Gas shortfall to cause power price rise

By Stephen Cooke

Limited domestic gas supplies next year are causing significant price rises, which will hurt the dairy farmer through rising electricity costs and potentially reduced farmgate prices through processors.

The shortfall is caused by liquefied natural gas (LNG) producers chasing more money overseas by selling to international spot markets.

The Australia Government has released the ACCC’s first interim report into the supply of, and demand for, wholesale gas in Australia.

The Government directed the ACCC to conduct an inquiry into the supply and demand of wholesale gas in Australia, with interim reports to be delivered every six months.

“The interim report projects a supply shortfall in the east coast gas market of up to 55 petajoules (PJ) in 2018, which could be as high as 108 PJ if domestic demand is higher than expected,” ACCC Chairman Rod Sims said.

“One PJ is enough gas to supply the residential needs of Warrnambool, or a large industrial user for a full year.

“Gas and gas-powered generators are also an important part of electricity generation, so higher gas prices feed in to higher electricity prices, leading to a double hit for many.”

The ACCC said for many commercial and industrial (C&I) users, gas is an irreplaceable source of energy. These companies can’t pass on costs as products they make are often supplied on international markets.

The ACCC says Queensland LNG projects have caused a significant disruption to the market and the supply-demand balance. In 2018, the LNG projects will together produce over 70 per cent of the east coast’s gas and account for two-thirds of the east coast’s gas demand.

“The expected shortfall could be reduced to a significant extent if the expected sales on international LNG spot markets were instead redirected to the domestic market,” Mr Sims said.

Mr Sims said prices in southern Australia are caused by lack of supply and lack of competition between southern gas suppliers.

The ACCC has determined appropriate benchmark prices against which to assess current domestic prices and prices being offered to C&I users.

These benchmark prices, based on international LNG spot prices, are $5.87/GJ in Queensland and up to $7.77/GJ in the rest of the east coast.

“On the east coast, particularly the southern states, users generally have only one supplier, and price offers in 2017 have generally been in the range of $10–16/GJ.

“The situation in the east coast gas market is serious and options to address the problems in the immediate term are limited,” Mr Sims said.

The Australian Government has recently implemented the Australian Domestic Gas Security Mechanism (ADGSM), which allows for the restriction of LNG exports in an expected shortfall year, with the aim of directing those supplies to meet domestic demand.

“Export controls may go some way to addressing this shortage in the short term. However, further steps are needed to address the underlying problems of lack of gas supply and lack of diversity of suppliers in the east coast gas market,” Mr Sims said.

In a submission to the ACCC earlier this year, Saputo’s Warrnambool Cheese and Butter warned that the cost of gas for its Allansford plant will increase by 50 per cent from 2018 due to “(Victorian) government policy restricting gas exploration”.

Earlier this year, Australian Dairy Farmers said the gas crisis could drive processor costs up 50–100 per cent or more over the next two years.

“The gas price rises will have a flow on effect and will be felt by dairy farmers through their processors,” interim CEO John McQueen said.

Unlike electricity, which can be produced by alternatives such as solar and wind, processors have no choice but to use gas to pasteurise and dry milk in manufacturing.