Promise or threat? PM’s intervention in NSW electricity market

Prime Minister Morrison is today expected to unveil a new set of policies aimed at improving energy security and centred around natural gas. These include ambitions to supersize an existing gas hub at Wallumbilla in Queensland in order to facilitate greater liquidity in gas trading, with hopes that Wallumbilla can emulate the US’s Henry Hub at Erath in Louisiana. The increased volumes of gas that would be required to support greater liquidity will come from five new gas fields, in Queensland and the NT. The government will create something called a “strategic blueprint” to facilitate the opening up of these fields. Stronger “use it or lose it” rules on gas tenements are aimed at discouraging hoarding of gas resources. And the federal government will direct its wholly owned energy company to build a 1,000MW gas powered generator (GPG) at Kurri Kurri in NSW if the private sector does not commit to build new capacity before April 2021.

The gas market and infrastructure changes will be analysed in a future blog. This article examines the Kurri Kurri option and whether it stacks up. The first puzzling thing about it, is that it is apparently aimed at providing electricity to the nearby Tomago aluminium smelter. But smelter owners who perennially complain about electricity prices aren’t likely to be keen to contract at the price point that a GPG would need to be viable. This fluctuates with the gas price, but some heroically optimistic assumptions would be required for a GPG to be viable at less than $70/MWh, based on CSIRO’s levelized cost estimates.

Next up – where’s the investment signal that says NSW needs 1,000MW of new plant urgently? Wholesale prices are lower this year than the previous year and ASX futures prices through to 2024 (when the new plant needs to be up and running according to the PM) are mostly in the $45-$50/MWh range except for the March quarter where summer price spikes mean that baseload contracts trade around $75-78/MWh. This is despite the expected closure of Liddell by April 2023.

AEMO’s crystal ball on future reliability, the ESOO report is a little less sanguine than the market. It does think that if no new plant is built by the time Liddell closes that there will be some consequences for reliability. Even so, their projections do not see the reliability standard being breached before 2029-30 (when Vales Point is predicted to exit the market), only the tighter interim reliability measure (IRM) that energy ministers dreamed up earlier this year. It’s hardly surprising that the market hasn’t reacted to that.

In any case the IRM is only at risk for a couple of years before Snowy 2.0 comes online and increased transmission links allow more energy to flow to NSW users from Snowy 2.0 or interstate. In other words, the Commonwealth’s own pet project is throwing a shadow over the market because it will not be online for five years or so (AEMO forecasts 2025-26). This kind of short-term issue is not best fixed by a 40 year investment into GPG but into flexible and temporary resources such as demand response, emergency diesel gensets or even batteries.

Finally, let’s consider the other reason. why there has been a dearth of investment in dispatchable capacity in NSW. Put simply – government policy. We have been through over a decade of well-documented political turmoil over climate policy for the energy sector. While AGL announced the closure of Liddell with plenty of notice, the commonwealth government has spent the last few years trying to undermine the investment signal this created by cajoling and threatening AGL to change its mind or sell the plant to someone else. There’s also the Underwriting New Generation Investment program which collected expressions of interest from new projects 18 months ago. Only 2 shortlisted projects have progressed and neither of them are fully committed. Curiously, neither of them is in NSW, which if this was the region that really needed new investment, you’d think would be the priority.

Plus, there is the 800 pound gorilla that is Snowy 2.0. Some energy market analysts think Snowy 2.0 is a white elephant in any case. Even if is a good investment, it’s likely to be a less good investment if its owner also builds a large GPG in the same region that much of Snowy’s output flows to. Nor is this doing much to reduce supply-side concentration, which is one of ACCC chief Rod Sims’ bugbear. But is writ doesn’t extend to government owned businesses, so a dominant Snowy is worse news for consumers than a dominant AGL.

All in all, the PM’s proposed GPG appears to be a solution looking for a problem when analysed in energy market terms. Analysed in political theatre terms it may be a win-win. Having set up the supposed need for new generation, if the private sector does come forward with project commitments in the next 6 months, Morrison will claim it was his threat of intervention that forced their hand. If they don’t, he will claim that he is the white knight riding to the rescue of NSW energy consumers with the proposed GPG.