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Soaring prices derail future for gas in power generation

Soaring prices derail future for gas in power generation

By Angela Macdonald-Smith on 9 June 2017

Soaring east coast gas prices are foiling hopes of a renaissance of the fuel's use in power generation, with the Finkel Review forecasting its already-skinny share in the market will be halved by 2050 as it gets beaten to the punch by battery storage.

Under the Clean Energy Target measure recommended by the report, gas should in principle become more widely used in power generation to make up for outgoing coal plants and to complement renewables, the chief scientist said in his report.

But the high price of domestic gas, which has doubled over the past two years as huge volumes get exported from Queensland as LNG, means its share is instead likely to fall and end up much smaller than in the "business as usual" case.

The share of gas in power generation, currently 6 per cent, would fall to 5 per cent under a CET in 2030, then to just 3 per cent by 2050, according to the Review. That compares with a share of 29 per cent under "business as usual".

It also starkly contrasts with the hopes of gas producers such as Santos that pushed for such a target mechanism several years ago, when gas prices were much lower, with the aim of growing its use in power generation.

"Given the current gas market conditions, it is possible that new technologies such as battery storage systems may be more cost-effective in providing security and reliability in the NEM [National Electricity Market] in the near future," the Review cautions.

Gas industry spokesman Malcolm Roberts agreed the amount of gas used in the NEM would depend on its price and reiterated calls for states to remove impediments to onshore gas.

"That's why it's critical governments remove the political bans and restrictions on gas development to put downard pressure on prices," said Dr Roberts, head of the APPEA oil industry group.

The long-awaited report from the chief scientist on energy security doesn't propose a specific threshold for emissions intensity that would apply in a Clean Energy Target, leaving it unclear to what extent gas-fired plants would quality for a subsidy.

But a possible threshold of 700 kilograms of carbon for every megawatt-hour of power produced would allow more efficient gas-fired power stations to get a small subsidy for electricity supplied, sources said.

"Gas generation of electricity has half of the carbon emissions of coal, and increasing the proportion of electricity generated by gas would be a quick way to assist Australia to reach its emissions targets," said Peter Greenwood, head of the Australian Pipelines and Gas Association.

The review still highlighted the vital role gas plays in electricity supply security and made several significant recommendations to cement that role.

Iit said the Australian Energy Market Operator should be given "last-resort" powers to purchase natural gas in order to ensure power stations can run in an emergency, recommending a deadline of mid-2018 for the measure to be put in place.

Such a step could avoid a repeat of the recent situation in South Australia which suffered blackouts when the Pelican Point gas fired generator was instructed by AEMO to start generating power, but was unable to because of a lack of gas.

The report also recommended power producers be forced to provide information to AEMO by the year-end on their fuel resources and contracts so an independent assessment can be made of whether they have enough or not.

"To help address problems caused by rising prices and reduced availability, AEMO should be given expanded visibility on gas contracts so that it can plan responses to shortages," the Review said.

Financial Review

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