Author John Bartlett
Date March 2017
Over recent weeks media coverage has intensified over the issue of energy supply security, with the latest stories centering on the release of the Australian Energy Market Operator’s report on the state of gas supplies across eastern and south eastern markets. In this report, AEMO re-iterates what Energetics has been saying since October last year, that a severe gas supply shortage is forecast within two years with implications not only for large gas users, but for gas fired power generation and consequently, electricity prices in the National Electricity Market.
In this article, Energetics argues that the shortfall is occurring now and that there are scenarios in which the price of gas could rise dramatically.
Most of our east coast gas is exported. At what price could it be sold into the domestic market?
In the absence of other short term solutions, we saw the possibility raised of LNG producers releasing much needed gas into the domestic market – if the price is right.
The Australian Financial Review in their article on Tuesday, 7 March quoted AGL’s head of wholesale markets, Richard Wrightson. The article said, “..he had ‘a degree of confidence' the LNG producers would eventually sell more gas locally – as happened last June when gas prices spiked – particularly given the low LNG prices in Asia”. That means we’re looking at spot prices in the order of $20/GJ to see sellers return to the domestic market. A spot price in this ballpark translates to a gas contract approaching $30/GJ or higher with take or pay conditions. Industrial clients are currently exiting two year contracts paying $6-7/GJ.
It is difficult to see domestic wholesale price volatility providing benefit to domestic consumers and industry if it is simply an opportunity to exploit the market during times of scarcity. Similarly, making gas available to a power station through a short term spot trade is opportunistic and not a signal that producers are committed to maintain supply for industry.
There is a gas supply problem now
AEMO in their release of the Gas Statement of Opportunities for eastern and south-eastern Australia said that the gas shortage is set to come into effect within two years. However, for Australian industry the shortage has already led to dramatically reduced competition. As stated back in October 2016, Energetics sees an ongoing commitment to supply residential customers, but a definite loss of appetite for servicing large Commercial and Industrial (C&I) businesses. For this market, it is not simply the price of gas which is a problem, but the limited number of gas retailers who are willing or indeed able, to offer prices.
There are implications too for gas fired power generation, which we have seen decline recently. Read our discussion of this issue in our article The other factors driving price volatility in the NEM
What are my options?
Energetics recommends large gas users take the following steps:
● Engage with all authorised gas retailers to maximise competitive tension
● If your contract falls due end financial year 2017, consider moving the tendering process forward. Better prices are likely to be offered further out from the contract's expiry. Especially too, because at that time of year, domestic gas demand is higher
● If you are a large gas user, assess the risks and opportunities in using alternative channels to market and contracting arrangements such as wholesale priced gas contracts (ie. buying gas at the variable wholesale price applicable to the relevant gas hubs, now available along the east and south east coast)
● If you have gas-fired cogeneration or trigeneration systems, particularly in commercial buildings, review your system control strategies to optimise performance. In addition, assess the impact of rising gas prices in relation to operational costs, NABERS ratings and options to procure green power
● Review overall business efficiency opportunities to drive down consumption through both process and equipment efficiencies
● Consider the longer term: review planned energy investments and any changes intended to infrastructure and plant, and evaluate options for alternative supply such as solar thermal or biogas in the industrial sector (especially suitable for the food manufacturing and beverage industry).
Over the last 15 years, Energetics has developed flexible gas supply contracts tailored to meet the risk and cost management objectives of our clients. Incorporating our understanding of the drivers of natural gas prices into forecasting and modelling, is core business for Energetics. We tender in a large number of natural gas contracts per annum using robust tools and methodologies for examining historical market trends, future price drivers and key developments that influence pricing.
Please contact our experts for advice.