GOVERNMENT CONTINUES TO KEEP ITS FOOT ON THE GAS PEDAL

Tomorrow night the federal government is expected to announce $58.6 million in funding to drive its gas-led recovery. Prior to the budget, on Friday the federal government released its interim National Gas Infrastructure Plan that advised where the funding would be used.

Building on Australia’s gas fired recovery plan released in September 2020, the interim report outlines $38.7M will be spent on early works to support critical gas infrastructure projects, $3.5M for the development of a long-term Future Gas Infrastructure Investment Framework, $4.6M to develop initiatives that empower gas reliant businesses to negotiate competitive outcomes, $6.2M to design, consult and implement reforms to continue accelerating the development of Wallumbilla as Australia’s Gas Supply Hub and $5.6M to develop a further National Gas Infrastructure Plan for 2022.

This funding is to ensure there will be enough supply to meet demand on the east coast gas market, part of the funding could go to Australian Industrial Power, a company setup to build a gas import terminal and power station at Port Kembla.

Other beneficiaries of the funding include the Golden Beach gas production and storage project in Gippsland, Victoria that could receive a short-term loan of up to $32 million and support for a business case for the expansion of the South West pipeline. The South west pipeline will allow additional capacity to be used at the Iona storage facility. These projects are expected to deliver 1,000 new jobs.

Modelling for the Interim National Gas Infrastructure Plan continues to show a potential shortfall in gas supply by 2024. These shortfalls are expected to occur during peak demand times so as a result funding is designed to stimulate the availability and reliability of high gas volumes close to the demand centres at very short notice. The report also noted the requirement for supply flexibility.

Pipeline developers are concerned that funding for an LNG import terminal will take the focus away from the existing Australian resource projects.

The final National Gas Infrastructure Plan is due by the end of the year and pipeline developers such as the Hunter Gas Pipeline are increasingly frustrated as they have to wait until the final plan to see if they can receive support to build a new pipeline from Queensland to Newcastle.

Other developers are concerned projects such as a pipeline in the Bowen basin should be fast tracked to allow the export of up to 15,0000PJ.

Australia’s first net zero emissions, hydrogen/gas power plant gets the green light.

EnergyAustralia has announced that the expansion of its existing Tallawarra power station in the Illawarra region is proceeding, following an agreement reached with the Government of New South Wales.

Tallawarra B will be Australia’s first net zero emissions hydrogen and gas capable power plant, with direct carbon emissions from the project offset over its operational life. EnergyAustralia will offer to buy 200,000kg of green hydrogen per year from 2025.

The 300+ megawatt power station will be powering New South Wales homes and businesses in time for summer, following Liddell power station’s retirement.

Not only will the new power station deliver reliable power to around 150,000 homes but it will also contribute $300 million to the economy and create 250 well-paid jobs during construction.

“EnergyAustralia has a goal of being carbon neutral by 2050. Today we provide further evidence of another energy project that can help keep the lights on for customers with reliable, affordable, and cleaner energy,” Managing Director Catherine Tanna said.

ORIGIN DOWNGRADING

With the downturn in the Electricity market, most companies are finding it hard to make a profit. As a sign of things to come Origin Energy has downgraded its guidance for full-year profit.

Previously, Origin had highlighted it was partially insulated from the impacts of the Electricity market downturn. However, following a ruling on a gas dispute with Beach Energy, this has resulted in Origins gas supply costs increasing by up to $40M this financial year, then increasing to $80M the following year. The dispute occurred due to Origin and Beach Energy not being able to agree on pricing under the contract which is reviewed every three years.

Origin has previously amended its guidance for gross earnings to $1.14B, with earnings expected to be $1.02B. As a result of this news, shares in Origin dropped 4.5%.

Beach Energy is a major supplier of gas to Origin.  The gas pricing determination will affect the cost of gas and impact the profits from Origins network of end users and power generation assets.

