Killing off domestic low cost energy mix – Queensland style

It was some surprise amongst friends that Angus Taylor (thought to be the rising star of the Liberal Party) said gas was the future of a low-cost energy mix. This seemed at odds with Tony Abbott’s (the Prime Minister’s) view that coal is the key. Some react to that story as an OMG moment. We take the story as one that is a design to disguise and deflect on what is actually happening and lead the consumer to a path to pay more. Some might even say it is a centrifuge of fluid appeal. The opening line story is from:

http://www.goulburnpost.com.au/story/2791033/angus-at-odds-with-abbott-over-coal/?cs=181

So there is no confusion as to what we believe: Lets us declare we are pro-market. What we question is whether pro-business rent-seekers are slewing benefits for the rent-seekers at the expense of the consumer. After reading the article immediately below, the story should unfold as to why the opening paragraph was so well linked:

Will Queensland defy the trend of declining demand? By Paul McArdle Wed, 24 December 2014 | Topic Summer 2014-15 in the NEM

“As early as 2011 and perhaps earlier, we’ve been posting commentary about how growth in electricity demand was slowing, and then began to decline.  Across the NEM this trend does not appear to be slowing (and there are a number of reasons for this).

However, within Queensland we wonder whether what we’ll see this summer and next will buck this trend?

Earlier this week we noted articles (Gladstone Observer, Courier Mail and SMH) about the arrival of the first LNG export tanker in Gladstone.  Billions of dollars of investment have been sunk into this new east-coast industry, a fair percentage of which being focused on the upstream tasks of releasing the coal-seam gas and delivering it to Gladstone.  With the three projects each opting for electric compression of gas delivery to Gladstone, we’re looking to see a sizeable increase in demand for electricity as a result.”

Good stuff, hey! Can you see that only a few benefit? We cannot save you, but we can make you aware!

Lets us look at some of those linked ‘demand risers’ in more detail:

The $170m Bauhinia rail electrification project has just been completed and is a spur line to link with the Blackwater System in Central Queensland. The Blackwater system too was upgraded to double its electrical capacity, so rather than using diesel trains carrying coal from the Rolleston mine all the way to the coast it will be all electric powered haulers, which will no doubt further increase electricity demand. Queensland now has electric locomotives rated to 4,000 kW each as opposed to the previous 3000kW. So this means each locomotives at 100% load factor it would be 4 GW of demand! For more information go to –

http://www.aurizon.com.au/projects/bauhinia-electrification-project

Therefore you can expect: Each new coal train is likely to have three locomotives and each locomotive is about 4 megawatts load rated and drawing current directly from the overhead wires. This is and 12MW additional load on the network for each new train. This load was not required before.

We then read the Queensland people and business in general will pay more for gas than other states in Australia. Despite that state having more than enough gas for domestic purposes. Our Queensland contact said it has something to do with the resources rent policy of the state government. We noted that the quoted price, last week, from traders is Brisbane trades for gas in the order of $4.21 per GJ. This was an increase, which was coincident on the arrival of the first LNG tanker in Gladstone to export gas. At that same time Sydney prices rose to $4.00 per GJ. However Victorian prices remained at around $3.50 per GJ.

Now, 13 January 2015, Paul McArdle reported Brisbane hub for gas trades had reached $8.69 per GJ, Sydney $4.52 and Victoria 3.75 per GJ. While we could argue Sydney and Victoria are merely movements in the market, it is obvious Brisbane is a seismic like demand wave pushing up prices.

We no longer need to speculate that higher Queensland gas prices will mean gas for electricity peaking generation plants will be a higher price. Being that the energy market is a spot market the higher bidder sets the price. In short, as electricity demand increases so does price. What this means for electricity generators is higher demand, higher Queensland gas prices, and the market rewarding them because the higher bidder sets the electricity price for them to benefit. How much higher Queensland gas prices will go will be interesting to follow. We no longer speculate as 13 January also see Queensland peak electricity prices running as much as 300 precent plus higher than the remainder of the eastern seaboard on that day.

A short while a go the Federal Government with the Queensland Government’s endorsing repealed the carbon tax (the inception program was called the Carbon Price) as it was claimed it was to blame for higher energy prices! But now those bodies welcome higher prices, and the investor rent seekers want to hear this glorious venture has raised higher revenues from higher prices. It may be immoral but it is not illegal they say.

