Many clients coming up to renew their electricity procurement contracts are asking us why the prices that they are now seeing are so much more expensive than those under their current contract? Recently we’ve been running a series of posts about why electricity prices are increasing and this post looks at what’s been happening in Queensland.
A glance at the Energy Action Price Index shows us that since mid 2014 the price for electricity excluding network charges, renewable certificate costs and other non-energy related items has gone up in every state. The reasons behind this general trend are covered in Energy Action’s commentary piece “Why is my new electricity contract costing me more?” which you can find under the news section on our web site. For Queensland the price has gone from being the lowest in the NEM between 2007 and 2012, to the second highest from 2013 until now. This post looks at the reasons for this change in the level of prices in Queensland and the upwards trend that we have seen in the last eighteen months.
The first thing to note is that prompted by generation shortages in the early 2000’s Queensland commenced on an extensive power station construction programme. These included the coal fired Callide C, Millmerran, Tarong North and Kogan Creek stations as well as the gas fired Swanbank E station. By the time the last of these stations was commissioned over 3,300MW of new plant had been built. Fast forward to 2007 (when the EAPI price series commences), and Queensland had gone from being an under-supplied to an over-supplied market, and with much of the excess power being exported to NSW through the QNI interconnector built in 2001. The result was relatively low prices compared to the other states (the fact that prices everywhere were actually very high in the late 2000’s was due to the impact of the prolonged Australia wide drought that finally broke about that time). In the late 2000’s an additional 1,700MW of new gas fired plant was also built. As the EAPI graph shows, by late 2010 the retail price had hit the bottom.
From early 2011 things started to recover. This was initially helped by closure of some of the older, smaller coal fired stations and later by mothballing of units at some of the newer stations. About this time another thing was happening though. The developing coal seam gas industry needed a market to take what was going to be a truly enormous quantity of gas (about twice as much per year as the annual gas consumption in the whole of the Eastern and Southern states). That could only come from export markets, and hence the three new LNG liquefaction plants on Curtis Island in Gladstone, the last of which is coming on line shortly.
Not only did this suck up all of the coal seam gas that was becoming available in Queensland, it needed even more. While we have no reliable picture of how much gas contracted for export is coming from the new coal seam fields, it’s a fair bet to say that the liquefaction plant owners have had to buy a reasonably large quantity of gas on the open market, hence the increase in gas prices that we’ve seen over the last several years. So what has this to do with the electricity price?
The liquefaction plants have had two effects on the electricity market. Firstly, they have pushed up the gas price, which has hurt the gas fired stations in Queensland (Queensland used to produce about a fifth of its power from gas fired generation, much more than for NSW or Victoria). That in turn has pushed up the price of electricity. Secondly, the liquefaction plants themselves have a high demand for electricity. We don’t know for sure exactly how much new electricity demand has come from this source, but it’s certainly in the hundreds of MWs. That’s pushed the price of electricity up too.
But what about the funny dip in the Queensland price that we see around the end of 2014? What caused that and could it happen again? As it happens, this was also caused by the new gas extraction. Coal seam gas isn’t like conventional gas. In a coal seam gas field there are literally hundreds (possibly thousands) of individual wells. Each one has to be brought into production individually, and when they’re up, you don’t want to turn them off unless it’s absolutely necessary and that explains the dip in the electricity price. In late 2014 the coal seam gas fields were being brought into production in advance of the first shipment of LNG from Curtis Island. That meant that for a short while there was quite a lot of gas with nowhere to go. The answer was to either flare it, or sell it cheap to the nearby gas fired generators. And that explains the short term blip downwards in the electricity price. With most of the liquefaction plants now in production, and with the coal seam gas fields seemingly not able to produce enough gas to meet contracted volumes, we wouldn’t expect to see this kind of blip again.
There’s one last thing that may also be helping to support the retail price in Queensland. The concentration of ownership of power stations is higher for Queensland than for any other state in the National Electricity Market. The two largest Queensland generators, CS Energy and Stanwell Corporation, are both owned by the state government. In 2012 a third state owned generator, Tarong Energy, was restructured and its assets allocated to CS Energy and Stanwell. With a large proportion of the generation sector owned by the same shareholder it may have been easier to mothball power stations than had the generation assets been held by a broader group of independent companies.
So, if we understand what’s behind the increasing price for electricity in Queensland, what, as a customer, do you do about it? For that, contact Energy Action. With more than ten years’ experience in electricity procurement and as the largest independent provider of energy procurement services in Australia we’d be delighted to help you.
Update released on 23 June 2016