Electricity Generation & the Gas Market

Greg Sise, Energy Link Ltd

View from Paritutu Rock

A Question of Flexible Storage

Hydro lakes

Gas fields Coal

stockpile

Security of

Supply

Tasmania

South Australia

Exploration

Exploration has ground to

a halt

Success rate since 2005 is zero

And the average size of discovery falls over time

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

0

5

10

15

20

25

30

35

40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Exploration Wells & Gas Discoveries

Exploration wells Gas discoveries Success rate

Modelled Gas Reserves

• Reserves run down over time and prices increase, even allowing for development well successes

0

500

1,000

1,500

2,000

2,500

2017 2022 2027 2032

Natural Gas Reserves - PJ

90th Percentile 10th Percentile Average

On and offshore

Taranaki

1

10

100

1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

Imp

lied

Ye

ars

of R

es

erv

es

PJ

Proven Reserves (P50) versus Implied Years of Reserves

Maui Kapuni McKee Waihapa/Ngaere Kaimiro/Ngatoro

Tariki/Ahuroa Mangahewa Rimu/Kauri Kupe Pohokura

Kowhai Turangi Other Implied Years Reserve

Reserves & Consumption

-

50

100

150

200

250

Natural Gas Consumption by Sector (PJ per annum)

Energy Transformation Non-Energy Use Consumption

Electricity is still 25% of gas consumption incl. cogen or 22% excl.

cogen

Reserves/Production

Reserves & Consumption

• What about contingent reserves?

• 3P – 2P = 400 PJ

• 2C = 1,700 PJ 0

500

1,000

1,500

2,000

2,500

3,000

2009 2010 2011 2012 2013 2014 2015 2016

P50 Natural Gas Reserves (PJ)

Other

Kowhai

Mangahewa

McKee

Turangi

Kupe

Kapuni

Pohokura

Maui

At current rate of consumption:

reserves are zero in 2027

LNG ?

• LNG = Let’” Not Get excited!!

•Our gas market is small and isolated

no direct links with international gas markets

gas prices have a mixed relationship with oil prices

•Our LNG importation price is assumed to be $16/GJ

• Current wholesale gas price in NZ is $5 - $5.50/GJ

$0

$1

$2

$3

$4

$5

$6

$7

$8

Average Wholesale Gas Price ($/GJ)

Natural Gas Prices

The last time

reserves were

below 10 years

Over-supply

and low

methanol

prices

And Now to Electricity

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

GWh paHouseholds Residential Sector

Occupied Households Residential Consumption

7,000

7,200

7,400

7,600

7,800

8,000

8,200

8,400Average Annual kWh per Household

2,000

4,000

6,000

8,000

10,000

12,000

14,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

GWh paGDP ($millions) Commercial Sector incl. Ag

Calendar Real GDP Commercial Consumption

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

10,000

11,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

220,000

240,000

19

74

19

77

19

80

19

83

19

86

19

89

19

92

19

95

19

98

20

01

20

04

20

07

20

10

20

13

GWh paGDP ($millions)

Industrial Sector (excl Tiwai)

Calendar Real GDP Industrial Consumption excl Tiwai

• Industrial Demand

• Down 1,500 GWh pa in wood, pulp, paper & printing

• Tiwai down 460 GWh pa

Impact of Tiwai Closure

• 5,000 GWh pa (12.5% of national demand)

• Coal-firing might cease (Huntly Rankine units 500 MW)

• TCC would likely close (365 MW)

• Gas & coal reduce by 35 PJ p.a. immediately after closure

• BUT: Tiwai has significantly reduced the risk of closure

And Now to Electricity

$0

$1

$2

$3

$4

$5

$6

$7

$8

Average Wholesale Gas Price ($/GJ)

Price path to support demand

growth, exploration &

development:

gas + carbon

Price path to

compete directly

with the best

renewable projects

$0

$5

$10

$15

$20

$25

>$18

Early Warning Signs

•The market needs gas or coal-fired generation

•The gas-fired sector is already at risk

Southdown, OTAB closed in 2015

TCC is at risk

Huntly is under contract

$0

$1

$2

$3

$4

$5

$6

$7

$8

Average Wholesale Gas Price ($/GJ)

Market in Balance

•Renewables are not over-built: prices set by

thermals

•Most or all gas-fired generation remains

•New peaker(s) built

•Coal-firing ceases early to mid 2020s Stratford TCC and or e3p Huntly Rankines McKee & P40 Junction Rd Otorohonga

Subdued Gas Prices

•Gas prices do not climb due to

better drilling technology, new fields, lower demand

•Gas-fired generation remains directly competitive

Stratford TCC & e3p Huntly Rankines McKee & P40 Junction Rd Otorohonga

Coal Future

•Coal-firing increases at Huntly

•TCC shuts down

•Gas-fired peakers remain

•Thermal fleet supported by capacity contracts

Stratford TCC Huntly Rankines McKee & P40 Otorohonga e3p

Excess Renewables

•Renewables are extensively over-built

•Hydro storage held higher, spill increases

•Gas and coal-firing fall faster than expected

•Spot prices collapse

Stratford TCC & e3p Huntly Rankines McKee & P40

Capacity Market

•Capacity mechanism introduced

•Supports coal and gas

•Market progresses toward very high %

renewables

Stratford TCC & e3p Huntly Rankines McKee & P40 Junction Rd Otorohonga

Summing Up

• Electricity generation gas consumption static at best

higher renewables requires more flexible thermal plant (gas or coal)

• Upward pressure on gas prices

unless supply expands significantly

• If renewables in electricity are to approach 100%, but with flexible storage available:

electricity spot prices will collapse

capacity mechanism(s) will be required in some form

gas-firing will only be for emergency & dry year peaking

Greg Sise, Energy Link Ltd

Electricity Generation & the Gas Market