Ballooning Gas Exports to Leave Australian Wind Winner: Energy
Australia’s $65 billion of projects to export liquefied natural gas from the east coast are set to push up domestic prices, opening the way for record investment at home in competing energy sources to produce power.
Prices are forecast to double this decade closer to levels customers in Asia will pay for Australian LNG after companies including BG Group (BG/) Plc and Santos Ltd. open terminals to ship gas that could have been supplied to the local market. That will help drive the A$33 billion ($34 billion) of wind- and solar-power projects developers plan to build through 2020 in Australia, according to data compiled by Bloomberg.
“With high, LNG-driven domestic gas prices, renewable energy is the cheapest source of new electricity generation,” according to Kobad Bhavnagri, a Sydney-based analyst at Bloomberg New Energy Finance. “It is quite conceivable that we could leapfrog straight from coal to renewables to reduce emissions as carbon prices rise.”
Electricity can be supplied from a new wind farm in Australia at a cost of as little as A$80 per megawatt hour when a price on carbon emissions is included, compared with A$143 a megawatt hour from a new coal-fired power plant or A$116 a megawatt hour from a new station powered by gas, a Bloomberg New Energy Finance report said in February.
Solar power in Australia will be competitive with gas in 2015 or 2016, according to Bhavnagri.
Policies embraced by Prime Minister Julia Gillard’s government to sell natural gas to the priciest market and tax carbon emissions are making renewable energy more competitive with fossil fuels. New wind farms are cheaper than gas-fired plants this year for the first time, improving opportunities for turbine maker Vestas Wind Systems A/S (VWS) and wind farm operator AGL Energy Ltd. (AGK) Australia has committed to get 20 percent of its electricity from renewable energy by 2020.
“Australia has essentially said ‘we should be subjected to global markets and let our products move to the highest value use,’’ Tim Jordan, a Sydney-based analyst at Deutsche Bank AG, said by phone. ‘‘We’re getting a better return by exporting our gas rather than reserving it.’’
Rising Gas Prices
Gas on Australia’s east coast may double later this decade to about A$10 a gigajoule, a record, from a range of about A$4 a gigajoule to A$5 a gigajoule in late 2012, Graeme Bethune, chief executive officer of EnergyQuest, an Adelaide-based consultant to investors and governments, said by phone.
That compares with prices of A$2.50 to A$3.50 at the end of 2011, he said. A home in Victoria state using gas for central heating may consume as much as 80 gigajoules a year, according to the Melbourne-based Grattan Institute.
The rising cost of gas and the carbon price have made wind power as much as 30 percent cheaper than gas for new plants built today, New Energy Finance data show. Bhavnagri estimates the cost of wind generation has fallen by 10 percent since 2011, as wind turbines became cheaper per megawatt.
Vestas, which supplied the turbines for AGL’s 420-megawatt Macarthur wind farm in Victoria, has half the market in Australia and expects the country will add about 1 gigawatt of wind power a year for the rest of the decade, Chief Executive Officer Ditlev Engel said in an interview in Sydney.
Gas For Export
‘‘It’s quite an attractive market,” Engel said yesterday. “With 50 percent market share, if we can keep that up that would be a nice overall level of activity.”
A looming gas shortage amid government plans to restrict some areas for drilling coincides with increasing demand driven by exports, AGL Managing Director Michael Fraser said at the Bloomberg Economic Summit in Sydney today.
“We’re seeing gas prices heading from A$4 to somewhere between A$6 and A$9 and probably toward the upper end of that,” Fraser said in an interview. “Certainly wind is becoming more competitive with gas.”
BG Group, Santos and a ConocoPhillips (COP) and Origin Energy Ltd. venture are building LNG export plants in the northeast Australian state of Queensland to tap increasing demand in Asia. The BG project is estimated to cost $20.4 billion; the Santos and Origin ventures have budgets of $18.5 billion and A$24.7 billion, respectively.
