Energy prices reach “point of catastrophe”

From Judith Sloan:

On one side of the debate is the assertion that rising electricity prices are not related to the increase in the penetration of renewable energy but are the result of rising gas prices. The proponents of this argument point out that electricity price increases have been higher in Queensland, which has very little renewable energy, than in South Australia, which has a lot (close to 50 per cent of its generating capacity).

…On the other side of the debate, rising electricity prices are seen as the result of too much subsidised renewable energy which, in combination with low demand, has driven cheap, reliable sources of electricity generation out of business. Since electricity prices are set by the marginal provider at a point of time and gas is increasingly that marginal provider, the rising price of gas is feeding into higher wholesale electricity prices.

Moreover, domestic gas prices are rising in part because the renewable energy target excludes gas as a source of electricity generation. The gas companies, in effect, have been forced to seek out other markets for their product overseas, a strategy sanctioned by the federal and Queensland governments. While this led to the development of some new fields at the time, the subsequent moratoriums placed on exploration and exploitation of coal-seam gas by several state and territory governments have meant the growth of new supplies of gas has come close to a grinding halt.

…The bottom line is that energy policy in this country has reached the point of catastrophe. Faced with crippling electricity prices and uncertain system reliability, there is still no agreement about the appropriate direction of policy into the future. If anything, the divergence between the federal government and some state governments is as wide as ever.

And all the talk of demand-side measures is simply code for asking people (and businesses) to desist from using power when it is actually appropriate for them to do so — during a heatwave, for instance. This is not a feature of a First World developed economy.

In the meantime, well-heeled households are subsidised to spend up big to install solar PV with battery backup, meaning that the cost of operating the grid is shared across a smaller number of participants. This drives up prices further for those who can least afford to pay. They call it energy poverty in Europe; expect that term to become common parlance here.

For Frydenberg, his best hope is that domestic gas prices start to fall by virtue of the restrictions on exports and some regulatory changes affecting pipeline operation. But there can be no guarantees.

Gas supplies are not something you can simply switch on and off. And unlike hard rock mining, gas requires an ongoing program of drilling to replace expiring wells.

Without strong financial incentives, the Australian government may find that some of the gas companies simply decide that it is easier to pick up their bat and ball and go home.

If only they would! Close a Curtis Island LNG plant and all problems are resolved. Sloan is wrong about gas and the RET. Gas generation capacity has grown significantly over the past fifteen years owing to the national plan to use it as the bridging fuel as we transition from coal to renewables:

The only problem now is that half of the capacity is idled because the gas cartel has exploded prices:

The gas industry was not “forced to seek out other markets for their product overseas, a strategy sanctioned by the federal and Queensland governments”. Rather, firms blew an enormous investment bubble from 2006 to 2011 as they extrapolated Chinese demand growth to insane levels and built huge white elephant LNG plants to service illusory demand. That has left the global LNG market in a state of crippling glut:

Asian customers don’t even want the gas. They’re forced to take it on contract but are reselling it on spot markets at a loss. Japan has gone so far as to declare the contracts illegal so it can dump the gas even faster:

Japan’s Tokyo Gas, the biggest city-gas supplier in the world’s largest importer of liquefied natural gas (LNG), is in talks to renew supply contracts and will push to revise terms to get more flexibility and cut prices, a senior official said on Thursday.

The push for easier terms, a major concern among Japanese utilities after the Fukushima nuclear disaster six years ago led to a surge in LNG imports and drove prices higher, got a boost when the country’s anti-trust regulator last month ruled restrictions in supply contracts were anti-competitive.

“We have re-negotiations under way, including price review,” said Takashi Higo, senior general manager at the gas resources department of Tokyo Gas.

“There will be tough negotiations (with suppliers) and it will take a lot of time,” he added, speaking to reporters at an energy conference.

The decision by Japan’s Fair Trade Commission to rule that so-called destination clauses that restrict resale of LNG cargoes are anti-competitive is likely to lead to more trading by buyers in Japan and could prompt challenges to similar restrictions elsewhere in Asia.

