Generation prices to fall in front of Liddell closure

The analysis below makes the following points.

1. There is still room for some new supply under a 26% carbon reduction target. Not much but some. Maybe another 2000 MW
2. We expect a sharp fall in gas fired generation in the 2020-2022 period when all the new renewables are on line but before Liddell closes. This should lead to wholesale price reductions. The modelling we have done is crude, makes no allowance for interstate transmission and just looks at daily half hourly averages.It says nothing about demand spikes, low wind, low hydro or rainy periods. For all that I think its highly illustrative of the changes between the year to March 31, 2018 and what we will see in say 2020.

   Essentially I expect a lot less gas in each State and in QLD and Victoria there is some prospect, depending on exports of a small reduction in coal fired generation or to put it another way an increased requirement for coal ramping.

   These outcomes are shown in figures 7-12 and are based on scaling up existing average half hourly output from wind & PV to allow for new generation. We assume demand is flat, or at least that behind the meter growth broadly offsets near term increases in demand, so that every MWh extra from wind or PV is a reduction first in gas and then hydro for a particular State. Comments on this simple approach are, as usual, welcome.

3. The emissions intensity component of the NEG may, if implemented, take effect from 2020. Targets for the years between 2020 and 2030 have not yet been set. In any case the scheme proposes flexibility around meeting the target in any year, with over or underachievement able to be made up in subsequent years.The target means that at some point there will need to be some further reduction in coal fired generation, with Liddell the obvious impetus. In this note we don’t think muchabout the generation mix after Liddell. However …
4. Some new renewables will be required post Liddell both for price and emission reasons. What’s not clear is how the policy will produce new supply in front of the Eraring and other power station closures that happen in the early 2030s. If electricity prices fall far enough, which we doubt, as a result of the reduction in gas generation the profitability of Vales Point B, sky high at the moment, could also come into play.

Australia is doing a  crap job of reducing emissions. Outside of electricity, policy is BS

Respected consultancy NDVER states in their latest Tracking 2 degrees report

“Australia’s national emissions for calendar year 2017, excluding land use change, were the highest on record since records began in calendar year 2002”

The reasons are clear. You fight like crazy to get any action in electricity and emissions everywhere else go up because Australia has no policy.

Emissions in electricity are down and will fall further

We estimate that 20 mt of further reduction are required to get to 28% below 2005 levels in the NEM.

The exact numbers are always a bit rubbery and depend on sources and methods

We used NEM Review to show electricity related emissions for the year to March 31 based on emissions factors contained in the NEM Review Catalogue and electricity production. Using the 12 Months to March 2018 means that the Hazelwood closure is in the numbers.

We can look at the emissions by fuel and state and see that coal fuelled generation in NSW is the largest contributor

Figure 2 NEM emissions by fuel and State source: ITK, NEM Review

And breaking NSW down further we can see that even when Liddell eventually closes it takes just 8 mt out.

Figure 3 NSW coal emissions by generator Source: ITK NEM review

What about new supply?

We have long maintained that lot’s of new renewable supply is just round the corner. Our numbers total 5.6 Gw excluding behind the meter or 5.3 GW also excluding gas and coal.

Figure 4 NEM wide new generation source: ITK

However as we increasingly notice some of these PV farms are running slowly.

In QLD, FRV has a PPA with EnergyQueensland (Ergon in this case) but we can’t find any info that the Lilyvale PV farm has started. A few other projects seem to be running a month or two behind schedule but not enough to materially change our estimates

We are removing the EcoEnergy/Investec Aramara PV farm from out list of projects as it does not appear to have started construction.

Of the wind farms, Crookwell 2 (91 MW) has experienced delays in sourcing turbine blades and is unlikely to be online prior to the December quarter this year.

Sapphire (260 MW) is energising with max output regularly hitting 50 MW in the last fortnight. Silverton (200 Mw) and Mt Emerald (175 Mw) still seem to be roughly on track for September quarter energization . Mt Gellibrand (132 MW) seems to be very much on track for commissioning start in April.

All up we see about 15 TWh of new low emission generation. This assumes all that generation is dispatched. However it may not be.

Figure 5 Energy from new generation. Source: ITK

We know that wind farms in South Australia already have output curtailed by up to 10%. The question is whether there will be any curtailment elsewhere from current production.

The most likely is from QLD PV farms where over 1 GW of utility PV will essentially equal PV output of the existing  1.8 GW behind the meter base. On balance we don’t see any additional curtailment outside South Australia

Electricity consumption  to be flat for a few years

Unless electric cars take off in Australia despite zero policy support from any level of Government (Local, State and Federal are all equally slothful), it’s hard to see much growth in electricity consumption.

Even if EVs do take off its very hard to see them adding even 1 TWh to demand prior to say 2024. Even if they are 100% of new car sales by 2030 it will still take time to run off the existing fleet of oil based cars.