BG’s development, the first of the projects with production set to start next year, will send gas to the coast from fields in southern Queensland via a 540-kilometer (336 mile) pipeline and convert the supplies into liquid.
Domestic Gas Prices
With a total of almost $200 billion in LNG projects under construction, Australia is projected to record a more than fourfold surge in exports by 2017 and 2018 and to overtake Qatar as the world’s biggest supplier, the Bureau of Resources and Energy Economics said in a report last month.
In the U.S., LNG proposals have stirred debate over how tightly to control gas exports. After issuing the first permit to export continental U.S. gas to nations without free-trade agreements almost two years ago, the government suspended reviews of all other applications so it could study the potential impact of overseas sales on domestic energy prices.
Australian LNG sales to Asia at oil-linked prices are forecast to drive domestic gas prices higher as local users such as utilities and manufacturers are forced to compete with customers in Japan, China and South Korea.
“The export of LNG from Australia could essentially price new gas-fired electricity generation out of the market,” said Bhavnagri at BNEF.
Clean Energy Targets
The DomGas Alliance, a group formed in 2006 in response to a shortage of gas for new developments in the state of Western Australia, called last year for a national policy to reserve 15 percent of gas production for local industries and households to ensure energy security.
Still, the Australian government supports “open and efficient markets, where price is allowed to balance the market and provide incentives for developing new supply,” former Energy Minister Martin Ferguson said in November.
Australia’s gas resources are becoming more expensive to produce, Adelaide-based Santos said in an e-mail.
“Without the economies of scale that come from large export volumes, the next wave of Australia’s gas resources, including unconventionals, would remain uneconomic and unavailable to Australian industry and consumers,” it said.
While Australia is experiencing weaker energy demand, which is discouraging investment in gas-fired plants, the country’s target to get 20 percent of its power from renewable energy by 2020 is spurring wind, according to Tony Wood, energy program director at the Grattan Institute.
AGL, Australia’s second-biggest electricity retailer, suspended development of the first stage of its 1,000-megawatt Dalton gas-fired power station in New South Wales state in October after reviewing its economic viability. Falling energy demand last year also prompted EnergyAustralia, the unit of Hong Kong-based CLP Holdings Ltd. (2), to put on hold a proposed gas-fired power station in the state of Victoria.
In addition to the government’s 2020 renewable energy target and the A$23-a-ton price on carbon emissions introduced in July, Australia’s A$10 billion Clean Energy Finance Corp. is expected to start making investments this year.
Energy Mix Changing
The Australian Renewable Energy Agency, set up by the government in 2011, also plans to allocate A$2.2 billion in funds to support the industry.
Vestas and Suzlon Energy Ltd. (SUEL) have the biggest shares of the Australia wind turbine market, according to data compiled by Bloomberg. Sydney-based AGL’s A$1 billion Macarthur project is the largest wind farm in the Southern Hemisphere.
About 68 percent of Australia’s electricity is generated by coal, compared with about 19 percent for gas, the government’s resources bureau said in August. Renewable energy may grow to about 50 percent of the mix by 2050 from 13 percent, according to another bureau report in December.
The Australian government plans to shift to an emissions-trading system in 2015, although opposition leader Tony Abbott, favored to win the next election, has pledged to scrap the carbon price. Cap-and-trade is gaining favor outside the U.S., where legislation for a market stalled in 2009 despite the support of Obama.
In the U.S., while there isn’t a federal rule, utilities in 29 states are required to get an increasing amount of their supplies from renewable-energy sources.
The share of U.S. electricity from gas-fired power stations has grown to 30 percent in the last five years from 22 percent after a surge in shale production pushed prices down.
“Unlike the U.S., we’re not likely to see this move toward gas, even though people have been expecting it,” Wood of the Grattan Institute said in a phone interview. “People use this term, ‘dash for gas,’ but you’ve got a series of things that mean it’s just not happening.”
To contact the reporter on this story: James Paton in Sydney at email@example.com