Sydney (Platts)--6Feb2014/416 am EST/916 GMT

Stanwell Corp, the largest electricity generator in the eastern Australian state of Queensland, has taken the unprecedented step of closing its major gas-fired power plant so it can cash in on higher prices in the domestic gas market.

Stanwell said Wednesday it would withdraw its 385-MW Swanbank E gas-fired power station from service for up to three years from October 1, 2014. Rather than using its gas to generate electricity, the state-owned utility will sell it in the Queensland market, which is currently undergoing a significant restructuring due to the impending startup of three new export-oriented LNG facilities.

"With subdued market conditions and increasing gas prices expected to continue, Stanwell can earn more revenue from selling our gas rather than using it in electricity generation," said Stanwell CEO Richard Van Breda. "Stanwell is a commercial entity, operating in a highly competitive electricity market, and we need to pursue strategies that deliver the best return for our shareholders: the people of Queensland."

To compensate, Stanwell will return to service two 350-MW units at its 1,400-MW coal-fired Tarong power station. The company shut the units in October and December 2012 in response to low wholesale electricity prices.

Unit four at Tarong will restart later this year, followed by unit two in mid-2015. "The exact timing for the return to service of both units depends on market conditions and portfolio requirements which Stanwell will continue to review," Van Breda said.

"We expect to achieve significant financial benefits by replacing generation at Swanbank E with generation at the lower marginal cost Tarong unit four and through the sale of Swanbank E gas," he added.

Swanbank E consumed 12.2 petajoules of gas in 2013, according to local energy industry consultancy EnergyQuest. The power plant, which has at times consumed up to 20 Pj/year of gas, operated at an average 49% of capacity in 2013, EnergyQuest CEO Graeme Bethune said Thursday.

Bethune estimated Swanbank E's gas supplies were likely to be priced at historical levels of A$3-4/gigajoule. In comparison, new gas contracts in Queensland are being priced at oil-linked export-parity levels of about A$8/Gj, he said.

"Falling power demand, the end of the Queensland gas scheme and mandated renewable targets have meant baseload power is less attractive. We're forecasting there will be a fall in gas-fired power generation," Bethune said, meaning there could be more moves like Stanwell's.

The Queensland gas scheme, which was introduced in 2005, required the state's electricity retailers to source a prescribed percentage of their electricity from gas-fired generation. The scheme, which ended on December 31 when the required percentage was 15%, was a kickstart for the Queensland coalseam gas sector, in turn underpinning the development of the LNG industry.

EnergyQuest estimates around 85 Pj of gas was consumed for gas-fired power generation in Queensland in the year to September 30. Of the total, around one-third went to baseload power plants.

Stanwell's switch back from gas to coal-fired generation capacity showed "the market working," Bethune said.

"Greenhouse gas emissions are best constrained by falling power demand," he said. "And people have been concerned about gas shortages, but this frees some up for the domestic market and LNG."

Concerns about domestic gas supplies and prices in Queensland and its neighboring state of New South Wales have risen in recent months ahead of the looming startup of the three coalseam gas-to-LNG projects on Curtis Island in Gladstone.

The Australian Energy Market Operator said in an annual report in November that additional gas production capacity would be needed to supply the LNG plants, which will produce 24.3 million mt/year of LNG from a total of six trains.

"Without further production investment, potential shortfalls in Queensland may exceed 250 terajoules/day once all six LNG trains reach full output. This is projected to occur in 2019," the regulator said at the time. "If production in Queensland and South Australia is prioritized for export, there will be flow-on effects to New South Wales with potential shortfalls of 50-100 Tj/d over winter peak demand days from 2018."

Demand for gas to feed the Queensland LNG facilities is projected to rise from zero to around 1,450 Pj/year between 2014 and 2019, according to the AEMO. Domestic demand is projected to grow at around 0.9% annually from present consumption of around 620 Pj/year to about 750 Pj/year by 2033.

--Christine Forster, christine.forster@platts.com
--Edited by Meghan Gordon, meghan.gordon@platts.com

© 2014 Platts, The McGraw-Hill Companies Inc. All rights reserved.  To subscribe or visit go to:  http://www.platts.com

http://www.platts.com/latest-news/natural-gas/sydney/australian-generator-shuts-gas-fired-plant-to-27903846