National Electricity Market
The National Electricity Market (NEM) operates as a wholesale market for the supply of electricity to retailers and end users in South Australia (SA) Queensland, New South Wales (NSW), the Australian Capital Territory, Victoria and Tasmania.
The NEM operates the world’s longest interconnected power system from Port Douglas in Queensland to Port Lincoln in SA. This is a distance of around 5,000 km.
NEM market participants include generators, transmission network service providers (TNSPs), distribution network service providers (DNSPs), electricity retailers, and other large customers.
Exchange between electricity producers and electricity customers is facilitated through an electricity pool, where the output from all generators is aggregated and scheduled to meet demand.
The NEM contains more than 40,000km of transmission lines (refer Figure 1), has around 45,000MW of generation capacity and serves 19 million people. The substantial network distances and associated capital and maintenance costs, result in transmission and distribution fees making up over 50% of retail electricity cost. Operations of the NEM are typically smooth under normal conditions, but can be impacted by adverse events e.g. Heywood Interconnector outage and extreme high temperatures.
Figure 1: Electrical Transmission Infrastructure - NEM
Source: Australian Energy Market Operator (AEMO)
Electricity Market – South Australia
The SA electricity market consists of a region within the NEM, with electricity generation concentrated in and around Adelaide. Major electricity demand is located both around Adelaide and at locations distant from Adelaide. Major demand in the north is driven by BHP’s Olympic Dam mining operation and the surrounding mines.
During peak electricity demand periods, SA supply is dependent on transmission interconnectors from Victoria. Upwards of 40% of SA’s electricity may be supplied by wind and solar generation, however this supply is intermittent. SA has the highest amount of renewable energy generation capacity per capita of any state in Australia (refer Figure 2).
Figure 2: Electricity Generation Capacity Type (Financial Year 2016)
Source Data: Australian Energy Regulator
The SA electricity market is forecast to experience continuing intermittent grid instability, volatile pricing (on average the highest on the NEM) and power outages. This stems primarily from the high proportion of intermittent renewable energy combined with the closure in May 2016 of the large base load coal fired power station at Port Augusta. With the remaining SA base load power generation consisting solely of gas fired turbines, the shortening of gas supply (net of LNG exports) in eastern Australia is impacting the profitability of base load generation and therefore electricity prices. These events have made it increasingly difficult for large electricity consumers in SA to be able to secure affordable base load power.
The expansion of the Heywood Interconnector (to Victoria) from 460 to 650MW has partially alleviated these pressures. However, this expansion did not prevent SA experiencing a ‘system black’ in September 2016. The planned and anticipated decommissioning of several large coal fired base load power stations in Victoria may adversely impact on future supply reliability. The planned closure of Hazelwood Power Station for early 2018 has already been confirmed. Gas fired generation supply could provide increased base load volumes, but is unlikely due to poor economics resulting from high gas prices.
Unless reliable base load electricity is secured, or peaking generation introduced into the SA market to provide supply when “the wind isn’t blowing”, manufacturing and mining may well need to accept power interruptions and volatile electricity prices.
Wholesale Gas Markets - National
The two key areas of Australian gas markets are the east coast and west coast markets, which are not physically interconnected. The east coast market is:
- an interconnected gas grid of over 7,000 km of pipeline;
- connects all of Australia’s eastern and southern states and territories;
- is supplied by the gas basins that contain approximately 1/3 of Australia’s gas reserves;
- traditionally focussed on domestic sales;
- undergoing structural change as the Liquified Natural Gas (LNG) export industry develops;
- has pipelines, which while owned and operated by separate entities, are configured to operate as a single network system; and
- has some pipelines which are bi-directional.
Most participants in the wholesale gas market purchase gas under firm gas supply agreements (GSA). GSA’s are the dominant type of contract for wholesale gas market participants. The Australian wholesale gas market is relatively illiquid as there are only a few buyers and sellers and there is not an accessible or managed market place or exchange. Contracts are generally made confidentially and as a result there is little transparency in wholesale gas prices.
Australia also has several spot wholesale gas markets where buyers and sellers trade gas on a daily basis. These are the Short Term Trading Markets (STTM) and they operate in Adelaide, Brisbane and Sydney. The Declared Wholesale Gas Market (DWGM) is operated by Australian Energy Market Operator (AEMO) in Victoria. There is no minimum annual demand threshold for a GSA, however most gas producers are likely to enter into a GSA with a customer that has an annual demand in excess of 1 petajoule (PJ). In southern states most gas is purchased by industrial customers from retailers rather than gas producers.
The east coast gas market is in need of new sources of gas to meet future demand underpinned by large LNG projects. LNG projects in Queensland are anticipated to reach full production capacity sometime in 2018-19 and are expected to export over 1,400 PJ of gas per year. This will result in an approximate tripling in domestic demand from circa 700 PJ. All eastern states have experienced a period of substantial rises in gas prices to $6-8/GJ during the last three to five years from a historical price of $3-4/GJ in 2010. The wholesale gas price at Moomba has a major influence on the price of gas paid by customers in NSW and SA. This gas price has been affected by several factors:
- the declining reserves and deliverability of conventional gas available in the Cooper Basin led to increased supply from coal seam gas (CSG) in Queensland to Moomba and new Victorian gas supply to SA and NSW; and
- the Gladstone LNG projects began influencing the Moomba wholesale gas market from 2010- 2011 by significantly tightening domestic supply.
The Moomba wholesale gas price has experienced a rapid price increase compared with Victorian wholesale gas prices for the following reasons:
- Moomba is closer to the Gladstone LNG projects which created contractual relationships between Moomba suppliers and LNG buyers, resulting in higher LNG netback prices at Moomba;
- the additional transportation costs and pipeline constraints of transporting gas from Victoria to Wallumbilla inhibited the supply from Victoria to Gladstone LNG projects; and
- Legacy GSA’s with Victorian producers are not due for renewal until 2018 and this tends to suppress Victorian gas prices.
Figure 3 illustrates increasing gas prices for large industrial customers up to 2015. The average wholesale gas price in SA was approximately $9/GJ in July 2016.
Approximately 60% of natural gas demand in SA is used for electricity generation. The remaining is piped through the distribution networks for use by households and businesses.
Figure 3: Gas price trend by state 2002-2015
Source: Oakley Greenwood Gas Price Trends Review Feb 2016