Looming Vic gas shortages may hit system security, warns AEMO

Gas shortages in Victoria risk plunging the nation’s electricity market into a fresh crisis, with the power grid to be fragile for weeks.

The national electricity market faces a fresh crisis with looming gas shortages in Victoria this winter. Picture: Getty Images

Gas shortages in Victoria ­threaten to plunge the nation’s electricity market into a fresh ­crisis, with the power grid operator warning the system will ­remain fragile for weeks as consumers face a hit of hundreds of millions of dollars from the last electricity system failure.

Levels at Victoria’s underground gas storage plant, Iona, have dropped to a record low and forced the Australian Energy Market Operator to put an official system security threat in place until the end of September.

The low storage levels could force authorities to invoke an emergency supply guarantee for the second time this year. AEMO is also considering intervening in the market to limit the amount of gas taken from Iona.

AEMO chief executive Daniel Westerman will tell an industry conference the situation in both gas and electricity remains fragile, with gas reserves being depleted at a rapid rate and issues remaining with fuel supplies such as coal, gas and water.

Consumers can expect a hit to their power bills, with Mr Westerman revealing compensation payments for the market suspension in June will cost the industry hundreds of millions of dollars which will almost certainly be passed onto households.

Electricity generators are now in the process of claiming compensation if their costs were higher than the price cap, but AEMO watered down speculation of a $1bn-plus compensation bill.

The latest shortage comes as gas demand is typically three times higher in the Victorian winter than summer. A cold snap and booming LNG exports have limited domestic volumes, while Russian sanctions have deprived global markets of supply and deepened a global energy squeeze.

Iona’s owner, Lochard Energy, said the cold winter and coal breakdowns led to customers draining gas supplies earlier and in larger quantities than usual.

“It is the case that gas supply and winter peaking capacity are becoming increasingly tighter on the east coast,” Lochard said in a statement. “Iona is working with its customers to meet their current and future storage and peaking capacity needs.”

The Iona gas storage facility in Victoria is on track to fall to an all-time low of just six petajoules by August 6, with the depletion of inventories leading to the risk of “total system” gas supply shortfalls for the state.

The AEMO chief will say gas storage was already rapidly depleting before winter started, with more LNG being exported from Queensland, which meant lower flows to southern states, triggering more gas to flow north to NSW sourced from Victoria’s offshore Bass Strait fields.

A rare cap on Victoria’s gas prices has been in place to calm the market but the move has -provided an incentive to producers to direct supplies to other states further exacerbating the tight market.

“This reduction in Iona supply capacity increases the risk of curtailment during peak demand days and during periods of high gas generation demand,” AEMO told the industry on Monday in a letter asking producers to supply gas to ease the situation.

“AEMO has determined that there is a possibility that market or operational responses may prove insufficient to alleviate the threat. AEMO are considering all other possible options prior to intervening.”

An emergency supply guarantee mechanism may now be invoked on gas producers for just the second time since it was introduced in 2017 with the Victorian government blaming NSW for the supply crunch.

“The unprecedented demand for gas in NSW – who produce almost no gas of their own has drawn down Victorian reserves, but AEMO advises that there continues to be sufficient gas to meet our needs,” Victorian Energy Minister Lily D’Ambrosio said.

AEMO will reveal the wholesale cost of power in the national electricity market soared to $2.4bn across the 10-day period prior to price caps being introduced on June 14.

This represented 10 per cent of the annual bill for energy purchased in the market in the 2022 financial year.

Introducing a $300 per megawatt hour cap saw the cost fall to $1.6bn during the next 10 days of administered pricing.

Despite lower overall costs, the effect on energy retailers and large users would depend heavily on their contracting strategy.

Mr Westerman will tell the Clean Energy Summit that deferred charges through the compensation mechanisms may cause significant difficulty.

The $300 per megawatt hour cap was deemed as too low for generators who withheld 5 gigawatts of generation or the equivalent of three large coal plants given some of that supply would have run at a loss.

AEMO will disclose that it directed a total of over 10,000 MW of generation to either be made available or generate electricity between June 13 and 23 and made 500 separate manual directions to maintain sufficient supply.

A lockdown of the electricity market was lifted on June 24 but power generators were warned they should not withhold supply and must notify authorities of fuel shortages and outages.

Mr Westerman will say on Tuesday it would be unhelpful if the electricity price cap were breached again and given the fragile nature of the market outlook, it was critical that energy outlook forecasting was as accurate as possible.

Consultancy Energy Edge said the cap imposed on Victoria‘s gas prices had provided an incentive for producers to direct supplies to other states.

“The issue with the current Declared Wholesale Gas Market is that the market has been under an administered price cap of $40 per gigajoule since 30 May 2022. Therefore, there are no market signals with Victoria as gas prices can‘t go higher than $40/GJ,” Energy Edge managing director Joshua Stabler said.

“Perversely, as the market signals will exist in Adelaide and Sydney uncapped, market participants will be economically incentivised to support other regions in preference to Victoria.”