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Know your NEM: Why AEMC needs a fresh view of policy mess

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What’s interesting at the moment

COAG Energy council committed by majority vote to progress further extensive work on the design of the NEG, including consultation in 2018.

The Communique (official bulletin) also stated:

Ministers formally amended the Terms of Reference for the ESB including that it only undertake work as directed by the COAG Energy Council

This can be seen as explicitly preventing the Federal Government setting the agenda by asking the ESB for its own advice.

New commissioners for coal – can’t come soon enough

Also, COAG agreed, in a long overdue move, to the appointment of two new Commissioners to the AEMC (Australian Energy Market Commission).

We think there is an increasingly widespread feeling in the industry that the current Chair of the AEMC, John Pierce, could benefit from the additional support of other commissioners, particularly those that can take a fresh view of the bureaucratic, impractical, outdated mess of ideology and rules that passes for  electricity policy in Australia.

We have previously written that we think that Pierce as the Chair of the AEMC must take his share of responsibility for the current situation. Certainly this would be the case in the private sector.

Rather than providing a clear line of management chain of command the Finkel report has produced another Government body, the ESB, then appointed the Chairs of the AEMO, AEMC and AER to the ESB to the ESB.

As Pierce is executive chair, the chain of command and responsibility has been compromised. How can the ESB oversee the AEMC when the AEMC chief is on the ESB? Surely even by Australian standards this is a joke.

Further, Pierce has been Executive Chair since 2010. He has been in the most powerful position in the management of Energy Policy in the NEM and more broadly Australia, during the entire period when the current policy impasse has developed.

Of course given the divided nature of COAG, the coming and the going of the carbon tax, it’s been a tough job. Still 7 years seems a pretty good run.

 

Share Prices

Figure 3 Selected utility share prices

Figure 3 Selected utility share prices

 

Figure 4: Weekly and monthly share price performance

Figure 4: Weekly and monthly share price performance

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Figure 10: Baseload futures financial year time weighted average

Figure 10: Baseload futures financial year time weighted average

Sale of LYB – good for competition

Alinta, a private company, bought Victoria’s most modern and smallest brown coal generator, LYB for about A$1100-$1200 m. Virtually no information was revealed either by the buyer or seller. Engie, the seller, may eventually disclose more.

LYB is about 960MW, gets all its coal from neigbhour LYA and as such is responsible for a share of LYA’s eventual closure costs of the coal mine.

Alinta has no natural retail base on the East Coast of Australia but Origin Energy is a natural buyer from LYB in Victoria.

In addition press reports suggest that Alinta has negotiated a book of contracts with large industrial users in Victoria (we didn’t know there were any, anymore) Alinta’s CEO is Victorian and well respected in the industry. LYB could be seen as the rock around which Alinta will be able to build a more sustainable business on the East Coast.

Historic financial information will be of little use as LYB’s main contract was with Portland Smelter and that has ended.

What we can say though is that despite the massive increase in Victorian baseload electricity prices in the past year, right out to 2021, it seems that Alinta purchased LYB on a lower per MW price than AGL paid for LYA five years earlier.

Macgen and Vales Point in NSW were much cheaper than either, but we think its quite reasonable to compare LYA and LYB as they are identical assets save for the coal mine ownership.

Figure 1 LYB & LYA acqusition metrics

Figure 1 LYB & LYA acqusition metrics

The weekly action

Electricity volumes this week were flat v pcp across the NEM, down in QLD & NSW and up in Victoria and South Australia due to the hotter weather in those States.

Electricity spot prices were volatile in South Australia reaching a high of $329 MWh and a low of negative $42. Across the NEM spot prices are about double last year’s level. AEMO has done a great job on demand management and reserve capacity so that our worries about blackouts this Summer are somewhat comforted. But we still worry about a major outage in the heat.

Futures prices  did absolutely nothing.

Gas prices rose at a double digit pace. We’d have to look into whether this was full production at LNG sites in QLD pushing up demand, or demand for gas generation in Victoria or both but we do expect gas prices to rise seasonally into Summery

REC prices were unchanged

Figure 2: Summary

Figure 2: Summary

Volumes

Figure 5: electricity volumes

Figure 5: electricity volumes

Gas Prices

Figure 11: STTM gas prices

Figure 11: STTM gas prices

 

Figure 12 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO

Figure 12 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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  • Andy Saunders

    Very diplomatic language there – I bet you had a few revisions!

    • David leitch

      You make me smile Andy