Gas boom may leave power stations ‘stranded’

Up to $4bn worth of gas-fired power stations are in danger of being mothballed as gas prices jump.

Up to $4 billion worth of gas-fired power stations are in danger of being “stranded” as gas prices explode and the renewable energy target pushes extra generation into a grid already oversupplied with excess power, a new report has found.

It says this could cause investors to slash maintenance spending on older generators, potentially threatening future power supplies.

Commissioned by the Energy Supply Association of Australia, and written by independent energy analyst Mark Lewis, the report’s modelling warns that Australia’s power system is potentially even more vulnerable to disruption than Europe’s, where power companies have faced a crisis that has forced them to retrench workers and slash maintenance spending across the sector.

Australia’s market is already “chronically oversupplied” and it is most likely the power stations to be “stranded” are those that use gas, it says.

Arguing that the “stranding” has already begun, the report, written by energy analyst Mark Lewis, points to the decision by Queensland’s largest power generator, Stanwell, to mothball its biggest gas-fired power station so that it can sell the gas rather than use it in electricity generation.

“The similarities then with the European market conditions are material,” the report says.

“Both markets are oversupplied; both have significant mandatory new deployment of renewable-ener­gy supplies into these oversupplied markets; both have carbon prices well below the ‘true’ value required to prioritise gas generation ahead of coal; both face the equivalent of oil-indexed gas prices; and both experience or face increased stranding of relatively new and efficient gas generators as a result.”

Since 2004, about $4bn worth of gas power stations have been built. In 2011, former treasurer Wayne Swan maintained that gas-fired electricity was projected to increase by 150 per cent to 300 per cent over the period to 2050 because of Labor’s climate change policies.

But the report says the carbon tax is still up to $40 a tonne too low to force a switch from cheaper coal-fired power stations to gas. The use of gap will only get wider when the carbon price is repealed, it says.

The stranding of gas power stations is likely to have a “knock-on” effect and hit operational expenditure on colder coal-fired generators, nearing the end of their commercial life.

“Companies that have endured substantial balance-sheet pain from impaired gas assets are likely to be less willing and able to invest in maintaining older assets,” the report warns.

“Uncertainty will shroud their ongoing operations. It is not unreasonable to see scenarios in the near future where reliability at scale becomes an issue if the issues surrounding the transformation of the energy supply sector are not resolved.”

The report adds that, as the value of multi-billion-dollar electricity assets are written down, banks will attach a risk premium on future investments in the market, making modernising the energy sector “more expensive”.

This echoes recent warnings by EnergyAustralia, which owns several generators, including the Yallourn brown-coal power station in Victoria’s Latrobe Valley.

The government is under pressure to wind back growth in the renewable energy target to stop more power being funnelled into an oversupplied market.

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