Victoria facing gas shortage triggered by price cap

Key points

• Gas at Lochard Energy’s Iona storage plant in Victoria is dropping to near-record levels, driven by soaring east-coast demand.
• The energy regulator warned that if gas at the Iona plant continues to be drained at the current rate, it could be forced to step in to guarantee gas supply for electricity generators.
• Victoria is the only state in which a $40-per-gigajoule price cap on gas remains in place to keep a lid on soaring wholesale prices.

A key Victorian gas storage facility is being drained to dangerously low levels thanks to soaring demand, raising the prospect of another dramatic market intervention to shore up the supply of electricity.

Gas at Lochard Energy’s Iona storage facility, located near Port Campbell in south-west Victoria, is dropping to near-record levels as eastern states take advantage of the state’s price cap, sparking fresh concerns about a gas supply crisis this winter.

Lochard Energy’s Iona underground gas storage plant in Victoria is being drained to dangerously low levels thanks to this winter’s soaring gas demands.Credit:

On Monday night, the national energy regulator, the Australian Energy Market Operator (AEMO), issued a statement warning that if gas at the Iona plant continued to be drained at the current rate, it could be forced to step in to guarantee gas supply for electricity generators.

“AEMO has determined that there is a possibility that market or operational responses may prove insufficient to alleviate the threat. AEMO is considering all other possible options prior to intervening,” it said.

Last month, the AEMO made the unprecedented decision to briefly suspend the whole east-coast electricity market to restore calm to the volatile system.

Victoria is the only state in which a $40-per-gigajoule price cap on gas remains in place to keep a lid on soaring wholesale prices.

The cap, which was triggered automatically at the end of May under Australia’s gas market rules, prompted NSW and Queensland to get more of their gas from the Iona plant, which is the largest independent provider of storage services to the east-coast gas market.

The uptick in demand caused storage at the plant to drop from 48 per cent to 43 per cent in a week. The looming supply crunch prompted the AEMO to issue a “threat to system security” notice in a bid to prevent supply shortfalls this winter.

The regulator said gas at the facility dropped to 10.2 petajoules on July 17 and was on track to fall to a record low of 6 petajoules by early next month.

At this level, the AEMO said Iona’s reservoirs could fall to such low levels that insufficient pipeline pressure would further restrict the supply of gas, threatening Victoria’s ability to supply the east-coast gas market, leading to a “total system” supply threat.

“This reduction in Iona supply capacity increases the risk of curtailment during peak demand days and during periods of high gas-generation demand,” the AEMO said.

The AEMO has previously warned that the “legacy gas fields” that supply Victoria’s Longford Gas Plant will be depleted before winter 2023, prompting concerns about the state’s ability to cope with peak electricity days next year.

The AMEO predicted annual “existing and committed” state production would drop by 43 per cent by 2025.

State Energy Minister Lily D’Ambrosio said Victoria remained a net exporter of gas, producing more than it uses and supplying the majority of gas to the east coast.

“The unprecedented demand for gas in NSW – who produce almost no gas of their own – has drawn down Victorian reserves, but AEMO advises that there continues to be sufficient gas to meet our needs,” she said.

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