All gas demands are equal; but some are more equal than others

One of the key objectives of the federal government’s proposal for a ‘gas-led recovery’ – besides building a 250MW gas-powered generator (GPG) – is reducing gas prices through increased supply to domestic consumers. The proposal highlights the need to invest in domestic gas exploration and transportation, as well as create an ‘Australian gas hub’ in Wallumbilla in a bid to increase liquidity in spot gas in the east coast.

In this week’s ‘Chart of the week’, we investigate how different gas demand segments in New South Wales (NSW) have been trending and provide commentary on the potential impact of future supply on prices. As shown in the Fig. 1, the start-up of Liquified Natural Gas (LNG) exports in 2015 resulted in bullish trends in domestic gas prices with annual average prices in NSW tripling between 2014 and 2018. Whilst most demand settles on pre-agreed contract prices, spot prices are usually a good indication of potential price movements during contract negotiations. According to an inquiry from the Australian Competition and Consumer Commission (ACCC), contract prices offered pre-2020 were in the $9–12/GJ range. It is left to be seen how much of the current price softness flows into the next round of negotiations.

This sharp rise in prices post-2015 have had discrete impacts on different sectors of gas demand in NSW (and other states). Total gas demand in NSW in 2019 dropped by 15PJ (11%) on 2014 levels; with GPG – and to a lesser extent large industrial (LI) demand largely complicit in this swing. LI demand between 2014 and 2019 dropped by ~3PJ as large manufacturers procured lower gas volumes and streamlined operations due to the drastic increase in contract prices. A further drop in LI demand is predicted this year as a result of impacts from the COVID-19 pandemic on consumer demand and spending. Interestingly, despite being the only commercial sector with the ability to pass on the full cost of input gas to consumers (through bids into the electricity market), GPG in the state has seen the highest drop in demand over those years. GPG demand in 2019 was 13PJ lower than in 2014; in fact, GPG demand in 2020 is already tracking to be the lowest-ever with only 7PJ used so far (< half of last year’s) with only one month to go. Last December, GPG demand in NSW was 0.3PJ. This dramatic drop in GPG demand highlights the impact renewable technologies (rooftop-/grid-solar and wind) are having in the state.

Tallawarra – a combined cycle gas station – in NSW is typically accountable for the majority of GPG demand in the state. So far this year, it has used ~70% of the total GPG demand in NSW. Examining how its operations has changed over the years highlights the changing landscape for GPG in the market. On average, in 2020, the power station generated just 70MW during the day (7AM-3PM), down from 330MW for the same period in 2015. However, during the evening peak (5-8PM), the station generated an average of 227MW in 2020 against an average of 360MW in 2015. As renewables continue to squeeze GPG out of the bid stack, it is left to be seen how effective the ‘gas-led recovery plan’ will be for GPG.

With mass market demand less sensitive to wholesale prices and more dependent on weather (heating) and households (cooking), the only sector that could benefit from the government’s plan remains the LI users. However, Australia is running out of cheap gas reserves (we will cover this in a later issue) and the price at which LI users can access any new gas could remain a persisting issue going forward.

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