Soaring gas prices take toll on generators as well as consumers

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.

Last 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.

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.