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In September 2020, Prime Minister Scott Morrison announced (amongst other things) his Government’s intention to support up to 1 GW of new gas generation capacity in the Hunter region of NSW to partially replace the retiring 2 GW Liddell coal-fired power plant. This was subsequently clarified to indicate that the Government will step in to fill any capacity gap not met by the private sector, which it expects to be around 250 MW. In this blog post, we explore the investment case of this proposition.
Do we need new gas generation capacity?
In July, the Australian Energy Market Operator (AEMO) published its 2020 Integrated System Plan (ISP). The ISP is a detailed biennial study aimed at providing the industry with information around the least-cost path for the National Electricity Market (NEM) to achieve a reliable and secure electricity system in the next two decades.
The latest ISP paints a picture of retiring coal capacity, continued renewable energy growth and a need for 6-19 GW of new dispatchable capacity by 2040. This flexible, dispatchable capacity will serve the role of firming and balancing the inherent variability of a system dominated by distributed and large-scale renewables.
As shown in Figure 1, the ISP’s central scenario ‘least-cost’ pathway for the NEM involves a mix of 14.5 GW of dispatchable capacity and 6 GW of additional transmission capacity by 2042. This mix has no new gas capacity (CCGT and Peaking Gas + Liquids), and is dominated by hydro, storage and demand-side participation (DSP).
Figure 1 ISP 2020 Central scenario least-cost development path’s new dispatchable capacity
Focusing on NSW, AEMO expects 8.9 GW of coal capacity to retire over the next 15 years. Part of its replacement is likely to come from Snowy 2.0, the NSW Government’s 3 GW Central West and 8 GW New England renewable energy zones and the NSW Government’s 2.2 GW Emerging Technologies program. As stated in the government announcement, these may still leave a gap, which the ISP central least-cost pathway shows should be filled by storage, DSP and greater interconnection.
So why are we hearing about gas?
Historically, gas-fired power generation has played a crucial role in the NEM. Gas is often used as a ‘peaking’ technology, with an ability to quickly increase and decrease output in response to demand changes, unlike coal. It is also used to provide system stabilising services, which some other technologies (wind, solar) are not yet able to provide.
Gas generation could theoretically operate as ‘baseload’ generation. However, gas is a more expensive fuel type, which means that gas generators need higher electricity prices to recover their operating costs. These higher prices generally correspond with high demand periods, reinforcing gas’ role as a peaking technology.
Gas’ unique and valuable characteristics mean that gas is likely to continue to play a role in the NEM’s future. The ISP central scenario ‘least-cost’ path shows 1% of all utility-scale generation coming from gas in 2042. However, for new-build dispatchable generation, gas prices would need to reduce significantly for it to be part of a least-cost pathway for the NEM.
Can we expect new gas capacity?
Part of last month’s announcement focused on ensuring lower gas prices by developing new gas fields and investing in pipeline infrastructure to increase supply into the market. All else being equal, and noting that domestic reservation policies have been flagged, this could bring gas prices down to a point where new entrant gas generation may be competitive on a peaking basis.
More likely, all supply and demand factors considered, any capacity gap presented by the closure of Liddell will be most cost-effectively filled by a mixture of renewables, storage, DSP and interconnection, with new gas outside of the equation unless gas prices come down.
Shira is a senior analyst in energy, with deep understanding of Australia’s electricity markets and renewable energy. She specialises in electricity market modelling, scenario modelling including rapid transformation of the energy sector and robust analysis to better inform clients in generation, networks, manufacturing and government across the energy sector. Shira is experienced in generator feasibility studies, energy procurement strategy and Power Purchase Agreements, policy analysis, scenario modelling and techno-commercial analysis within the electricity industry. Within Deloitte, she has developed a number of market-leading models of the Australian National Electricity Market (NEM) and Wholesale Energy Market (WEM), a revenue-maximizing battery operation algorithm and a dynamic energy procurement optimiser tool.
Emma is a Director in Deloitte’s Energy Transition team. She focuses on how Australia’s energy markets are changing in response to climate change and emission reduction objectives. Emma has extensive experience working with energy clients to understand the energy market transition, identify opportunities and risks within the transition and develop strategies to capture growth opportunities.
Kumar is a Partner in the Financial Advisory practice and is responsible for the Energy and Resources Sector. He specialises in portfolio management, policy advice, commercial and financial analysis, market modelling (electricity, gas and renewable energy), strategic positioning and assisting clients with growth strategies. Kumar helps his clients make future decisions with confidence.