We are told gas prices must increase to match world demand and the price continuum. But that is seeming a hollow argument as even Japan now appear to be reluctant to source or pay for our LNG. This is a shift from their previous willingness to pay high prices for gas. Why this shift? Because, new low-cost LNG producers elsewhere are joining the supply side, and Japanese LNG demand is moderating to lower levels of need. Other factors to indicate a lower LNG demand is lower oil prices, and alternate energy sources coming in lower priced too.

Why will the demand increase in Queensland, the key to this is three projects each opting for electric compression of gas delivery to Gladstone, and therefore an increase in demand for electricity as a result.

The confidence trick here is QCLNG and APLNG are electrified using electricity from the NEM, and the GLNG upstream project has gas turbine driven hub compressors and electric driven nodal compressors supplied by open cycle gas turbine generators. Therefore it is the gas prices that is be the price setters for the electricity price, not any increase electricity demand on the NEM. Good double talk is it not?

Then Hugh Saddler said, 7 January 2015, via WattClarity: “The excellent data available through NEM-Review tells me that a large new continuous load of around 400 MW came on line in Queensland on 27 October last. This suggests that the 2014-15 summer peak is likely to be considerably higher, for equivalent weather, than in recent years; this has already happened on 9 and 17 December. However, without knowing what the load is, it is difficult to be certain with such a prediction.”

The later we find most interesting and it is the unknown that is more to worry about. About what price you will end up paying.

Now back to Paul McArdle he continued to say:

“1)  We can see that, in summer 2014-15, we have already experienced a higher demand in Queensland than was the case in the whole of summer 2013-14 .

2)  Queensland demand (with respect to the competition) has already peaked to the level of 8,472.23MW

3)  That demand peak occurred as late as 17:15 on that day (hence as the effect of solar PV injections into the grid had receded).  This is something we would not have seen several years previously!

4)  We also see that price volatility is starting to look as something like what happened in summer 2012-13 as well.”

Co2land org concluded it will continue to be a good time for ole king coal generators in Queensland and those state consumers will pay the price. A price that will lead to other east coast states rising their prices too. However, it will not the market causing the rise it will be rent seekers and their influence on the policy makers.

The ray of sunshine is it may become too expensive for policy makers to bear!

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Gas Prices – irrelevant statements

Are you having trouble making fracking sense of the gas price? Don’t understand that if we triple our gas production we pay more for energy! Simple answer is it is a case of people on the far queue. The queue being the mantle of ‘world price’, and dismantle of price protection for domestic consumption. In this instance we mean Australian industry and households described as domestic.

It was bemusing to hear the new NSW Energy Minister (in case you did not hear – new premier and new cabinet after the shock resignation of the old, but same party, Mid April 2014) say we need to find more gas to keep prices down after the regulator said we approve 17% increase for gas from 1 July 2014. Bemused because our price is now set at what the world is prepared to pay to keep their industries productive. Therefore the more we produce the more economical it is to export the gas in economies of scale – simple is it not?

Then the Australian Broadcasting Commission (ABC) reported via Stephanie Smail : “The mooted gas price hike in New South Wales has created tensions with Queensland about the future of the coal seam gas industry. The NSW Government wants more information about overseas buyers from Queensland’s fast-growing market. The Queensland Government says that’s not an issue”.

Co2Land org is not so sure, that it is not an issue. The issue is how do we have faith that government is still relevant and capable of making decisions that are patriotic. But wait I hear you say we need to be aware of world trade and economic cooperation (AKA, Economic Participating Agreements, Free Trade etc). But something gets lost in all that: Governments tend to add fees and charges to balance their own end. So even if you agree on the level playing field for border entries (AKA Tariffs), the distribution price can be distorted by subsidies, fee and other charges.

This leads to the next matter. Why do we not have a social protection price for our own gas? We did, but it was not privatised then. So who wins? As we said increasingly, government is making itself irrelevant.

But let us, Co2Land org, propose a new angle for social inclusion and we could engage in for Direct Action (being the new Energy Reduction Fund white paper is released by the Federal Government) on this issue: 1. Do not engage in reverse auctions with no detail yet. 2. Crowd funding future developments. That is correct we the people fund the projects to the tune we expect prices to rise, and then from the interest we charge we pay off the increases when they come. Oh no! A terrible thought, we could tell the Treasurer the idea come from overseas and he will buy it. Imagine it now: We will save you, we are responsible managers etc. Overseas experience says etc. They are doing it as it is proven?

