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Know your NEM: Energy costs jump $11 billion

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Summary

FY18 futures prices in the latest week ended March 10 rose another 4% and – as figures 11 and 12 below show – FY18 prices in Victoria are equivalent to those in South Australia, with NSW only $5 MWh behind.

The overall increased cost to consumers is now up around $11 billion, although this assumes that every contract is fully repriced.

We will look at what is actually happening to consumer price offers later.  The increase in grid prices is just the same as if the battery + PV price had fallen 25%.

Rising prices are a natural part of markets. They signal the need for new investment. Only producers complain when pries are low and no one except shareholders listen. When prices are high it’s front page news.  Prices are not going back to 2015 levels for a long time.

It’s important to understand that the rise in baseload futures reflects an expectation that the market will be tight for energy. Futures prices don’t convey much information about blackout risk.

By our counting there is now ~1.6GW of wind and ~1.16GW of utility PV under construction in the NEM but only a small fraction of this will be on line in FY18.

Figure 1 New supply excludes rooftop. Source: ITKe

Figure 1 New supply excludes rooftop. Source: ITKe

Even including rooftop PV we still wont quite replace Hazelwood in terms of energy assuming capacity factor of 35% for wind and 28% for utility PV.

More to the point is what will happen to average prices. EG the PV will lower daytime prices but have no impact on overnight prices.

There are ways to deal with the volatility and building the wind out of South Australia is certainly a start but without more planning higher prices for volatility hedges  still look on the cards.

Using gas for electricity is DUMB. Gas is tight and needs to be used for heating processes, ie non crease fabrics, cooking, fertilisers and chemicals. Wasting it on electricity when there are alternatives is so yesteryear.

Figure 2 The impact of higher prices. Source ITKe

Figure 2 The impact of higher prices. Source ITKe

Turning to the weekly action

  • Volumes were soft this week reflecting ongoing mild weather and back at 2015 levels
  • Future prices FY18 rose 12% in Victoria during the week and 4% in NSW. FY19 prices were up a more modest 2%
  • Spot electricity prices. Were on average lower during the week than last year mainly driven by Victoria. Volatility was low with only a couple of incidents where prices were over $300 MWh and Victoria also saw a negative price of $50 MWh
  • REC Unchanged.
  • Gas prices remained high.  A new Fig. 13 shows the average of Adelaide, Brisbane and Sydney prices, itself averaged over 30 days. The Figure clearly shows the lift in prices this year and you can see the pickup in February and early March from January.  There are plenty of answers for more gas supply including LNG imports or a diversion of LNG related gas from QLD.  Origin Energy holds the key year. Not only does it have 700 PJ of proved reserves it can quickly develop in QLD at its Ironbark field, its partner APLNG (ORG owns 37.5%) has about 1 mt of LNG which is essentially uncontracted and sold on the spot market. That’s about 60 PJ  per year of gas at the field that could be redirected to the domestic market. Of course any idea the Govt. might have about increasing the PRRT will go straight out the window if the LNG guys are going to “help the Government” out.
  • Utility share prices: were soft. ORE was very soft.  AGL is up 40% over the past 12 months reflecting the market’s judgement of its ability to make money from the higher pool prices. The $1 bn Hazelwood closure liability is not being read  through to AGL just now. One day it will be.
Figure 3: Summary

Figure 3: Summary

Share Prices

Figure 4 Selected utility share prices

Figure 4 Selected utility share prices

 

rsz_screen_shot_2017-03-13_at_12705_pm

Figure 5: Weekly and monthly share price performance

Volumes

Figure 6: electricity volumes

Figure 6: electricity volumes

Base Load Futures

rsz_screen_shot_2017-03-13_at_13318_pm

Figure 11: Baseload futures financial year time weighted average

Figure 11: Baseload futures financial year time weighted average

 

Figure 12 FY18 futures. Source ASX

Figure 12 FY18 futures. Source ASX

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

Note: To hear Giles Parkinson and David Leitch dissect the week’s events, including the Tesla vs gas, and questions about who is in charge, please click on the Podcast link below.


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 K Clarke
    • Jonathan Prendergast

      Are you missing AGL’s Silverton in NSW and Yaloak Wind Farm in Vic? And 212MW Lincoln Gap in SA and 90MW Glen Innes project in NSW?

    • Rod

      David,
      Do you know what the latest is on Ceres in SA?

      • David K Clarke

        It has gone quiet in the last year. It is not an easy one, it is big, and can’t be built in stages. It’s all or nothing.

        • Rod

          Thanks,
          Fingers crossed. Brilliant concept.
          It would have been very handy last September.

  • Ray Miller

    Thanks David, it is going to take a number of months to play out the high costs last summer and expected price. With all state governments working on the electricity charges for 2018, watching the political squirming and blame game will be interesting at least. I think the upside (as you indicated with effective 25% drop in price) will be a major boost for PV plus battery installers in the next 12 months. I see the business community taking a lead with the larger PV systems as it makes a lot of sense and potential decouples their escalating costs from the market.
    I find your figure 2 very interesting, with SA having the lowest increase, those with the highest increase have the least renewables. How is Malcolm and Josh going to explain that one?

  • Jonathan Prendergast

    Great analysis as always David. That graph of renewables under construction is great.

    The large scale renewables industry has really stepped up in response to the Hazelwood announcement, and other market factors. I estimate we need around 6GW of solar or 3.5 GW of Wind to replace the genration of Hazelwood, so still lots of room. Obviously there are many ways the generation of Hazelwood gap can be filled.

    (And the revised FY18 Futures Column graph is great too)

  • Alastair Leith

    Terrific post, David.

    Just on the gas for cooking thing, BZE has shown how great energy savings (costs obviously) by entirely eliminating the gas network from domestic, commercial and institutional buildings.

    We don’t need gas for cooking, induction is superior in every way (except purchase price but that’s a volume thing and the fuel is a magnitude of 10 cheaper), unless you want a naked flame for some reason, so buy a gas torch for that. The fossil gas network is a redundant energy distribution network which leaks methane like a sieve in some cities (NYC for example) and methane is 86x as potent a GHG over 20 years as CO2. (and 104x as potent as CO2 molecule for molecule).