“If it keeps on rainin’, levee’s goin’ to break
If it keeps on rainin’, levee’s goin’ to break
When the levee breaks I’ll have no place to stay
Mean old levee taught me to weep and moan”
Led Zeppelin version 1970 of 1929 McCoy & Minnie original
Ducks and droughts
During the few weeks that I’ve been away from the desk the electricity transition in Australia has accelerated. As usual when change comes it’s the exact opposite of how T S Elliots “Hollow Men” would have had it as in “not with a bang but a whimper”. Change instead seems to come upon markets dramatically and all of a sudden.
Everyone knew that the increase in solar was going to force down midday prices. Everyone knew that a large increase in VRE (variable renewables) was going to force down prices for an increasing part of the time.
And yet probably few of us thought it would happen in late winter 2019. Especially when there was so much coal and gas generation out in Victoria, and Basslink – less reliable than Nick Krygios – threw another wobbly and went off line.
So for the record here are the hourly average prices for the mainland States during August, 2019.
The summary of that graph is:
There are a lot of things to think about. Observations are:
This is only a foretaste of what’s coming. It’s a stronger foretaste than expected but still a foretaste. There are still significant new wind generators to come on line and more solar at both a rooftop (behind the meter) and utility level.
In addition at some point the out of action thermal generators will come back on line. This will drive average prices lower as, leaving aside the March quarter, total supply is increasing way faster than demand.
As ITK pointed out to its subscribers when the transmission links are working well its easier for the VRE impact to be felt over the entire NEM on several occasions driving NEM wide prices to zero or even lower.
The challenge for the industry is going to be:
- Stop looking at things from the point of view of individual generators. It should be of benefit to the system and consumers that there is a surplus at times. Yet those generators contributing to the surplus still need to earn a return. How can this be?
- Translating the price weakness from periods of strong VRE output into lower average prices. If August 2019 was a year long norm there is enough of an arbitrage for various forms of energy storage to earn a return. In August itself though average prices were enough for thermal generators in NSW, QLD and Victoria to cover variable costs. Volume loss though is another matter.
This brings me to the most important point. Price is dynamic and self adjusting. Said differently, the low and high prices are signals that in a fair and competitive market would create investment incentives and disincentives.
Looking at market share by fuel
The overall stats show that QLD VRE share of total output has just about doubled in a year to 12%. Nationally the share for the last 30 days, effectively August 2019, is 17%, up from 14% last year.
The charts we like to show are:
An annualized 30 TWh. Of course annualizing is incorrect as the numbers are not seasonally adjusted.
It hasn’t even been a particularly strong wind season as we can see from the SA market share of VRE being below last year in Fig 2
Finally, its well worth noting the market share loss of coal generation.
The Victorian situation is overstated because of the outages. But, but ITK expects that when the Victorian coal generators are working, and assuming the transmission also works, then the Victorian and even QLD market share loss will become NSW thermal share losses.
Although I haven’t analysed the transmission flows in detail yet its like that power coming into NSW from QLD is just being shifted south to Victoria, particularly as prices rise.
There is much more to say about these trends, particularly the fact that thermal generators have to manage total volume not just price, but that can wait for another occasion.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.