Submitted on March 12, 2018

It’s been a while since our last blog post due to workload and other factors, but it’s a new year and it’s going to be another interesting year in the electricity industry, an industry undergoing change.  In this post we look at the recent announcement by Contact Energy of the sale of the Ahuroa Gas Storage facility to First Gas.

By Greg Sise, 12 March 2018

Once upon a time there was a producing gas field called Ahuroa onshore Taranaki. But as with all fields, eventually the pressure started to fall, which raises the question, should the field be developed further to increase gas draw-off rates, or should it be shut down?

In 2009 Contact Energy decided on an alternative path, to use the field as a ‘storage vessel’ for gas which it purchased under contract from other fields.

Why would anyone want to do this at a cost of $120 million?  Why not just use the gas from the other fields as required?

The problem for gas fields is that large sums of money are required to find and develop a new field, and to justify committing funds to these ventures, gas producers want to get a steady return.  So gas producers typically sell gas under take-or-pay (TOP) contracts.  A TOP contract requires the buyer to pay for minimum quantities of gas whether they are used or not.  For a generator in a market with lots of renewables, i.e. New Zealand, this can lead to burning expensive gas, or just not using gas you’re paying for anyway, when prices are beneath the marginal cost of generating.

Not good!

So Contact’s idea was to add a storage vessel which could store gas under TOP contract when electricity spot prices are low, then allow this gas to be used when spot prices are high.

Late last year Contact announced the sale of its Ahuroa Gas Storage (AGS) facility to First Gas, the owner of the two high-pressure gas transmission pipelines.  This allows First Gas, through its subsidiary Gas Services NZ (GSNZ) to be an independent vendor of gas storage, removing any concerns about predatory pricing (for storage) by Contact and giving GSNZ an incentive to increase the use of the storage and to upgrade it in future.

The really interesting aspect of the sale, however, is that it provides a direct competitor to the coal stockpile at Huntly, which is currently seen as the ultimate backstop in a dry period.

The AGS can currently store 18 PJ of gas, enough to keep a 200 MW gas-fired peaking station running continuously for a year.  By contrast, the coal stockpile has in the past held up to around 1 million tonnes of coal, but that was with all four of the steam turbine units running at Huntly – now there are only two.  So if the stockpile held 500,000 tonnes of coal that equates to 14.5 PJ, less than the AGS storage.

What’s more, there is reportedly the potential to expand the AGS storage significantly in terms of the rate at which gas can be drawn-off (which is already proposed as part of the transaction with First Gas).

The point has been made by a number of people, that having Huntly units in service, and the coal stockpile, is a low cost (probably the least cost given that costs are sunk) way of providing dry-year reserve, and that coal burning has fallen off markedly in the last few years.  Nevertheless, the move by Contact and GSNZ provides a viable alternative to using coal, raising the possibility of the phasing out the use of coal some time with the next few years.