Interactions between gas and electricity markets Mark Collette August 2012 Private and Confidential
38 Electricity and gas – interdependent? Electricity and gas prices have been more closely related over the last few years as the gas market has matured and gas-fired electricity generation has increased. Electricity & Gas Price Interdependence in Victoria 2007 - 2011 200 20 180 18 160 16 140 14 $ per MWh 120 12 $ per GJ 100 10 80 8 60 6 40 4 20 2 0 0 1/2/2007 1/4/2007 1/6/2007 1/8/2007 1/10/2007 1/12/2007 1/2/2008 1/4/2008 1/6/2008 1/8/2008 1/10/2008 1/12/2008 1/2/2009 1/4/2009 1/6/2009 1/8/2009 1/10/2009 1/12/2009 1/2/2010 1/4/2010 1/6/2010 1/8/2010 1/10/2010 1/12/2010 1/2/2011 1/4/2011 1/6/2011 1/8/2011 1/10/2011 1/12/2011 Daily Electricity Spot Price Average Carbon Adjusted ($/MWh) Daily Gas Spot Price Average ($/GJ) Private and Confidential
39 Electricity and gas – interdependent? Since the introduction of carbon pricing on 1 July 2012, electricity and gas prices appear to be even more interdependent. Electricity & Gas Price Interdepedence in • The Treasury modelling Victoria anticipated higher carbon prices and potentially lower 100 18 gas prices. 90 16 • The expectation was that 80 14 electricity would largely 70 12 shadow price gas. $ per MWh 60 $ per GJ 10 • Demand for gas-fired 50 8 electricity generation was 40 also expected to be a 6 30 significant source of gas 4 20 demand. 2 10 • However, with weak 0 0 demand for electricity, lower carbon prices and potentially higher gas prices Daily Electricity Spot Price Average Carbon Adjusted ($/MWh) this interdependence may Daily Gas Spot Price Average ($/GJ) reduce. Private and Confidential
40 Changing nature of eastern Australia’s gas market The dynamics of eastern Australia’s gas market are changing rapidly and it is critical that supply is able to respond flexibly to changing market conditions. Trend demand plus committed LNG • Committed LNG projects 2000 2000 will increase gas demand PJ/a PJ/a by over 1000 PJ/a by 1800 1800 2020. 800 PJ/a Shortfall 1600 1600 • The only current source of Supply Demand gas to meet this increase 1400 1400 LNG in demand is CSG. Trend production ... Sydney CSG • Trend production growth 1200 1200 LNG Surat/Bowen CSG from CSG will contribute TAS Surat/Bowen 1000 1000 only 200 PJ/a of this, after SA Bass QLD replacing the decline in Otway 800 800 NSW conventional production Cooper/Eromanga SA VIC and non-LNG growth. Gippsland SA 600 600 QLD SA • An additional 800 PJ/a of QLD QLD 400 400 CSG production, above NSW NSW NSW current growth rates, will 200 200 be required. VIC VIC VIC 0 0 2005 2010 2020 2005 2010 2020 Forecast Forecast Private and Confidential
41 Competing demands for Australia’s gas resources Competing demands for Australia’s gas resources, coupled with increasing costs of production, will see higher future gas prices. Private and Confidential
42 Competing demands for Australia’s gas resources Competing demands for Australia’s gas resources, coupled with increasing costs of production, will see higher future gas prices. Indicative Production Costs for Gas • Competition for EPC 10 9 • Productivity 8 7 • Drilling costs 6 5 $/GJ 4 3 2 1 0 Historic CSG New offshore Private and Confidential
43 What is the future price of gas? In an environment of rising prices, gas market transparency becomes critical – both for the gas market and for the electricity market. Private and Confidential
44 Impact of gas price uncertainty A lack of forward price transparency reduces the willingness of market participants to contract with one another. A clear price signal will promote the right investment signal to correct any imbalance between supply and demand. • With forecast increases in demand and price along with decreasing domestic gas contract availability, Governments – particularly State governments – may entertain interventionist policies such as gas reservation. Private and Confidential
45 Availability of domestic gas at competitive prices A deep and liquid wholesale gas market would ensure domestic access to gas at competitive prices. • Domestic gas reservation policies would be detrimental to the development of the gas industry and may only see gas stay in the ground/seams. • A lack of transparency in the gas market is contributing to the perception that the contract market is in hiatus. • TRUenergy supports the development of initiatives such as AEMO’s Gas Supply Hub – this could assist with the future development of secondary markets. • In addition, TRUenergy has been working with governments and industry participants to develop a gas price index to assist market transparency. The index would be constructed based on surveys of market participants conducted by an independent third party. • To the extent that gas and electricity market interdependency increases, greater gas market transparency will increase the efficiency of both markets. • The industry will only benefit from policy that supports increased market and price transparency, while unnecessary regulation could slow the rate at which gas exploration is conducted in the future. Private and Confidential
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