While governments are not blameless for the post-GFC bubble, they had no reserve management system to prevent the extraction beyond environmental assessments. Can you imagine the stink that would have been made post-GFC if they had tried to block Curtis Island development (not least by The Australian)? Similar scandals cost Kevin Rudd his job.

Then there is the on the record fact that the gas firms lied to the QLD and Federal Governments about having enough gas to launch the huge export facilities. Sloan is a former director of Santos which was appalling:

As Santos worked toward approving its company-transforming Gladstone LNG project at the start of this decade, managing ­director David Knox made the sensible statement that he would approve one LNG train, capable of exporting the equivalent of half the east coast’s gas demand, rather than two because the venture did not yet have enough gas for the second.

“You’ve got to be absolutely confident when you sanction trains that you’ve got the full gas supply to meet your contractual obligations that you’ve signed out with the buyers,” Mr Knox told ­investors in August 2010 when asked why the plan was to sanction just one train first up.

“In order to do it (approve the second train) we need to have ­absolute confidence ourselves that we’ve got all the molecules in order to fill that second train.”

But in the months ahead, things changed. In January, 2011, the Peter Coates-chaired Santos board approved a $US16 billion plan to go ahead with two LNG trains from the beginning….as a result of the decision and a series of other factors, GLNG last quarter had to buy more than half the gas it exported from other parties.

…In hindsight, assumptions that gave Santos confidence it could find the gas to support two LNG trains, and which were gradually revealed to investors as the project progressed, look more like leaps of faith.

…When GLNG was approved as a two-train project, Mr Knox assuredly answered questions about gas reserves.

“We have plenty of gas,” he told investors. “We have the ­reserves we require, which is why we’ve not been participating in acquisitions in Queensland of late — we have the reserves, we’re very confident of that.”

But even then, and unbeknown to investors, Santos was planning more domestic gas purchases, from a domestic market where it had wrongly expected prices to stay low. This was revealed in August 2012, after the GLNG budget rose by $US2.5bn to $US18.5bn because, Santos said, of extra drilling and compression requirements.

The gas carteliers knew that if they ripped the gas out of Australia’s east coast that they could fall back on gouging the locals, and that is exactly what is happening.

In summary, Sloan has it 180 degrees backwards. The best thing that could happen to the east coast energy market is that a major gas exporter “pick up their bat and ball and go home”.

So long as they turned off the lights at a Curtis Island plant as they left – at the price of a lousy 175 jobs and a few GDP points – the wider economy would improve measurably!

Comments

  1. Johannes Kepler

    They are threatening Australia as a sovereign entity becoming like Argentina.

    People seriously need to brush up on their history of South American countries and how the US and UK have aborted their economies over energy claims – the wider western world just thinks there is a plethora of unstable political entities in South America, that the people are too stupid to govern themselves etc – rather than understanding the powerful control the US and UK exert over these countries.

    Australia is in the firing line – we will look back in a decade and understand how we were destroyed, the rest of the world will just think we are too stupid to govern ourselves properly.

    We need to sort this out. Like it or not the current state of capitalism is terminal and people need to come to grips with that – without government regulation to maintain the society in top condition business dies – but business sees governments and society as a function of business and regulation as a hindrance to that.

    Until we can restore the balance that business is a subset of society, and not the otherway around – capitalism is dead.

    I think capitalism is a fantastic driver and should be persevered with, but if it can not conform to the society which governs it – take it out the back of the hay shed and put a bullet through its head.

    • And of course Judith failed to mention her pecuniary interest and responsibilities with regard to Santos.
      Put another log on the fire…

  2. Jake GittesMEMBER

    And the Commonwealth is handing pensioners $75 cheques to cope with power price rises. The depth of idiocy and delusion a new chapter.

    • $75/head buys you a lot of low hanging votes… Who said that a vote is priceless? There’s the price – right in front of you, staring you in the face.

      Never waste a good disaster, I say…

    • It is not idiocy. The pensioners will continue to vote for them. They are a solid liberal block, however they might be tempted left or right if their benefits are cut, or they need to pay more tax. Old people vote.

      “A government that robs Peter to pay Paul can always depend on the support of Paul.”
      George Bernard Shaw

    • $75 cheques?