Unfortunately, it is all too true – we do follow others, and despite all the measures not working overseas we are being told to have faith. Again a case of people on the far queue.

Inverted J Curve – Gas, and RET recommendation predictions

Time to make predictions: Gas prices will rise through an ‘inverted J curve’ response and world political pressures – antidote – devalue our Dollar. The outcome of the Australian Renewable Energy Target Review will recommend ‘constraint payments’ to be paid to renewable sources such as wind farms.

Gas prices will rise very soon, but not because of domestic pressure, but more because we will ‘promise’ it to be exported. Japan says thank you, as will others. This prediction is not new and it may have been part of the detail not yet released to the public over our new trade agreement. But the actual more recent driver is energy security concerns because of the Russian threats to gas supplies.

The evidence comes from Russia itself and the letter released by the Kremlin says that ‘if Ukraine does not settle its energy bill, Gazprom will be “compelled” to switch over to advance payment, and if those payments are not made, it “will completely or partially cease gas deliveries”. Mr Putin added that Russia was “prepared to participate in the effort to stabilise and restore Ukraine’s economy” but only on “equal terms” with the EU”.

Why is that so scary? Nearly one-third of the EU’s natural gas comes from Russia.

Co2Land org previously said we tend to borrow policy from overseas and then rebadge as a new idea here. Our Eastern seaboard National Electricity Market is a prime example. It should follow then what is happening in the UK will happen here (albeit the gas supply market is their greater influence and here we have the coal supply as the influence).

You might note that also recently posted by CO2Land org was that our Conservative brigade finds it ‘unpopular’ for wind farms to be ‘forced’ onto local rural communities. They will find it reassuring that the UK are it is “Long unpopular among some Conservative MPs from rural constituencies, onshore wind turbines appear to have incurred the wrath of the Prime Minister as well”. We do not have to be a guru to work out that this tactic will be mimicked in Australia, anytime soon.

There is the pointer to this likely development? Plans to restrict wind farms to seas around Britain will need much larger subsidies from consumers, experts say.

Newspaper reports suggest that the Conservative Party will include a pledge to limit onshore turbines in next year’s election manifesto.

But a member of a working group reviewing UK wind energy said this would require increased subsidies of around £300,000 per turbine per year.

Prof Richard Green said this would have a knock-on effect on electricity bills.

The dilemma for our politics is, just as they in UK promised the next few years will be difficult for the better good – they limit subsidies and toughen planning laws to make wind farms unviable in the countryside. The issue will be that to do so will make alternative energy more expensive to build and run. Why? As the UK report points out that “onshore wind energy is more expensive than electricity from coal or gas, but wind is one of the cheapest sources of low carbon power”. It is going to be very difficult to eliminate a energy source with a low carbon benefit! Forget arguments about Carbon Price (Carbon Tax sometimes called for emotive responses), this is about the need to respond to business pressures for them to be competitive, and like it or not gas prices are going up and wind is looking good in terms of low carbon benefit. Add to that the energy storage capability being developed and game set and match.

In the mean time (interim) constraints being put on renewable generation may well include payments to not participate in the market. This would allow traditional coal fired generators to at least run until the end of their economic life.

Is this fair? Glass half full or half empty – depends on your view.

 

 

patterns of behavior – natural gas prices up

Researching Gas Cogeneration for the built environment you will be told many different stories about feed stock prices. The more common story is we are over the costs blow-outs because of world shortage around 2006, so expect prices will go down. However, the opposite is likely to happen, the costs are going up. Why? The answer is complex. It depends on how you participate and where you participate.

CO2Land org takes note of ValueInvestorcanada.blogspot.com that has a very good article going through this argument from the perspective of an equity analyst. The premise of this article is rising gas prices would be good for people holding stock in gas suppy companies. The argument is based on American activites, being:

1 – Any energy company that can move capital spending away from natural gas drilling and into oil is doing so (Ed. a major driller doing just that).

2 – U.S. LNG import facilities are being converted to LNG export facilities. That will allow producers to get world prices, which are 4-6 times higher than North American prices.

3 – A continued shift from coal to natural gas as a source of power, for economics and the environment.

4 – At some point won’t the government get behind a plan to move to natural gas as a transportation fuel? Instead of having to rely on the Middle East, Venezuela and Nigeria to provide oil to the U.S. wouldn’t it make more sense to use natural gas which the U.S. has in abundance?

