UBS: High electricity prices will continue on Australia's east coast until at least 2020

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East coast electricity prices are expected remain above $80 per megawatt hour (MWh) out to 2020, UBS says.

And here’s a chart Prime Minister Malcolm Turnbull would probably prefer voters didn’t see after announcing the government’s plan for a “National Energy Guarantee” this week and linking it to lower prices. The government’s experts are saying prices will drop for households by around $110 in 2020, but in the meantime UBS predicts prices will continue to rise – right up until and beyond the next election.

The medium-term projects represent around a 50% increase from 2016:

Analysts Nik Burns and Joseph Wong attributed the increased costs to higher gas prices due to Australia’s domestic supply shortage at a time of record production levels.

They also noted the difficult transition as the country pivots away from coal to alternative sources. Gas for the local market is another policy area where the federal government has intervened to negotiate adequate supply in a bid to drive down prices.

As Australia’s ageing coal-fired plants — such as Victoria’s Hazelwood power station — are shut down, near-term replacement options including the Snowy Hydro project and the SA government’s proposed gas-fired power station won’t impact prices in the medium term.

Meanwhile, the Turnbull government National Energy Guarantee market places the onus on energy companies to meet two specific criteria.

The details are sketchy at this point, but energy companies will have to ensure the reliability of their supply – to “keep the lights on” (as Turnbull puts it) via dispatchable generation – while also ensuring the sources of that supply meet the government’s requirements for reduced emissions as part of the Paris agreement.

The lack of supply options means UBS expects gas prices to remain in the $8-10 per gigajoule (GJ) range “for the forseeable future”.

Their research follows a report from the ACCC last month, which forecast a supply shortfall in the east coast gas market of up to 55 petajoules (PJ) in 2018.

The outlook from 2019 is for increasing year on year supply shortfalls, in the absence of new supplies being developed,” the two analysts said.

“By 2020 we estimate the shortfall to have increased to 82 PJ, and to 182 PJ by 2023.”

This table from the Australian Energy Market Operator (AEM) shows the forecast supply/demand outlook for the domestic market in 2018 and 2019.

Burns and Wong said in order to meet the projected shortage over the next five years, the east coast gas market will be dependent on the diversion of gas supply from LNG projects in Queensland.

“With diverted Qld LNG supplies being one of the more expensive gas supply options available, our near term outlook is for east coast gas prices to continue to increase as legacy contracts roll off,” they said.

Beyond 2023, the reliance on Queensland gas may reduce, however that will depend on the effective roll-out of long-term gas projects.

“To truly bring down future gas prices to levels below $8/GJ on a sustainable basis will require the discovery and development of large, new (and ideally liquids rich) gas volumes,” the two analysts said.

They added the most likely location for new supply would come from gas deposits off the coast of Victoria.

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