Origin’s coal fleet profits have been impacted as wholesale prices fall. Origin was hoping gas would be the solution to it’s drop in profits. Chief Executive Frank Calabria said the company is “disappointed in this decision which we believe is wrong and entirely inconsistent with our prior experience in the gas market”. “This will result in a gas price that does not reflect market prices, and it is therefore a very poor outcome.”

Origin will still benefit from the performance of Australia Pacific LNG which Origin owns 37.5% of and is expected to return cash distribution of $650M.

Origin guidance of “challenging” conditions in energy markets remain unchanged and expect returns not to improve in its electricity and gas businesses until the 2022 financial year

ORIGIN DEMERGER

Last week it was AGL. Is it now Origin Energy’s turn to announce a demerger?

On Thursday Origin Energy’s CEO put an end to the speculation, saying that they would not be taking AGLs lead and demerging their business for now.  In the announcement, AGL’s rival highlighted the benefit for the company to stay whole, but to diversify their earnings.

Commentary around the potential demerger has been highlighted by Edge and others over the last couple of months. Edge saw an opportunity for Origin to either spin off its retail business or split the business into 2, being electricity and gas.

Origin is a complicated business, operating across both electricity and gas, and across wholesale and retail. Parts of the business are also tied up in joint ventures such as the LNG export terminals in Australia and its part share in Octopus Energy in the UK. Origin has reported that it ‘‘will continue to assess the portfolio’’.

Origin’s structure is different to AGL’s.  Origin’s LNG business is currently propping up its domestic gas and electricity business units. If the pressure from a dropping international gas price puts stress on LNG returns, we may well see Origin have a closer look at its portfolio and structure.

Currently the APLNG venture returns $800M to Origin after tax.

CEO Mr Calabria said “Origin’s energy market business already looks very much like the ‘’new AGL’’’, with the notable difference that Origin has a more gas fired portfolio, with Eraring (the only coal unit) flagged to shut down from 2030.

Mr Calabria has also shown limited expectations in the short term for the energy industry, unless we see hotter summers leading to higher demand or the shutdown of coal power generation as a result of the unsustainable low spot prices.  He remarked that the market is in an ‘‘unstable equilibrium’’ as an increased amount of renewable generation enters the market and the resulting wholesale prices squeeze profits of the generators and retailers.

As we move through this unstable equilibrium, Origin sees opportunities for State governments to take NSW’s lead and introduce policies to motivate investment rather than wait for increases in spot price.

NB: Spot prices have historically been the leading indicator for investment in new generation. If government led roadmaps became predominant, it may lead to a smoother transition to a renewable future and the orderly retirement of coal and gas generation.

So, with APLNG subsidising Origin’s other business streams we are unlikely to see a demerger, but can Origin utilise this upper hand in the market to push out the competition – demerged or not?

IS GAS THE TRANSITIONAL FUEL?

 

Following feedback from industry that gas is not the transitional fuel for Australia to help move from Coal fired generation to renewables, AEMO is grappling with their plan to model a ‘gas led recovery’ scenario for the 2022 Integrated System Plan (ISP).

AEMO are now calling the ‘gas led recovery’ the ‘diversified technology’ scenario.

It appears that not all is dead for gas as an option as the transitional fuel and a fuel used into the future. Methane (CH4) is commonly thought of as the gas to power generation, however in this case it looks like ammonia (NH3) could be used. This carbon free fuel can be made by renewable hydrogen and is commonly used in fuel cells and rocket engines as a propellant.

Gas turbine generators are essentially modified rocket engines so it’s not hard to imagine ammonia to be used to fuel power generating gas turbines. Mitsubishi Power have developed gas turbines to operate on hydrogen but now they have gone a step further to develop ammonia-fired technology.

Mitsubishi Power is currently developing a version of its 40MW H-25 series gas turbine that would operate using ammonia, this commercial scale gas turbine is the first in the world to operate on ammonia as a fuel and is expected to reach commercialisation by 2025.