      Shows how brainless the Greens were with regards to the coal tax. I honestly thought they were going to give out carbon compo cheques.

      Imagined the optics of $900 annual cheques being called “electricity bill help cheque”. The bogans would have said “no power price rise for me mate, I got a $900 rebate, so I am not voting for Tony Abbott”.

  3. OK you’re a bit wrong here. The gas industry absolutely was forced to look at export markets in order to commercialise most of the qld csg and cooper basin expansions. Given their high break evens, back in the late 2000’s domestic industry refused to sign up to contracts at prices >$8/gj (not blaming them just explaining). That meant the gas wasn’t going to get developed unless producers could get it contracted at a price that made it work, hence LNG.

    As seems to be a theme here, you are very good at explaining all the screw ups by the gas companies (of which there are many) without explaining some of the other reasons for this mess.

    • I agree no one is blameless in this fiasco, had Asian gas demand remained as strong as it was in 2011 we’d be paying over $20/GJ for local gas and happy to be getting it at this bargain basement price, International prices would be a few dollars per GJ higher. Local drilling ceased when the global price paid for LNG collapsed, and as they say the rest is politics.
      So yes closing Curtis Island would fix a lot of our local Natural gas problems but it’s crazy thinking to believe that Curtis Is will close while there is still value to be realized by fulfilling over-priced contractual obligations entered into by the Japanese Energy sector.
      It’s also crazy thinking to believe that LNG operators will contract to have more NG wells drilled at the current global price for LNG.
      One way or another we’re stuck with this interim solution of higher domestic prices (I’m not defending this just stating the obvious). I suspect that too much Political interference in the operation of the LNG trains will expose both federal and state governments to to multi billion dollar suits under recently agreed Free trade agreement terms (specifically the Investor State dispute Settlement clauses) Even if Santos itself agrees with these operational changes their bankers are unlikely to agree and corporate control of the LNG trains will quickly shift from Santos to its bankers. The change over process is called Liquidation and in Australia it takes a brave (and foolish) man to continue operating any entity that is clearly Bankrupt…I’d suggest you run the numbers for Santos assuming that these domestic reservation policies were created and also assuming that Santos was prevented from profiting from high local prices for NG…..their balance sheet isn’t pretty today but these changes would definitely put the F in Fugly.

    • WTF.

      So Australian industry should have signed up for gas contracts that were expensive to help the gas producers? There was no domestic need for those csg explorations in the first place, it was all for export. Except they fucked up and couldn’t produce enough to run the number of plants they put in place, so they took gas which previously ONLY had a domestic market and exported it to meet their contractual requirements and we ended up where we are now: prohibitively expensive domestic gas which is strangling us.

      • Nope not saying industry should have done anything just explaining the situation. I will say though that around the time the LNG stuff was happening, the cooper basin was already in decline and the lowest cost CSG already drilled, so higher cost supply was coming. LNG has sped up the process though.

    • Don Voelte, former CEO of Woodside, was warning about an East Coast gas shortage from the very outset. I know that because at the time I had shares in many of the explorers putting the Qld fields together. He cast doubt on the ability of the fracked well system to produce continuoulsy at the levels being promoted by BG , Sanots and others I cant find his original comments but they are there for a more astute searcher of the Web than myself. However, here is a link to his comments in 2014 which repeat those concerns. His replacement as Woodside CEO has also expressed similar reservations. Whilst they maybe self-interested in supporting their own Browse fields, they do carry a reputation for considerable expertise in gas exploration and development.

      So MB is on the money with regard to whether or not 3 trains were viable at Gladstone or not. In fact the proof is in that the Qld gas fields were probably sufficient to support no more than just one train long term. The diversion of the domestic supply into the export stream proves that very point, whether Prof Sloan acknowledges it or not.

      http://www.afr.com/business/energy/gas/queensland-lngdoesnt-add-up-says-exwoodside-boss-don-voelte-20140910-jepee

    • Michael,

      How far away was that shortage? Are you talking a few yrs, a decade? I’ve not seen anyway so far make that claim. The present shortage is purely from exporting gas that before had only a domestic market.

