Independent Review into the Future Security of the National Electricity Market Blueprint for the Future, Jun 2017

Chapter 4: MORE EFFICIENT GAS MARKETS

Overview

Gas and electricity markets are closely connected. As ageing coal-fired generation retires, gas-fired generation can provide a low emissions substitute for coal and can also complement variable renewable electricity generation. In recent years, the contribution of gas to electricity generation has declined largely due to higher gas prices and tighter supply availability. Gas market reforms driven by the COAG Energy Council and recent Australian Government initiatives will help to improve both gas supply and affordability.

To improve transparency in all aspects of the gas market, the Panel concludes that:

AEMO should have better oversight of gas supply contracts for gas-fired generators.

Governments should work with communities and industry to enable the safe exploration and production of unconventional gas, including ensuring that landowners receive fair compensation.

Gas industry performance data should be transparent, clear and accessible. This should include seismic activity, fracking fluid composition, aquifer purity and fugitive emissions.

Even with the benefit of these reforms, domestic gas prices, in real terms, are likely to remain higher than historical levels. Improving the efficiency of gas-fired generators, both in their fuel use and flexibility, will help to ensure gas can continue to play a role in electricity generation.

4.1 Electricity and gas markets are linked

Access to a reliable and affordable gas supply is in the interest of all Australians for its direct use for heating, as a feedstock chemical for industrial processes and as a fuel for electricity generation. In the NEM, gas-fired generation can provide a reliable, low emissions substitute for ageing coal-fired generation, and can provide essential security services to complement variable renewable electricity (VRE) generation.

There is an increasing interdependency between gas and electricity (see Figure 4.1). Material changes in the gas market have a subsequent effect on the electricity market – whether it is with respect to supply or to price. The economics of gas-fired generators are being challenged by rising gas prices and tightening gas supply. As coal-fired generators retire, gas-fired generators are likely to set the marginal cost of generation within the NEM, which will flow through to consumers as higher retailer electricity prices. Under these circumstances, access to affordable gas supply will be critical.²⁰⁵

The recent linkage of the east coast domestic gas market to international gas markets has complicated the outlook for gas in the NEM’s future generation mix. The three Queensland liquefied natural gas (LNG) projects – Australian Pacific LNG (APLNG), Queensland Curtis LNG (QCLNG) and Gladstone LNG (GLNG) – are driving changes in the domestic gas market. To enable investment in these LNG projects, long-term offtake contracts were committed to major gas users in the Asian region. Domestic users in the east coast gas market now compete for additional gas supplies with prices set at a level that competes with the international market.

Gas prices have increased substantially in recent years, causing affordability stress for vulnerable residential consumers and severe cost escalations for some energy intensive industries. The extent of the price rises is unclear because there is little, if any, transparency in contract prices.

Efficient gas markets have a central role to play in maintaining energy security and reliability as Australia reduces its emissions in line with international commitments.

In this context, effective government policy and regulatory settings have a dual role. They should:

Facilitate new investment and enable the development of Australia’s gas resources.

Address community concern about the environmental and social impacts associated with unconventional gas extraction.

As indicated by Engineers Australia:

Gas is an important part of Australia’s energy mix, with the ability to respond more rapidly to variable grid demands, and with lower emissions than coal. However, it only remains part of the solution in a low carbon economy and the on-going role that it plays will be determined by its cost due to price volatility and availability, as well as broader energy policy considerations.²⁰⁶

Figure 4.1: Relationship between electricity and gas markets

4.2 The role of gas in the NEM

Traditionally, gas-fired generation has been used to meet periods of high demand in the NEM, such as when air conditioning loads are high on hot summer afternoons.

As demonstrated in Figure 4.2, gas-fired generation reached its highest level in 2014 when very cheap gas was available in the domestic market and local prices fell. This encouraged local gas-fired generation, particularly in Queensland, to run, substituting for coal-fired generation and contributing around 13 per cent of electricity energy generation in the NEM.

Since 2014, gas-fired generation output has been in decline due largely to higher gas prices, increases in VRE generation and reduced electricity demand. While gas-fired generation represented around 19.4 per cent of capacity in the NEM for FY2017,²⁰⁷ it contributed only 8.4 per cent of electricity energy generation in 2016.However, as coal-fired generators are retired, more gas-fired generation will be required to substitute for coal and complement VRE generation.

Figure 4.2: NEM generation 2000 to 2016 by fuel type²⁰⁸

Gas contributes to a secure and reliable NEM

Rapid changes in power output from VRE generation need to be balanced with generation technology that has the ability to increase (ramp up) or decrease (ramp down) power output at the same time. Gas-fired generators have the ability to ‘fast ramp’. Most of Australia’s coal-fired generators do not. In addition, gas-fired generators are synchronous and provide essential security services, including physical inertia to help dampen rapid frequency changes, fault current to help maintain system strength, and the ability to supply or absorb reactive power to help control voltage. These security services are discussed in more detail in Chapter 2.

In the NEM, the main types of gas-fired generation technology are combined cycle gas turbine (CCGT) and open cycle gas turbine (OCGT) (see Figure 4.3).

Figure 4.3: Gas-fired generation technology²⁰⁹

CCGT technology captures heat from the exhaust of the first-stage gas turbine to produce steam to drive a second-stage steam turbine. The capture of waste heat improves the thermal efficiency of the plant, thus CCGT generators use less fuel but the trade-off is that they have higher capital costs. CCGT generators offer an intermediate level of flexibility and capital expenditure between coal-fired and OCGT generators. Initial start-up times for CCGT generators can be quite fast to achieve partial output, but reaching full output takes longer. Mothballing and reinstatement times for CCGT generators are shorter than for coal-fired generators but involve more time and cost than for OCGT generators.²¹⁰

OCGT technology uses a gas turbine to generate electricity. This technology does not recover heat, and therefore has a lower efficiency and higher fuel use than CCGT. OCGT generators are the most flexible form of fossil fuel generation, in the context of both frequent cycling as well as seasonal or longer shut-downs. This flexibility is due to the versatility of gas turbines and their lack of thick-walled components. The time and cost to mothball and reinstate an OCGT generator is much shorter and lower than for coal-fired generators and CCGT generators.

Recent technological improvements have increased the flexibility of gas-fired generators to provide fast ramp rates and dispatchable capacity. New CCGT generators are able to operate with a high degree of flexibility, including being able to ramp up their output from zero to 100 per cent in less than 10 minutes. Thus, with new generation CCGT the flexibility of traditional OCGT can be had without the higher fuel costs.

In the short to medium term, the NEM is likely to require higher levels of flexible, gas-fired generation to maintain security and reliability. Storage technologies, such as pumped hydro and batteries, will be able to play a role to support reliability as and when they are deployed at scale.

Gas contributes to emissions reduction

As discussed in Chapter 3, Australia’s coal-fired generation fleet is ageing and is unlikely to be replaced on a like-for-like basis.

The best gas-fired generation is less than half as emissions intensive than even the most efficient coal-fired plant, including ultra-super-critical coal generation, which is referred to as high efficiency, low emissions (HELE) generation. To compete with new gas-fired generation from the emissions point of view, new HELE generation would need to be fitted with carbon capture and storage (described in Chapter 8).