Ammonia is the chosen fuel as it is a highly effective transporter of hydrogen, using readily available nitrogen molecules to create a stable compound able to be easily stored and transported.

Apart from the usability of ammonia as a fuel source it comes with the added benefit of achieving a carbon neutrality fuel.

As with any technology there is always a downside, the combustion of ammonia results in the production of Nitrogen oxide (NOx).  NOx can have harmful effects on the environment by creating smog and in some cases acid rain. The NOx by-product can be reduced using catalytic similar to the ones used in car exhausts to reduce the level of emissions.

Green Star Building Rating Reject Gas

In a major overhaul of the Green Building Council of Australia’s (GBCA) Green Star rating system, Australian buildings hoping to achieve the gold standard for sustainability will now have to ditch gas.

For buildings to achieve the highest 6 star rating, the building will be required to be fossil fuel free and 100% renewable powered.

The Green Star rating system was launched by the GBCA in 2003 as an independent and voluntary certification system that assesses the sustainability of construction projects across all stages of their life cycle.

Green Star rated buildings have been recognised as having a higher standard of sustainability and energy efficiency than buildings that meet the National Construction Code.

The industry has supported the need to eliminate carbon emissions from buildings and construction to meet obligations under the Paris Agreement, this has resulted in the new focus.

Atlassian, the company behind energy-savvy billionaire Mike Cannon-Brookes has signed on to use Green Star Buildings for its flagship new Sydney headquarters.

The new ratings will push for electrification however emerging technologies, such as green gas will be beneficial to reaching the higher standards as it aligns with Australia’s goals in energy transformation and emissions reduction.

Changes to your Energy Bill

Changes to your Energy Bill

The effects of COVID-19 have impacted the retail energy space heavily in the last 12 months. This has caused underlying costs of electricity production to decrease significantly. It is expected that costs will remain low for the next 6 to 12 months.

As the Australian economy begins to rebuild itself in the next 6 to 12 months, it is expected that costs will remain low. Following the impact of COVID-19, came price changes with the introduction of the Default Market Offer (DMO) and Victorian Default Offer (VDO).

The DMO outlines the annual maximum total bill amount that an energy company can charge to eligible residential and small business customers in New South Wales, South Australia, and South East Queensland. Energy retailers use the DMO as a reference price, to guide how they structure their charges. However, retailers can set their own supply and usage charges provided they are equal to or less than the DMO price. The VDO is like the DMO, however is applicable to eligible Victorian customers only.

High electricity offers have now reduced significantly. This reduction means end users who choose to switch offers will still save money but not as much as prior years. The difference between the highest standing offer and lowest market offer has decreased by 10%. Although there has been a decrease in the overall offer price, Victoria has actually seen a 10% increase. The average market offer price is still considered to be quite high at 56%. It is unclear whether these changes are because of the DMO and VDO changes, or by increased market competition.

Market Competition

The increased market competition appears to be pushing retail energy prices down after the introduction of 40 new retail brands. In the last 12 months alone, 35 new companies have entered the market. There have also been 8 existing brands who have expanded into other states jurisdictions and are now offering new products. Net retailer margins across the National Electricity Market (NEM) have also dropped due to increased competition. This has seen on average, a decrease of $93 to $66 per customer in the last 2 years.

Products deemed to be essential services such as electricity and gas, have also continued to evolve. To appeal more to customers, retailers are strategically using add-on products as a way of selling the underlying product. Most retailers are doing this by bundling electricity and gas with internet and phone services.

As we can see, there has been a large amount of changes to the market and to customers costs. However, an Energy Consumers Australia (ECA) survey has shown that end users are happier. The results of the survey showed that 57% of customers believed there was value for money at today’s price. Switching rates are a leading indicator of customer dissatisfaction, and recently these have lowered.

 

Written by: Alex Driscoll

 

To learn about what else is changing in the market, read our latest article: https://edgeutilities.com.au/2020-isp/

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