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Know your NEM: Prices fall, but say goodbye to the good old days

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Summary

A combination of actions is continuing to drive down both the short and long term outlook for generation prices.

However, there is no way known we are going back to the “good old days”. As well as new supply (250MW more Victorian wind confirmed), both Federal Govt action (jawboning on gas) and Queensland Government (instructions to Stanwell) seem to be effective.

Figure 1 NEM monthly avg pool price v gas price: Source NEM Review, AEMO

Figure 1 NEM monthly avg pool price v gas price: Source NEM Review, AEMO

There will be a cost to decarbonise the economy, its’ just a lot less than the cost of not decarbonising. As such generation prices are going to stay high, network prices are also very sticky. The incentive for “grid defection” either in part or whole is therefore going to continue.

That incentive would get a whole lot stronger if the installation cost for behind the meter storage was to come down by say 50%. If a Powerwall 2 costs $9000 with supporting hardware as an online purchase from Tesla why should it be $11000 or $12000 installed?

But by the same token BNEF report that batterypack prices are under US$200 KWh or say A$266 KWh.

At that rate the pack cost for a 14 KWh Tesla powerwall 2 is A$3700. So all the extra bits, including installation are trebling the price. It’s hard to see why those BOS costs can’t halve in fairly short order. Those costs include the balancer, case, inverter, software, shipping and other bits and pieces.

Installed battery manufacturing capacity will double by 2021 from 2017s level and this will create market pressure. Despite hype we doubt if there will be any big battery factories built in Australia.

It’s much cheaper to ship lithium to China than to ship manufactured batteries, nevermind the labour cost.

 Figure 2 Pack v installed cost of 14KWh Tesla Powerwall 2. Source: BNEF, ITK

Figure 2 Pack v installed cost of 14KWh Tesla Powerwall 2. Source: BNEF, ITK

In Australia there  is a main stream media unspoken blackout on climate change notwithstanding that Australia has leading researchers in the field. This probably happens because the ALP and the Coalition don’t talk about it much either.

Still, there is ever increasing evidence of the impacts. Not only that but of course the impacts are lagging what’s actually happening. Over the past couple of weeks we have seen evidence of atomospheric temperatures being higher than previously measured and sea level increases accelerating.

Anyone that reads up on Greenland, see for instance this excellent easy read from last year will find themselves seriously concerned http://www.newyorker.com/magazine/2016/10/24/greenland-is-melting

No policy new this week of significance

We increasingly find ourselves disappointed with the Finkel report. A low emissions target would be a step forward but only if the initial bar is set low enough, say 0.6 tCO2/MWh. The report though was very simplistic in its suggestion that every new piece of renewable generation had to guarantee dispatchability.

That’s not how it’s been done overseas. What we see is missing at the moment is a good integration study. All the studies we see are policy based, and on what’s the best policy. What we’d like to see is an integration study. As the share of renewables grows, how do we best integrate them into the existing system. Do we need new frequency control markets? Dispatchabilty services? Is the gross pool still the way to go?

New renewables – 250 MW of wind in Victoria added

Tilt announced its proceeding with the 54 MW Salt Creek Wind Farm in Western Victoria and is expected to take 12 months to build. Capital cost is $105 m and the project has no PPA. Operating costs are $4.6 m per year. Capacity factor forecast at 36%. Capex cost works to $1.9 MW (cheap) and opex to $26 MWh(expensive).

We also add in the 196 MW Neon Bulgana wind farm. Not to be confused with the Bungala PV farm in South Australia.

That brings ITK’s count to 1.1 GW of new wind in Victoria, with another 300 from Goldwind sure to be confirmed, 2.9 GW of wind including Hornsdale across the NEM and about 6.3GW new renewables including rooftop PV in total. We still don’t think it’s the end by any means. These are exciting times in the renewables industry.

 Turning to the weekly action

  • Volumes: Were down this week
  • Future prices Continued to fall
  • Spot electricity prices were lower than last year in most States other than Victoria. Lower gas prices certainly helped.
  • REC there was a sharp recovery in the 2019 REC price.
  • Gas prices Despite 20% of Longford (the key gas processing plant for the Australian domestic market) being closed for part of the week gas prices were actually below last year’s levels and this is helping keep a lid on electricity prices. We want to give the Turnbull Govt. some credit for this although we suspect that low international LNG spot prices also contribute. Fig 14 is worth a look. However, there is still plenty of time for gas prices to spike in this winter. It is after all only early July.
  • Utility share prices. Little action last week in the share market
Figure 3: Summary

Figure 3: Summary

Share Prices

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

temp chart

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

Baseloads

Screen Shot 2017-07-03 at 1.26.15 PM

baseload futures

Gas Storage

Figure 13: STTM gas prices

Figure 13: STTM gas prices

 

Figure 14 30 day moving average of Adelaide, Brisbane, Sydney STTM price

Figure 14 30 day moving average of Adelaide, Brisbane, Sydney STTM price

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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  • Jonathan Prendergast

    I think low prices will return. And I don’t think prices are necessarily related to costs.

    Between 2010 and 2013, we had high investment in renewables, above $5 billion p.a. for 4 years straight. As projects take 2 years, this saw on oversupply of electricity generation from 2012 to 2016.

    Then demand rose and Hazelwood left, creating a shortfall of supply. And due to rising gas prices, who fill the gap and set the price, a very expensive short fall.

    With all the investment now, and a reduction in demand in response to current high prices, I think low prices will return. So long as current generation sticks around.

    • Jonathan Prendergast

      PS. Thanks for your analysis as always David. The only article I get the time to read some weeks.

  • George Darroch

    BYO electricity generation. Anyone who has their own roof, and isn’t putting PV on the top is losing out.

    (A pity about Gen Y, who are being screwed over by their elders and will pay premiums for housing and imported electricity)

  • George Darroch

    “At that rate the pack cost for a 14 KWh Tesla powerwall 2 is A$3700. So all the extra bits, including installation are trebling the price. It’s hard to see why those BOS costs can’t halve in fairly short order. Those costs include the balancer, case, inverter, software, shipping and other bits and pieces.”

    Bundling these at the manufacturer should help reduce costs.