MELBOURNE, October 10, 2017 – A new report from energy analysts, RepuTex, indicates that the outlook for gas in the Australian electricity market could be dimming, with high LNG prices – and competition from the Snowy 2.0 pumped hydro scheme- likely to see energy storage investment displace gas as a bridge-fuel to a low emissions energy system.
The RepuTex report, “Goodbye Gas, Hello Pumped Hydro” analyses the government’s proposal to extend the operating life of Liddell, and scale-up pumped hydro energy storage via the Snowy 2.0 scheme, examining wholesale electricity price and competition impacts in the National Electricity Market (NEM).
The report is good and bad news for the Turnbull government, with findings indicating that the proposed extension of Liddell could increase wholesale electricity prices, while the future scale up of pumped hydro energy storage may lower electricity prices and accelerate the displacement of gas and coal in the NEM.
EXTENSION OF LIDDELL MAY INCREASE WHOLESALE PRICES
According to RepuTex, with a proposed $900 billion in capital investment, the extension of Liddell’s 2,000 MW of capacity is expected to increase the cost of supply – despite maintaining New South Wales’ (NSW) theoretical generation capacity – as any operator seeks to recover refurbishment costs.
‘NSW coal is no longer the cheap source of electricity that some remember’, said RepuTex head of research, Bret Harper.
‘The fuel cost of coal fired electricity in NSW has grown to over $60 per MWh, while the long-run cost of recovering any new investment in Liddell could be well over $100-120 per MWh, depending on how often it runs’, he said.
‘At those prices, even without valuing a carbon price, the levelized cost of energy is around the same as large-scale solar with storage – like lithium-ion batteries or solar thermal – which could provide similar dispatchable capacity for $80-120 per MWh for the hours when it’s most critical’.
Critically, RepuTex notes that extending the operation of Liddell is likely to have a detrimental effect on planned wind and solar investment. This is likely to result in NSW becoming increasingly dependent on more expensive gas – leading to higher wholesale prices.
“Directing Liddell to continue to operate could increase uncertainty for strategic investment in renewable projects that would otherwise be likely to go ahead. Around 4,000 MW of new generation is already in the advanced stages of development, but has not yet made a final investment decision’.
‘Modelling this scenario suggests average wholesale prices will grow above $100 per MWh with Liddell in play instead of low-cost renewables”, said Mr Harper.
PUMPED HYDRO TO DISPLACE MORE EXPENSIVE GAS GENERATION
More favourably for the government, RepuTex analysis indicates that the scale-up of pumped hydro storage capacity – such as via the Snowy 2.0 scheme – is likely to drive a broader transition away from expensive gas, mitigating high electricity prices.
According to RepuTex, pumped hydro has already become a viable technology to provide dispatchable flexibility to the NEM, and is likely to fill the role that gas was envisaged to play to smooth Australia’s transition toward a low carbon system.
‘Snowy 2.0 could add 2,000 MW of capacity – equivalent to Liddell’s nameplate capacity – which would help maintain reliability and provide transmission support for neighbouring regions when further large coal generators close in NSW” said Mr Harper.
‘Critically, pumped hydro could serve as a lower cost substitute for gas, while complementing future low-cost renewable energy with greater dispatchable capacity, rather displacing new investment.
‘With Snowy 2.0 in the mix modelling indicates less dependence on gas in NSW, with wholesale prices falling towards $80 per MWh, while greater firm capacity in the system would allow aging facilities to close with less impact on reliability’, he said.
GAS NO LONGER EXPECTED TO BE AUSTRALIA’S TRANSITION FUEL
According to RepuTex, the outlook for gas to play a larger role as a transition fuel in the NEM is therefore dimming, with its role in providing flexible capacity likely to be eclipsed by cheaper energy storage technologies.
‘If gas prices come down it could lower electricity prices and tip the scales toward more gas generation, however, rising gas prices – and high electricity prices – is likely to continue to accelerate the search for alternatives’, said Mr Harper.
‘RepuTex’s outlook is for gas prices to remain above $7.50 per GJ, while the cost of competing energy storage technologies is anticipated to fall’.
‘Given the current domestic gas price outlook, it would be brave to bet that gas investment will outcompete pumped hydro as the primary transition fuel in Australia’, he said.
RepuTex’s report, “Goodbye Gas, Hello Pumped Hydro”, is available via the RepuTex Connect platform. To access this report please visit www.reputex.com
RepuTex spokespeople are available for comment. Please contact RepuTex Melbourne on +61 3 9600 0990.