Gas Statement of Opportunity

After years of the government placing their heads in the sand on the East Coast Gas Crisis, which is about to engulf the Australian market, the Gas Statement of Opportunities (GSOO) and the government are finally recognising that the status quo will no longer work.

AEMO’s CEO, Daniel Westerman, has emphasised the severity of the situation, noting that the Longford plant is set to retire in 2033 and will likely see reductions leading up to that point. Longford supplies two-thirds of the East Coast gas supply, and with Bass Strait fields depleting and coal closures imminent, new investment in gas supply is imperative.

The gas gap, the difference between supply and demand, remains from 2028/2029, making investment decisions critical to ensuring supply security from that time. The GSOO has touted solutions such as LNG regasification terminals, new production sites, fast-tracking proposed projects, and developing new gas fields and transportation options. However, these solutions are costly, time-consuming, and unlikely to be operational in time to meet the imminent demand.

Don’t be under any illusion, Australia is not lacking in gas supply. As a replacement fuel for coal, there should be ample capacity to meet both domestic and power generation needs. However, up to 80% of the gas extracted in Australia is exported.
The government has tried to address this through the Gas Code of Conduct, which came into effect in 2023 and has, in some aspects, been successful. APLNG has agreed to supply 10PJ / year for four years at the gas cap of $12/GJ (CPI indexed) until 2029, an extension of the existing domestic supply deal, which was due to expire at the end of this year.

However, without clear investment signals and a significant gap between achievable contracts in the international and domestic markets, the market will inevitably follow the money. Gas will be required, regardless of advancements in batteries and renewables, gas-powered generation will still play a critical role. The government knows this, but with an election looming and energy policy at the centre of the debate, no one wants to acknowledge the elephant in the room or the cost of ignoring it.

Frequency Performance Payments starting in June

The wait is almost over for the implementation of the new Frequency Performance Payments.

In 2022, the Australian Energy Market Commission (AEMC) published a final determination and rule to change the way Primary Frequency Response (PFR) payments and regulation Frequency Control Ancillary Services (FCAS) payments are made. The rule change went into sandbox mode (non-financial industry trials) at the end of 2024 but will commence industry-wide on June 8, 2025.

As the National Electricity Market (NEM) evolves and quicker frequency response is required, maintaining grid security and keeping the power system frequency within the tight band around 50Hz becomes increasingly imperative. While electricity prices can be “controlled” by generators through bids into the dispatch mechanism, the ancillary services market has pass-through charges, which are levied onto end users to cover costs for inefficiencies in the system.

The new rule will introduce a double-sided frequency performance payment process, which will calculate, on a 5-minute basis, a generator’s ‘Contribution Factor’ to show the extent to which the unit has helped or is detrimental to the system frequency. As an end user, your previous calculation of FCAS, based on the ‘causer pays’ allocation, will also be replaced. The pass-through costs of FCAS will now also be calculated in 5-minute intervals, which will be based on the contribution factors. Those who have a helpful impact on frequency will receive payments, but those who are unhelpful will pay the penalty.

Those who react quickly to the market (batteries and hydro plants) will likely be the largest winners from this new mechanism. However, this will be funded by end users and renewable generators (solar and wind), who cannot react to the conditions. As such, this shake-up will likely have wide-reaching impacts upon financial inception.

LNP CQ-H2 DE-FUNDING

The future of the Central Queensland Hydrogen Project CQ-H2 is now uncertain after the new Queensland LNP government pulled any further funding for the project. The previously agreed $1.4b in funding, agreed under the Queensland Labor government, has been rejected by the new state energy and treasurer minister.

The project was part of Stanwell’s green hydrogen strategy, and the removal of funding has now put the project in doubt. The consortium of Australian (Incitec Pivot and Stanwell), Singaporean (Keppel) and Japanese (Iwatani and Marubeni) energy companies was to develop 720MW electrolysers, eventually scaling up to 2.8GW of electrolyser capacity. The government’s view was that the $1.4b of funding was vastly underestimated when reviewing the upgrades required to the water, ports, transmission and hydrogen production, and this would not align with the underlying requirement to produce affordable, reliable and sustainable power for the state.

The Acciona Energia Aldga solar farm (420MW), which is already at the Front Energy Engineering Design (FEED) stage and construction began last April, is also now under threat as the Stanwell Financial Investment Decision (FID) for the initial phase has not yet been made.

This is just the latest blow to the green hydrogen economy, following Fortescue’s withdrawal from the green hydrogen project in the Hunter, and Origin’s withdrawal from the Newcastle, Hunter Valley Hydrogen Hub.

All this de-investment seems in contrast to the federal government’s plans, which, via the “Future Made in Australia” plans, are still forging ahead with incentives, including tax credits from 2027 set at $2/kg of green hydrogen for up to 10 years.

The winners of this tax windfall could be those left standing. Projects such as the Yuri project in the Pilbara region of WA, a 10MW electrolyser powered via solar and batteries run by Engie (French) and Mitsui (Japanese) backing, is already under construction, although delayed by a year to be completed in 2025.

Overall, the landscape for large-scale hydrogen production in Australia has never looked so uncertain. With Canberra’s delay in announcing projects that would receive funding under the Hydrogen Headstart initiative still outstanding, the future continues to remove Australia from the appetite of international investors. This is now only exacerbated by the LNP’s removal of funding in Queensland, a possible indicator of what could occur if we do get a change in government in the next election.