5 – Producers have hedges in place at the high rates they could get a few years ago. When those hedges expire they will only get a price for gas which might be below their break even level.

Then www.energyshop.com posts:

Dec 2012 – Driven by Oil Shale Economics, Natural Gas Prices Primed for Slow and Steady Rise – Forbes

“As long as oil stays close to $90 per barrel, it appears likely that the gas supply will continue to throttle back, and the supply overhang will continue to dwindle. In the meantime, demand is likely to grow in a variety of sectors, prices will rise, and a longer-term price equilibrium will eventually kick into place. Gas at $5 to $6 per mmBtu may well be in our foreseeable future. So, for now, drillers are generally going to prove up reserves and sit on them until the price of gas relative to oil makes it profitable to produce. ”

The last paragraph above clear shows a strategy is most likely to be based on profit. For those interested mmBtu as shown above can be interpreted as between 1.054GJ to 1.060GJ and 1GJ at 3.9 degrees C is 26.8cubic metres of natural gas. Source – Society of Petroleum Engineers (www.spe.org)

The Australian Experiences

In Australia we are seeing very similar patterns of behavior and we believe LNG exports to ASIA will be the price setter for energy prices in the foreseeable future.

We also note that cash strapped State Governments will seek to maximize the royalties from natural reserves including Natural Gas, Shale Oil, Petroleum and Coal Seam Methane extraction.

All of this will not be a surprise to most people, however the elephant in the room lies in how it is regulated and ‘allowed’ to get to your need. In Australia and in particular the Eastern Seaboard the federally based Australian Energy Market Operator (AEMO) has oversight, yet State based jurisdictions allow different treatments of price setting.

In more detail:

Victorian Wholesale Gas Market Data

A range of real time data sets from the Declared Wholesale Gas Market in Victoria uploaded from the Market Information Bulletin Board (MIBB) including price and withdrawals, ancillary payments, bid stacks, consumption, demand forecast, effective degree day, registered participants, heating values, gas quality data and more. Source – AEMO.

Short Term Trading Market

A range of data sets offering real time data from the Short Term Trading Market (STTM) system including ex ante market price, provisional market price, mos stack data, allocation quantity, schedule log, hub and facility definitions, total contingency bid & offer, default allocation notice, contingency gas price and more. Source – AEMO.

Viva la difference between the two market information sets as the STTM price represents a delivered price of gas to the Hub. That is, it includes both the commodity and the cost of transportation to the hub, unlike the Victorian Declared Wholesale Gas Market price which is a commodity price only.

Then come the area distribution effects on facility charges, the fees to distribute and that can include the trucking or reticulation. Other government changes and fees also.

The price you WILL pay, may change at any time.

Because of the range of commodity, transport, reticulation and delivery charges and government charges numerous bodies have argued it in itself brings about investment uncertainty. All well and good to talk about, however, one constant remains regardless to what is intended it is the opportunity to game that will not set but influence the price you will pay.

The Energy Users Association of Australia (EUAA), www.euaa.com.au , has presented several stories in January alone on the gas crisis that looms in Australia and now have a dedicated company page that features what is sees as the issues. The Australian Financial Review on 21, 22 and 23 January 2013 ran stories of a similar view from a number of sources. One story by Peter Roberts commented Western Australia’s reserving of 15% of gas supply for domestic use is under threat and it is further reported large Australian Companies cannot get supply contracts further out than 2 years, and those proposing new facilities are not able to secure any gas supply contract, or are finding it very difficult. In terms of what has happened around the country in gas prices since 2009 the following average gas price increases have been, despite adequate supply capability, Queensland 98%, NSW 79%, Victoria 80%, South Australia 78%, Western Australia 170%.

In term of what this means, the CEO Brickworks is quoted as saying his group now pays $8 GJ in Sydney (up from $4 GJ), Brisbane and Perth $12 GJ.

All writers expect the prices to rise more, and the reasons are given that transitions in the market are bringing conditions of uncertainty, and the export markets are getting policy priority. In another example it is quoted Japan is paying $15 GJ for Natural Liquid Gas (the form gas is transported).  The conclusion is therefore you will need to be very careful in how you evaluate your future gas price in your projects. In particular when considering fuel substitution focused projects such as cogeneration.

Co2Land org intends to look deeper into the price effects and predictions of the energy market and will post these accordingly.