New economic modelling shows the benefits of new gas supply

Tim Nelson
Tim Nelson
28 July 2014

ACIL Allen has completed modelling which shows the benefits of increasing gas supplies in NSW.

The Daily Telegraph provided coverage of the report today. The key points in the report are:

ACIL Allen used their gas market model and a Computable General Equilibrium (CGE) model of the Australian economy to determine economic activity in NSW across a range of scenarios.

Two scenarios were focused on to quantify the economic impacts of the Gloucester project:

  • “CSG Freeze” – in this scenario, no new CSG projects in NSW are developed. The existing project (i.e. Camden) continues to operate.
  • “Gloucester Only” – in this scenario, Gloucester produces 22.6 PJ per annum from 2017 onwards.

There are key differences in the results of ACIL’s gas market modelling:

  • Even though the Gloucester project produces a small proportion of the aggregate east coast gas demand, its output has the effect of reducing wholesale gas prices immediately in NSW. By 2025, the Gloucester project is forecast to reduce wholesale gas prices by 8%. In other words, this modelling demonstrates that increasing supply reduces wholesale gas prices – contrary to many of the claims being made by other commentators.
  • Developing the Gloucester project increases the real incomes[1] of NSW residents by $1.7 billion in Present Value terms[2]. In other words, by shifting away from more expensive imported gas, NSW residents have more money in their pockets to spend on other things.

The Gloucester project has a significant impact on economic activity because:

  • NSW produces very little of its own gas (only around% at present). By producing more gas, less gas is imported from interstate.
  • As AGL’s modelling demonstrated in the publication “Solving for X”, it is possible that NSW may not have sufficient gas to meet median winter peak demand from 2016. By developing the Gloucester project, shortages become unlikely thereby eliminating the adverse economic impacts of shortage events.

The ACIL Allen study also considers a “Base Case” scenario whereby the gas industry in NSW grows steadily, and by 2030 is producing 160 PJ per annum – effectively making NSW ‘self-sufficient’ in relation to gas supplies. Such a scenario would result in wholesale gas prices being 12% lower than the “CSG Freeze” scenario in 2025.

[1] Real income is a measure of the ability to purchase goods and services, adjusted for inflation. A rise in real income indicates a rise in the capacity for current consumption, but also an increased ability to accumulate wealth in the form of financial and other assets.

[2] In nominal terms, the project increases real incomes of NSW residents by $4.2 billion