There are still risks to large industrial loads. We’d specifically call out Portland aluminium smelter, and by extension other aluminium smelters as being at risk. And that’s despite a recent surge in aluminium price.

Household consumption from population growth can be broadly set to be notionally offset by behind the meter new build. On this basis we see NEM wide consumption growing about 0.5 TWh per year, maybe less, or less than 0.5% per year.

Average daily production by State and fuel post the current investment

As previously stated ITK can’t afford Plexos (as used by AEMO and some others) or the nearly as complex, black box models used by Jacobs and Frontier. Even if we could afford them it would be a bit like an amateur playing Jimi Hendrix’s red Stratocaster, it just wouldn’t sound like Jimi.

So we have adopted a much simpler approach and one that is no doubt open to many criticisms.

The model has three steps:

1. Get the latest 12 month average daily generation curve by fuel for a particular State.
2. Estimate the average half hourly output of new build wind and PV.
3. Assuming demand is flat use the new output to reduce first gas, then hydro and then existing coal output.

Step 1 existing half hourly generation year to March 31 2018

What we did is for of NSW, Queensland and Victoria, the main electricity consuming areas was to look at average  half hourly generation .  For the three large regions this is shown in Figs 7,9,11 below.

Step 2: Scale up wind & PV in each State for new supply

We then scaled up wind & pv in each State by the increase from new supply. For instance wind in NSW is going from 668 MW to 1557 MW.

We used NSW utility PV as the half hourly supply shape for the new utility PV in all States. This will probably be a bit inaccurate in Vic and South Australia but will be close enough in QLD.

Its well worth noting that for both wind and PV these are over the year half hourly averages when a better model would at minimum have Summer and Winter profiles. Another very obvious limitation is that export and imports are ignored.

For QLD wind we used NSW wind as the half hourly pattern.

The results are mainly for the Author’s own benefit. A summary of the new supply is :

Figure 6 New generation relative to current level in wind & pv. Source: ITK

Step 3: Reduce output of wind and or gas to get back to no change in average output

New wind and PV can be expected to displace the highest marginal cost fuels first. Gas is obviously the highest marginal cost, hydro is zero.

However hydro output is constrained in Australia by water catchment and is often only dispatched as a last resort. Its also constrained by irrigation requirements.

Irrigation laws often mean that hydro power is produced at times that have nothing to do with electricity prices or demand. Its hard to know how to deal with this exactly in a model of this kind.

For this exercise we made a decision that the new PV and wind would displace gas first and hydro second. In case there was still higher supply we then reduced coal. The changed supply patterns are in Figs 8,10,12.

NSW

NSW is the largest State by demand and  a net importer of electricity but the imports from Victoria have virtually ceased in the past 12 months. The results of this desktop exercise show that on average, and it is an average, the need for gas generation in NSW is much reduced, from 284 MW down to 16 MW and average hydro output is halved.

Figure 8 NSW average generation by fuel 2020. Source ITK

 

 

 

 

 

 

 

We would expect this to be beneficial for prices, to the extent that prices are based on marginal cost.

Queensland

Results in QLD are interesting. On this very simple view gas use in the middle of the day is on average eliminated and there is even some coal reduction. Its an obvious point that when you model on the basis of variable cost you penalise gas before coal, but this is the exact opposite of what you want to achieve for carbon emissions. Coal ramping will increase but should be quite manageable.

The result on average prices is harder to model.

To an extent QLD coal generators will probably try to export more to NSW in the middle of the day but will face resistance as prices in NSW will be under pressure at that point anyway

Figure 9 QLD average generation by fuel year to March 2018. Source NEM Review

Figure 10 QLD average generation by fuel 2020. Source ITK

Victoria

Figure 11 VIC average generation by fuel year to March 2018. Source NEM Review

Figure 12 10 VIC average generation by fuel 2020. Source ITK

 

 

 

 

 

 

 

Similar results in Victoria to Queensland except driven more by wind than PV. For the Vic PV we applied a 10% handicap on the PV ouput to allow for the Southern Lattitude. T

here is still enough to see some reduction in coal fired generation at lunchtime and, due to the wind, some reduction in coal in the minimum demand window.

Conclusions good for price but not initially for carbon in 2020-2022 period

Although these results are at best illustrative there is enough to suggest that AVERAGE  gas output and AVERAGE  hydro output will be significantly reduced over the NEM once the new renewables are in place.

Depending on who you believe its either gas or coal in NSW that sets the electricity price much of the time. If we assume it is gas because of its higher prices then these results suggest a fall in spot prices. But carbon output will be very little impacted.

The impact on price depends on the bidding behaviour of the remaining thermal generation and their own costs. We have already pointed out that the costs of coal fired generation are increasing in both NSW and Victoria.

In NSW we think the market has continuously underestimated the hit to long term average profits, or at least the increase in costs, that resulted from abandonment of the Cobbora project in 2014/15. That impact is masked by the current high prices but will ensure costs stay up in NSW.

These results only last until Liddell closes after which we will have to see what replaces it.

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.