Government underwrites gas to guarantee high power prices

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The Australian is celebrating because it has no idea what it is reporting:

New gas fired power plants will be built in Victoria and Queensland after gaining the backing of the Morrison government.

Energy Minister Angus Taylor has declared: “We are taking action to bring prices down” as he unveiled the first two projects to gain in-principle government support from the shortlist of the Underwriting New Generation Investments program.

The government has agreed to underwrite APA Group’s 220 megawatt (MW) gas generator at Dandenong in Melbourne’s southeast. It will also support a 132MW gas generator in the southeast Queensland town of Gatton.

This is good news for reliability but bad news for prices unless the Government also installs gas reservation. Current gas prices on the east coast for contracts remain around $10Gj. This will mean ongoing rises in wholesale electricity prices as expensive gas displaces cheaper coal.

The east coast gas spot price is showing where the contract price should be, now below $6Gj for the first time in years as the Asian glut weighs:

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But 90% of local gas contracts are effectively priced off a fraction of the Brent oil price that determines LNG contracts prices in Asia and they have been rising.

Break the gas export cartel or installing gas generators only entrenches higher power prices.

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SmoCo is a disater on energy and climate.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.