Kurri Kurri Gas Power Station

Carl Daley
Carl Daley
Kurri Kurri Gas Power Station

The Federal Government decision to use taxpayers funds to build the 660MW Kurri Kurri gas powered generation was justified on an alleged capacity shortfall and the need to keep prices down. However, neither of these foundations are supported by market conditions, facts and the market operator's analysis.    

1.0  Introduction

In case you are wondering where Kurri Kurri is located, it is about half an hour drive inland from Newcastle and the region has been a very influential in the energy industry over many decades.

After joining the industry in the mid 1990's one of my early recollections of visiting the region was touring the Kurri Kurri aluminium smelter. At the time, Capral Aluminium owned the smelter who was anxiously looking for a low cost electricity deal in 1998 to secure its future.

Kurri Kurri smelter began operations in 1983, and drew about 300MW from the grid, much smaller than the younger Tomago smelter located down the road. Tomago began operations in 1999 and draws about 850MW and is the largest single consumer in NSW.

Half-way through a tour of the Kurri Kurri smelter, our guide picked up a a chunk of steel measuring about 40cm long. Throwing the steel up into the air, he yelled, "Watch this! ..." With a thud, the chunk of metal smacked against the metal plate on the roof.

We all looked up 3 metres and saw the chuck of metal stuck to the plate held by a very strong magnetic field, with no hint of falling. No wonder we had to remove watches, mobile phones, etc before the tour. Pacemakers might have also been an issue on the site.

In 2012, Kurri Kurri smelter was closed due to its cost uncompetitive and tough trading conditions.

Now coming back to the Kurri Kurri gas powered generator decision ...

2.0  Federal Government Argument

The Federal Government Minister for Energy announced the decision to proceed with Kurri Kurri was based on two factors:

  1. the system will need extra capacity and resilience following the closure of Liddell Power Station
  2. with the Kurri Kurri plant, power prices will be kept down

2.1  Capacity Argument

The only problem with the extra capacity argument, is that AEMO did not concur.

Looking at the latest outlook by AEMO, it was concluded that by 2023-24 financial year, 154MW would be required increasing to 525MW by 2025-26 to meet the reliability standard and Interim Reliability Measure.

AEMO, Statement of Opportunities 2020, p9

However, the AEMO analysis indicated if EnergyConnect is completed before 2024-25 it is also "expected to play a key role in reducing supply scarcity risks ... between New South Wales and South Australia".  EnergyConnect has now received AER approval and is expected to be operational in 2023.

AEMO, Statement of Opportunities 2020, p8

The NSW Government provided $78m funding to Energy Australia's commitment to build a 300MW Tallawarra B gas powered generator that will be available for the summer 2023-24; meaning the Interim Reliability Measure would not be breached until 2025-26, and this excludes the beneficial impact of EnergyConnect.

AEMO, Statement of Opportunities 2020, p8

If AEMO updated the Statement of Opportunities for 2021 today and excluded Kurri Kurri, it is expected the NSW shortfall in capacity will be pushed-out until at least 2027-28.

The decision by the Federal Government to use taxpayer funds for Kurri Kurri cannot be justified based on a shortfall of NSW generation capacity.

2.2  Price Argument

The Government relied upon modelling undertaken by Frontier Economics that concluded without the Kurri Kurri project, prices would escalate.

Here is an extract from the press release from the Minister of Energy ...

"The Liddell Taskforce found closing the plant without adequate dispatchable replacement capacity risks prices rising by around 30 per cent over two years, or $20 per megawatt hour to $80 in 2024 and up to $105 per MWH by 2030."

However, the Federal Government failed to mention that this conclusion was drawn from the "No Replacement" scenario of the Frontier Economics study which consisted of:

  1. Liddell exits: 1 unit in 2022, 3 units in 2023
  2. Snowy 2.0 delayed until 2027-29
  3. NSW Emerging Energy Program proceeds but scaled down and delayed (400MW battery storage committed after 2023)
  4. ISP Group 1 and 2 interconnects proceed but delayed
  5. Humelink in 2028
  6. EnergyConnect 2028 (NSW-SA interconnector)
  7. Medium QNI post 2030
  8. No uncommitted investment proceeds other than that required to meet VRET/QRET

Recent announcements demonstrate it is misleading to suggest that the No Replacement scenario is close to today's market conditions:

  1. Snowy 2.0 has not been delayed and in March 2021 commissioned the first tunnel boring machine and at the offical ceremony, Angus Taylor announced it was named after his grandmother
  2. EnergyConnect has been given final regulatory approval by the AER to proceed and is expected to be operational in 2023, not 2028 as assumed
  3. Energy Australia has committed to build a 300MW Tallawarra B gas powered generator using a blend of green hydrogen and natural gas and will be available for the summer 2023-24, which is contrary to the assumption of no new investments in dispatchable generation
  4. Battery projects are coming online much faster than assumed in the No Replacement scenario evident by a 100MW battery being built alongside Darlington Point Solar Farm, TransGrid's 50MW/75MWh Wallgrove battery which is due in October 2021, and New England Solar Farm 50MW/50MWh battery; while further prospective projects include Origin's planned 700MW battery at Eraring Power Station, Neoen 500MW battery at Wallerawang coal power station site, and a dozen other projects

Investing taxpayers funds in Kurri Kurri gas powered generation based on the No Replacement scenario modelled for the Government by Frontier Economics in December 2019, cannot be justified due to the disconnect with current market conditions.

