Energy: How soaring gas prices hit power users

Soaring gas prices are not just a problem for gas users. Electricity customers also suffer because gas sets the wholesale cost of electricity much more often than it did in the past.

The Finkel review of energy security points out when the wind isn’t blowing or the sun isn’t shining and these sources of variable renewable energy – VRE – aren’t contributing, something else has to step in.

That something else is often gas-fired power. Every extra dollar on the price of gas per gigajoule adds about $10 to the wholesale price of a megawatt hour of electricity.

Costs of electricity vary according to plant type. But a typical gas plant can produce a megawatt hour of electricity at a short run marginal (bare operating) cost of about $50 with gas at $3.90 a gigajoule, about $80-90 with gas at $7.50/GJ and about $110 with gas at $9/GJ.

Electricity and gas markets are linked

Finkel review of energy security

Gas used to set the National Electricity Market (NEM) wholesale price about a tenth of the time. Now it’s a quarter of the time.

Punishing

So a doubling or tripling in domestic gas prices in the space of a few years is a punishing impost for households.

“Gas-fired generation typically sets the spot price for the wholesale electricity market when VRE generation is low or demand is high, and this flows through to consumers as higher electricity prices”, the Finkel review says.

Coal-fired generators have been forced out of the market because wind and solar farms are front-loaded capital investments with negligible marginal operating costs.

The cost of producing electricity rises by about $10/MWh for every dollar on the price of a GJ of gas
The cost of producing electricity rises by about $10/MWh for every dollar on the price of a GJ of gas

Finkel review of energy security

As well, gas peaking plants are more suited to the stop-start role forced on them by variable wind and solar power, because they can start up and switch off more quickly than coal plants.

Australia’s mostly old coal plants are designed to run 24 hours a day, although they are increasingly suffering from outages – like AGL Energy’s aged Liddell coal plant during the February heatwave-induced load shedding in NSW.

Problem for gas gen too

High gas prices are a problem for gas generators too. Because their operating costs are higher, they are less likely to be competitive in the market at times when wind and solar energy are producing, so their average capacity utilisation falls and their unit costs of electricity production increase in an adverse feedback loop.

NEM generation by fuel type
NEM generation by fuel type

Finkel review of energy security

This wouldn’t be a such a big problem if we had abundant other sources of capacity that is “dispatchable” – able to be switched off an on a hurry. Big grid batteries like the one Tesla is building in South Australia, pumped hydro storage of the type Snowy Hydro wants to build, and smart demand management – or “demand response” – can fulfil this role.

But battery prices need to fall even further to be economical for widespread use in the grid. Pumped hydro takes time – from a couple of years upwards – to build. Demand response hasn’t been used much in Australia, but the Australian Energy Market Operator is banking on it to fill most of the 1000 megawatt gap it has identified in Victoria and South Australia under extreme conditions this summer.

Renewables can help

Failure to integrate wind and solar energy into the grid in a smart way has contributed to the problem. But increasing investment in renewable energy, batteries and demand response also offer a solution that could reduce gas demand and lower electricity prices.

The Finkel review of energy security found that gas sets the cost of electricity more often than in the past. Chief ...
The Finkel review of energy security found that gas sets the cost of electricity more often than in the past. Chief Scientist Dr Alan Finkel at Mellbourne Economic Forum in Melbourne CBD today. Picture by Wayne Taylor 18th September 2017.

Wayne Taylor

AEMO says in its advice to the Turnbull government on dispatchable capacity that the potential 1000 MW shortfall in Victoria and SA this summer will progressively reduce over the following four summers “as peak demand continues to be moderated by additional rooftop solar PV, new large-scale renewable generation, and ongoing efficiency improvements”.

High gas prices will still be a problem though.

“The rapid increase in gas prices above historic averages … means that even once additional generator capacity is brought forward, wholesale electricity prices may persist at higher levels than in the past,” the Finkel review says.

Audrey Zibelman, CEO, and David Swift, adviser to th CEO of the Australian Energy Market Operator (AEMO), during an ...
Audrey Zibelman, CEO, and David Swift, adviser to th CEO of the Australian Energy Market Operator (AEMO), during an inquiry into modernising Australia’s electricity grid, at Parliament House in Canberra on Thursday 14 September 2017. Fedpol Photo: Alex Ellinghausen

Alex Ellinghausen

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