ACCC re-affirms concerns about the impact of gas sector issues on electricity prices

In brief

The ACCC's Retail Electricity Pricing Inquiry Final Report raises concerns regarding the impact of gas sector issues on wholesale electricity prices in the National Electricity Market. Many of the ACCC's concerns echo those raised in the ACCC's ongoing inquiry into gas supply arrangements in Australia, for which the ACCC released its third Interim Gas Report on 2 August. Keep an eye out for our upcoming analysis of the Interim Report.

What are the ACCC's concerns?

Gas shortages and high gas prices

The Retail Electricity Pricing Inquiry Final Report (Report) notes that the shortage of affordable wholesale gas supply has continued, particularly in the southern states. The Report notes that gas prices have risen from an average of around $5/GJ in 2015 to around $8/GJ in 2018.

The Report re-affirms the ACCC's previous finding that gas price increases are predominantly being driven by LNG exports, declining domestic gas reserves (particularly in the southern states) and government moratoria and environmental controls that restrict exploration for, and the development of, new gas reserves.

Although the ACCC's Interim Gas Report indicates that issues surrounding gas shortages and high prices have eased over the past 18 months, the ACCC has indicated the landscape in the wholesale gas market continues to present numerous challenges for buyers.

Higher gas prices translate to higher wholesale electricity prices

The Report notes that higher fuel costs for gas-fired generators directly increases wholesale electricity prices in the National Electricity Market (NEM). The ACCC commissioned HoustonKemp to 'quantify the relationship between gas prices and wholesale electricity prices'. In examining that relationship, HoustonKemp found that in South Australia, a $1/GJ increase in gas prices can translate to an increase of as much as $11/MWh in NEM prices.

The NEM increasingly relies on gas-fired generation

The Report outlines the consistently increasing reliance on gas-fired generation in the NEM, particularly in the southern states, resulting largely from the closure of coal-fired generators such as the Hazelwood plant in Victoria.

With gas-fired generators more often playing the role of 'marginal generator' in the NEM, the Report notes that there has been a shift towards the price of gas driving NEM prices in periods of high demand. As gas is traditionally a more expensive fuel than coal, the Report finds that is having a direct impact on average prices in the NEM.

Increased reliance on gas in the NEM may be causing higher upstream gas prices

The ACCC also stated that it considers high gas prices are being perpetuated by the increased reliance on gas-fired generation in the NEM, as generators are willing to pay more for gas, relying on recovering costs through higher electricity prices in the NEM.

What is the ACCC proposing?

The ACCC has once again called for policy reform aimed at bringing new gas supply to the market. Not for the first time, the ACCC specifically noted that the moratoria and regulatory restrictions in Victoria, New South Wales and Tasmania are impeding the development of potential new gas resources.

The Report also indicates the ACCC's support for the proposed construction of LNG import terminals at Port Kembla in NSW and Crib Point in Victoria, on the basis that LNG import terminals may increase the diversity and volume of gas available for supply in Australia. This support is qualified by an acknowledgement that LNG imports are unlikely to put downward pressure on domestic gas prices, as the price of imported LNG will be set by international prices plus shipping and re-gasification costs. However, the ACCC considers that the potential to import LNG may place a cap on domestic gas prices in southern Australia.

Where to from here?

The Interim Gas Report details a range of specific findings in relation to supply and pricing issues in the wholesale gas market. Keep an eye out for our upcoming analysis.