  4. Tassie TomMEMBER

    The primary reason we have high wholesale electricity prices at the moment is that the AEMC – the committee that makes the rules for the AEMO to follow – consists of a bunch of highly conflicted individuals who are deliberately not adjusting the market rules to suit the changing times.

    Here are links to the AEMC – “who are we?”
    http://www.aemc.gov.au/About-Us/About-the-AEMC/Chair-comissioners
    http://www.aemc.gov.au/About-Us/About-the-AEMC/Senior-management-team

    If the AEMC actually kept the rules updated to suit the present and the near future, we would have investment, we would not have the market gaming, and we would not have the constant high prices.

    But that’s ok. The fossil fuel generators who were making profits with wholesale prices of $30/MWh are now absolutely creaming it with wholesale prices of $70-$100/MWh. It still costs them the same to run their generators. And that’s what it’s all about at the moment.

  5. kiwikarynMEMBER

    I think the Liberal party are taking a leaf out of Trump’s book, like with Obamacare. If you let the current system collapse under the weight of escalating prices, pretty soon voters (and the Opposition) are forced to agree to whatever alternative you propose. #notstupid

  6. “In the meantime, well-heeled households are subsidised to spend up big to install solar PV with battery backup, meaning that the cost of operating the grid is shared across a smaller number of participants. This drives up prices further for those who can least afford to pay. They call it energy poverty in Europe; expect that term to become common parlance here.”

    I can see how that situation may have a lot of appeal for neo-liberals. Just waiting for some NSW state minister to start talking about how high prices are actually a good thing, the market at work, providing incentive to invest in renewables by those who can most afford it. Another wonderful trickle-up situation such as we have with housing.

  7. MediocritasMEMBER

    Computer hardware manufacturers often sell their gear at a loss in order to undercut the competition, increase unit uptake and increase market share. Losses are subsequently recouped by taking a % of profits from software that clients must run on that specific hardware. Making the hardware cheap enough to dominate market share incentivises software providers to develop for that platform and leaves consumers with more money to buy software.

    The sales strategy is effective and nothing new: https://en.wikipedia.org/wiki/Loss_leader

    Energy is no different. Ensuring cheap energy (at a loss to the providers) then stimulates economic activity that can be taxed to recoup losses. Energy-provider profits end up being higher than if they’d charged high prices in the first place, with the added benefit of all that other economic activity.

    Alternatively, let the Neoliberals have their way, ensure expensive energy to line foreign-owned pockets, constrain local profits and economic activity and watch GDP and tax revenues dry up. It’s the same story around the world in energy, water, transport networks, education, telecommunications, banking, etc. Not smart.

    Mixed economies are optimal when done right. Socialise base infrastructure (naturally monopolistic) and leave it up to the private sector to create and distribute the services that leverage base infrastructure (naturally competitive). Provide the infrastructure at a loss then pay for it by extracting a % of the profits from the private sector that runs on top.

    TL;DR: Ordoliberalism > Neoliberalism.

  8. The mistaken belief that intermittents actually replace fossil generation is the cause of increasing electricity prices. The intermittents have increased the demand for fast response fossil generation thereby making electricity supply more dependent on gas while annihilating the economics of coal generation.

    What is this nonsense?
    ” the national plan to use it as the bridging fuel as we transition from coal to renewables”
    Where is the national plan. The high cost of electricity is solely the consequence of the RET forcing the increased use of intermittent generation while subsidising its production to make it economic.

    Unless you are operating a stand-alone on-demand power system using intermittent generation sources you have no understanding of the costs structure for such a system. Those few people that have this understanding can appreciate the folly of the RET. There is no national plan. The Finkel report is based on junk models so is junk.

    The only direction for electricity prices is upward.

    Today is a rare day for wind energy production. The 4395MW of installed capacity is producing 2800MW right now. With some luck it will ride through the approaching front without shutting down and continue producing at 60% capacity till Wednesday when it gets back to more normal level of 15% of capacity.

  9. DominicMEMBER

    Surely the cure for high prices is, er high prices ..

    The world is awash in NG …. there is a natural ceiling close by …

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