Gas and Electricity Forecasts for NSW NSW Energy Security Summit Jim Snow, Director Greg Thorpe, Director 26 September 2013
NSW Energy A View of Potential Price Impacts A view on forecasts of demand and prices for energy in NSW under an increasingly tight gas supply scenario; The OGW modelling under these conditions shows: That the Sydney gas hub will be setting the gas prices this will likely also impact Victorian and SA gas prices as NSW will be reliant largely on gas from these other states under tight supply constraints; That demand for both energy sources are clearly dropping or set to drop considerably and gas looks set to follow the electricity trend into a price volume (death) spiral in NSW as it impacts end users (OGW forecast this trend in April 2009 for electricity); That new gas supply developments will be driven by price uplift as demand is impacted there will be no volume growth to drive development only recontracting of existing volumes which we know is significant for NSW; Prices for gas are escalating to the LNG netback case - but more likely be based on higher costs to supply to Sydney hub melding of these scenarios occurring; A new lower demand, higher price, equilibrium is most likely over the next 3 to 5 years for gas in NSW with sustained downward pressure on wholesale electricity prices; We also note that the reliability of demand forecasts for electricity and gas has been extremely challenging although we think this could be remedied. 1
Concern about massive changes in gas supply and demand Ref: Santos A Balanced Energy Solution for NSW, April 2013 2
Gas and Electricity Price Forecasts These forecasts were prepared for INSW in April 2013 as inputs into the Deloitte economic modelling (to be presented next) - with a view to assessing relative impacts across the NSW economy of escalating gas prices; Carbon prices used were the current tax amounts then dropping to $10/tonne, but we did a sensitivity run for electricity prices using $10+$2/year after the tax ends; For Retail gas costs the gas Network charges are not escalated - assumed to grow at CPI this was done to avoid network driven shocks in the modelling - to see the gas price effects more clearly this is now recognised as an underestimate; Retail costs were determined for a small Industrial load (10 TJ/year circa $100k plus per year for gas ) - residential would be a lot higher than the industrial, and Major loads would see lower Retail prices but this is OK as the additional price impost in the modelling for these customers will assist to mimic their greater price sensitivity for gas (over the general sensitivities in the modelling) impacts on users with relatively high gas use will be naturally greater; No gas volume demand elasticity effects were attempted as this became circular with output from Deloitte model need to reapply to explore. 3
Gas and Electricity Price Forecasts The forecasts used the 2012 Gas Statement Of Opportunity (GSOO 2012) demand for Mass Market and Industrials (which is flat), plus The Gas Power Generation (GPG) demand from our electricity modelling, and For electricity demand we used the AEMO Scenario 3 Electricity Demand Forecasts (know as the Planning Scenario) in the electricity model, The AEMO electricity demand Forecast has many similar assumptions used in our gas and electricity modelling (and tends to be the comparable basis across other published modelling runs for power price impacts), but We note that this electricity demand forecast has been revised downward several times it is a moving (declining) target; Our gas price forecasts are based on a mix of short term price history (market prices and trends), examining the impacts of LNG on the WA market prices, examining information on production and exploration from the upstream oil and gas sector in Australia, analysing international trends (and specifically the US gas market) and detailed discussions with upstream production cost experts. 4
Gas Price Forecast Sydney ($2013) Scenario assumes a cap on prices after 2022 set by LNG alternative use for gas - and production costs 5
Sydney Gas Price Forecasts The chart shows two plausible gas price scenarios - high and base (or more business as usual) and includes transmission costs to get to the Sydney hub; The high price scenario is reflective of more rapid impacts of LNG export values on the wholesale gas prices mainly impacting Moomba supply (WA Market was used as an analogue), and Recognises there are currently limited alternatives for gas supply into Sydney other than from Moomba and Victoria - so that the Moomba impact dominates this scenario is more likely now with several withdrawals from the NSW CSG market which has also impacted the base price scenario and also a growing constrained southern supply in the winter; The base price scenario is more reflective of past underlying trends and assumes there is sufficient competition to mitigate price rises. This follows economic theory in that it assumes there will be a supply side response from higher prices and more gas will become available (some evidence this was, and still is to a lesser extent, occurring) and flatter/declining demand; This base price scenario in the last 12 months has been moved forward a year in terms of price increases and to a slightly higher level. 6
NSW Electricity Demand forecasting is very problematic 7
NSW Electricity Price Forecast ($2013) - Wholesale Time weighted NEM market prices Base Carbon $10/tonne Likely to be lower with $0/tonne Carbon Price 8
NSW Electricity Price Forecasts The chart may seem to show two scenarios but is actually showing three high gas and base gas, and high gas with escalating carbon prices; There is very little difference in the high and base gas price scenarios on NSW electricity price forecasts: This result may seem counter-intuitive but occurs because gas use is so low given low demand and LRET investment (and carbon price) that it is rarely at the margin and no new gas plant is needed for a number of years; In the analysis discretionary CCGT gas plant was constrained-on to use a low annual quantity on the assumption some take or pay provisions would be present; The impact of the escalating carbon price is noticeable from the underlying assumptions on future carbon prices (in concert with the current Renewable Energy Target) although it is doubtful under current policy if the RET will be met with physical plant with such low demand (pay the penalty costs). 9
NSW Gas Demand Forecast 10
NSW Gas Demand The downward bump on the chart is the drop in gas generation mostly from assumptions around gas take-or-pay for gas generators, coinciding with the carbon tax roll off; This demand forecast is in our view highly optimistic as it is expected that significant industrial demand will also cease (see Deloittes modelling), network prices will escalate, and the spiral down will begin; However there are concerns over the robustness of the electricity (and gas) demand forecasts being developed if they are based on trend and econometric analysis propose these need to be more biased toward market research at a granular/segment level with calibrated modelling of load switching e.g. winter heating case; If demand was to increase the electricity pricing scenario may well be very different and it may well stimulate additional competitive gas supplies; The next chart shows the NSW Retail gas prices for larger users (10TJ/y) - without any network cost escalations above CPI again to remove this factor from the trend analysis and is again probably understated. 11
NSW Retail Gas (10 TJ/y larger/business user of gas) 12
Price Stack for Industrial Consumers 13
Price Stack for Residential Consumers 14
NSW Wholesale Gas and Electricity Price Forecasts Summary Gas prices are escalating fast due to lack of new competitive supplies for/in NSW 2/3 basins and 2 pipelines and strong LNG demand for one of these; AGL and Santos CSG may mitigate pricing a little but its unlikely to be enough; Gas demand is flat and we expect it to actually decline/spiral down as high prices bite, and The one big gas volume sales recontracting event on the east coast will happen circa 2017/18 which means competitive supplies (or threat of same) needed by then for any price mitigation; Electricity demand and hence wholesale price forecasts are also very flat, as no new generation capacity needed carbon prices just adding cost (coal still runs) but we also need to see new Federal Government policy detail OGW doing some modelling on options; Gas prices have minimal impact on power prices unless carbon costs escalate substantially or demand increases for power some gas growth in peaking plants later in the forecast; Gas Retail prices will impact on the industrial sector demand lets see the Deloitte Modelling. 15
Jim Snow, Director Oakley Greenwood Pty Ltd 214C Maundrell Terrace, Aspley Queensland 4034 +61 (0) 7 3263 7612 +61 (0) 4187775893 jsnow@oakleygreenwood.com.au www.oakleygreenwood.com.au 16