Incitec Pivot has opened a new chemical plant in the USA to take advantage of low gas prices and has warned they may have to close their QLD fertilizer plant [ASX 10May16] due to natural gas issues. IPL’s call for politicians, farmers and gas producers to consider the consequences of relying on imported fertilizer have fallen on deaf ears, nobody cares. Inevitably, we’ll import fertilizer and in doing so, lose control on its quality. Once imported fertilizer is spread across the land you cannot take it back.

    The activists have won, now for the unintended consequences.

  7. Ben 3 years ago

    Giles, wondering if you can take this topic a step further for another article. In SA, we’ve seen NEM prices increase disproportionately in comparison to other States as our high renewables mix needs gas to meet demand hour to hour when the wind is not blowing. Coal is not able to ramp up and down as quickly and hence we have seen it exit the system. But why should SA customers pay higher prices, when the RECs are used by national retailers? hardly fair is it…

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