3.0  Keys Handed Over to Snowy Hydro

Market power is a concern with the Kurri Kurri project because it will be added to Snowy Hydro's formidable portfolio.

The frequency and level of high and extreme prices critically affect the average spot price, as they also impact the perception of risk, and therefore flow through to the forward prices.  

Looking at spot prices above $300/MWh since 1 January 2017, Snowy Hydro has been the dominant Price Setter on the east coast of the NEM. Snowy set the high and extreme prices 22% of the time in NSW and Queensland, and 26% of the time in Victoria. More than any other participant in the market.



Once Kurri Kurri and Snowy 2.0 both come online, Snowy's capability to further exert market power will increase, although the additional battery energy storage systems will compete within their domain.

It is possible for more than one Price Setter be designated for each 5-minute period, and if so, more Price Setters indicate greater competition. On average there were more than 2 Price Setters across all price levels, but when Snowy sets the price above $300/MWh, the number of Price Setters is very close to unity. This means Snowy does not have much direct competition at that price point.

The Minister for Energy espoused that Kurri Kurri will keep prices low, but it is incorrect to assume a Government owned entity will necessarily use its assets to suppress market spot prices.

Snowy Hydro and Stanwell are two examples, where both of these parties are very active setting high prices. It is also Stanwell and CS Energy that is facing a class action for its behaviour over the period 2015 to 2021, where ... "We allege Stanwell and CS Energy gamed the electricity pricing system and artificially inflated consumers' electricity bills", says the litigants.

If Kurri Kurri costs $600m to construct and if Snowy is expected to deliver a 7% return on the capital, then this is equivalent to $64,000 per MW per annum; or about $7.25/MWh across all hours of the year.

In order to extract this value from the market whether that is directly from the spot market, selling $300/MWh caps, or firming intermittent generation; Snowy will require volatility. This means Snowy will be commercially driven to stimulate or let extreme prices occur, in order to create future value.

Given the financial pressures associated with Kurri Kurri and the other assets in Snowy's portfolio, it will not be in Snowy's commercial interest to suppress spot prices.

When Snowy 2.0 comes online, Snowy will be further motivated to maintain the energy arbitrage by buying low and selling high, to recover funds for the capital intensive pump storage facility of Snowy 2.0. Already, "analysis from the Victoria Energy Policy Centre finds that even Snowy Hydro’s inflated revenue projection will only cover a quarter of the project’s capital cost"

When Snowy completed a round of wind and solar Power Purchase Agreements in November 2018, Snowy announced it can deliver below $70/MWh for a flat load, for up to 15 years. However, the current NSW forward prices for a flat load is around $57/MWh for the next 3-years, putting financial  pressure on Snowy's plans. The advent of Kurri Kurri and Snowy 2.0, will only add to this financial pressure.

Snowy Hydro will need market prices to be strong, to manage these cost pressures.

4.0  Battery versus Gas Peaker

It is recognised that battery storage may not be able to provide the deep storage that a gas turbine plant like Kurri Kurri can offer, but it is interesting to read the results from the Clean Energy Council which concluded:

"Battery storage outcompetes gas peakers because of its faster reaction time, higher accuracy and flexibility to respond to price variability by both charging and discharging. With the rapid reduction in capital costs complementing its already lower operating costs, battery storage offers this superior performance at much greater commercial value than its gas peaker alternative, and at much lower exposure against future gas, carbon and market reform risk.

Given these risks and opportunities, developing a new gas peaker in Australia is both irrational and imprudent, exposing shareholders to potential losses, taxpayers to unnecessary debt and electricity customers to high costs.

Battery storage is the true bridge to a clean energy future and can become the new flexible peaker to accelerate Australia’s transition to sustainable energy. The case for batteries as the new clean peaker is impossible to ignore."

Source: Clean Energy Council - Battery Storage: The New, Clean Peaker

5.0  Conclusion

Private investors have hesitated stepping into investments not knowing how and when Governments may step-in. The Federal Government will no doubt argue that the private sector was given fair warning, that is 12-months, to invest or else the Government would do so. However, it is also fair to say that the goal posts moved.

Since the Federal Government proclaimed the market needed 1,000MW by 2023, AEMO released their analysis which showed the immediate shortfall was only 154MW in 2023-24, but would increase to about 525MW in 2025-26. However, since AEMO's modelling was undertaken in 2020:

  1. Energy Australia has committed to build 300MW at Tallawarra B,
  2. EnergyConnect has been approved, and
  3. a range of NSW battery projects have been committed.

Justifying investing taxpayers funds into Kurri Kurri gas powered generation based on an alleged shortage of capacity and the desire to keep prices down, is misguided and misleading.

Market participants always have a tricky job, to not let the market get out of control as Government's will feel compelled to act; and when they act, usually the decision is not rationale and is rushed. Furthermore, in the power industry, the action can have a legacy impact for decades.

You have to wonder how much of the adversarial clash between the Federal Government and AGL regarding the Liddell closure along with runaway power prices since Hazelwood's closure and domestic gas prices in 2019, has tainted the Government's decision to use taxpayers money to build the Kurri Kurri gas powered generator?



Great! Next, complete checkout for full access to EnergyByte
Welcome back! You've successfully signed in
You've successfully subscribed to EnergyByte
Success! Your account is fully activated, you now have access to all content
Success! Your billing info has been updated
Your billing was not updated