Via Matthew Stevens today:
The federal government might question Andy Vesey’s standing as a good corporate citizen, but a commercial nation facing further gas supply and price shocks from 2019 might well urge those working to craft a functioning energy policy to take stock of the savvy energy trader’s plans.
Vesey’s thought crime, of course, is that he remains firm on closing the Liddell power station in NSW at the end of its “economic life” in 2022.
The government wants the coal-fired monster kept alive to secure the east coast’s synchronous base load power base demands. But Vesey has other plans to fill the 1680-megawatt Liddell void.
…Vesey’s pitch is that this power will be generated by gas. But AGL’s problem is that it does not have the secure gas supply it needs to fuel that future. Here AGL is living the same nightmare that it has helped visit on its commercial customers.
AGL though has plans to fix its own problem. The Vesey Plan is to increase new renewable power and to buttress that new intermittent supply with battery storage at Liddell and other points already accessible to the network and then to add 750MW of new gas-fired generation.
To make that work, AGL needs to secure its own supply of gas. But, having dipped its toe in the coal seam gas waters through the first decade and a half of this century, AGL is now out of the gas drilling game.
Instead, then, Vesey reckons on spending about $300 million on a plant that will receive and convert liquid natural gas into 100PJ of gas a year. That is a lot of gas. The plant would, for example, inject abut 25 cent cent more gas into the system than the Santos’ proposed and relentlessly controversial Pilliga CSG development.
AGL wants to build the floating regas plant at Western Port Bay in Victoria. It would be fed by LNG acquired opportunistically in increasingly liquid regional gas markets. The opportunism is made possible by the fact that AGL owns a large gas storage facility in Victoria and plans to expand another in Queensland.
It is logical to imagine that both those facilities might end up storing gas swapped by AGL with producers closer to those storage facilities. That would reduce pipeline charges and allow AGL to be even more opportunistic in its LNG purchasing.
Importing LNG to east coast markets from Australia’s offshore LNG projects or even from the US is an idea that seems just that little bit counter-intuitive to be commercially sensible. But that seeming paradox is built very much on a misunderstanding.
Let me tell you why this is such a good idea for AGL and such a terrible one for the east coast economy.
Imported gas will arrive in VIC today at $10-11Gj on contract and $7-8Gj on spot. But that’s with the Aussie dollar at $77.50 cents. If it were to fall rather suddenly to 50 cents, say in a shock, then those prices would rise sharply even as oil-linked prices fall, and at a very inconvenient time.
Conceivably, we’d get ourselves an energy price shock just as the currency was supposed to be delivering lots of economic relief.
Sure, AGL could hedge these prices in currency markets to mitigate some of the fallout but would it? One of the reasons it wants to sustain a mix of gas generation and renewables is that the former keeps prices high owing to its marginal price setting role in the National Electricity Market allowing the cheaper renewable generation to make a fortune.
Even if it did hedge, that’ll add to costs as well. So, imported gas hits the market at, say, $13Gj.
That means it is still miles above export net-back prices, which is our first benchmark for a rational market. This is currently $10Gj for VIC on contract prices and $9Gj on spot.
Moreover, by importing gas as your cap for the cartel, you are embedding the cost of liquifaction and transport in your local price meaning you will never get back to export net-back, let alone lower.
It’s just another gouge in the making.
There’s no getting around it. If you want reliably cheap gas you must break the gas cartel to liberate cheap local supplies. That’s the only answer.
