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Know your NEM: Looking to the future of energy prices

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Price action in most major markets was muted in the past week. The markets trade steadily but need to anticipate:

  1. The Form of Victoria’s reverse auctions. How will the Victorian Government pass on the cost of the electricity procures to consumers?
  2. Release of the final version of the Mugglestone Report in Queensland. There really isn’t any obvious reason to delay this.
  3. Federal Court decision in Australian Energy Regulator v Australian Competition Tribunal. This is as vital decision that impacts electricity prices for all consumers.
  4. Finalisation of the Finkel report due in the middle of this year

Turning to the weekly action

  • Volumes: cooler weather (as much as 3C below last year in Melbourne) saw NEM wide volumes up 4% compared to previous corresponding period (PCP) driven by NSW and Vic. Qld remaind soft. For the CYTD (calendar year to date) volumes are flat, down in Victoria up in NSW.  At this stage our guess is that volumes for the calendar year will end up marginally ahead of 2016.
  • Future prices.. were largely unchanged this week. Again we draw attention to the fact that prices in the out years are lower than for 2018. For instance the very lightly traded FY2020 NSW price is at $74 MWh compared to $109 MWh for FY18
  • Spot electricity prices were well up on last year 160% in the case of Victoria, but only 57% in NSW. In the current Autumn conditions NSW and QLD spot prices are noticeably below those of Victoria and South Australia and Tasmania
  • REC
  • Gas prices .  Drifted slightly but no real change
  • Utility share prices.. Redflow’s announcement that production has resumed saw its share price up 31% on the week, to be still down 40% on last year.  Tilt shares lost 8% for the week after its outlook statement indicated that profits would be less in FY18 than FY17. Origin’s Stockyard Hill deal combined with some renewed confidence in the oil market saw its share price up 5% for the week and 20% since Jan 1 just about matching the 22% for AGL. AGL announced that Stephen Mikkelsen head of energy markets and former CFO will be stepping down. Stephen was well regarded in the market.
  • Overall the larger utility shares have done quite well this year. Networks have proved to be good investments. Perhaps not quite as good as some think. The following chart compares the CBA and Austnet share prices over 10 years. It isn’t adjusted for dividends. Ausnet’s dividends have been better than CBAs but CBA’s dividends are fully franked for the most part. My view is that over the 10 years they are much of a muchness. During the financial crisis both shares proved risky losing more than half their value.
Figure 1: AST & CBA share prices. Source: Factset

Figure 1: AST & CBA share prices. Source: Factset

That said sale of 50.4% of Endeavour energy brings  to $33 bn the total net benefit to the NSW Govt. balance sheet from sales of wires and poles. This money will fund the new Sydney metro (40% more rail services to the North Shore) as well as a wide range of other benefits. It also means the NSW Govt has less incentive to act in the interest of network owner and more to act in the interest of consumers. Unfortunately it still retains a minority interest in Ausgrid and Endeavour and retains 100% of Essential.

Figure 2: wires and poles are worth quite a lot

Figure 2: wires and poles are worth quite a lot

 

Figure 3: Summary

Figure 3: Summary

Share Prices

Figure 4 Selected utility share prices

Figure 4: Selected utility share prices

 

Figure 5: Weekly and monthly share price performance

Figure 5: Weekly and monthly share price performance

Volumes

Figure 6: electricity volumes

Figure 6: electricity volumes

 

Figure 7 7 Day moving avg year on year temp change. Source: BOM

Figure 7: Seven Day moving avg year on year temp change. Source: BOM

Base Load Futures

 

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Figure 12: Baseload futures financial year time weighted average

Figure 12: Baseload futures financial year time weighted average

Gas Prices

Figure 13: STTM gas prices

Figure 13: STTM gas prices

 

Figure 14 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO

Figure 14: 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO

 

David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.  

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  • David Osmond

    Will there be a cost to the Vic Governments renewable reverse auctions? If they procure wind and LGCs for under $75 per MWh (which seems likely), then that represents a massive discount (> 50%) to the current Vic electricity price of $90+ plus LGC prices of ~$80. It is likely to be more a question of how to pass on the savings.

  • Mark Roest

    What’s ahead: as prices fall, it takes less and less time to pay off the smaller financing. We get to a point at which a major portion of the renewable energy projects have been paid off in full. Aside from reserving about 4% per year for eventual replacement, and some smaller amount for O&M, the energy is now free!
    THAT is what this is all about financially — getting entirely out from under the thumb of the utilities, aside from such services as you really choose to pay for, and completely eliminating fossil and nuclear fuels, which when you realize you are no longer dependent on them and thus have no further reason to pay their economic rent, you also realize are ruining our fair planet! And directly killing people besides!

  • Malcolm M

    Of significance is that 1500 MW of coal generation in Victoria is currently out of action, which means the marginal cost is me by gas-fired generation (mainly Newport and Mortlake). The coal-fired units out of action are Loy Yang A2 (530 MW) and A3 (560 MW) and Yallourn W unit 4 (380 MW). Winds have been light, which has meant little wind generation.