Energy Markets: Spot electricity prices are shockingly high

This new series from David Leitch forms part of our new Energy Markets section looking in detail at the National Electricity Market.

Spot electricity prices are shockingly high for this time of year, partly due to Queensland prices and partly due to Tasmania.

Prices were massively up in Queensland, NSW and Tasmania. Prices were up in NSW even though consumption for the week was down. Queensland consumption was up 5% but across the National Electricity Market consumption was down. Futures prices continued to edge up and REC (renewable energy certificate) prices stay at feels not far from the penalty price.

In QLD, prices were over the $300 limit 3 times during the week. This is important because typically electricity price caps are set at $300MWh. A buyer of a cap pays no more than $300MWh even when the price is above that.  In general volatility in the market was very high for this time of year. Three southern states saw quite high negative prices during the week.

NSW and QLD prices are becoming more linked

As the chart courtesy NEM Review  of half hourly prices below shows over the past 7 days NSW and QLD prices were heavily linked.

Historically, NSW generators have typically been unable to take advantage of high price events in QLD because of the difficulty in getting transmission access.

For one thing generation sent  from the Hunter valley typically was constrained out in Northern NSW but more importantly Qld generators such as Milmerran and Kogan Creek located South of Brisbane typically “hogged” all the transmission capacity north.

Whether its Qld transmission upgrades or something else we don’t know, NSW seems to be finding a way. In the following chart a negative number represents generation flowing from QLD to NSW and vice versa.

Retail: Why the the biggest discount isn’t always what it seems

This week we also take a moment to catch up on the retail side of things to an extent. Households and small business are by far the largest profit earners for electricity companies whether they be networks, generators or retailers.

The way we look at the data is

1. firstly to select a fairly random address in each of Sydney, Melbourne, Brisbane and Adelaide.
2. We then check what the quoted price after allowing for discounts is from the website of a major retailer. We typically use AGL for this purpose but typically other retailer prices are similar.
3. We assume our customer consumes 8MWh a year – this is higher than average consumption but represents the kind of customers that retailers want.
4. We then calculate the non negotiable network costs that every retailer has to pay to the network company for that address. After backing out the network costs what’s left is more or less the retailer’s controllable costs. They still have to buy electricity, RECs and other environmental costs, allow for line losses and cover their own sales and marketing costs including bad debts. The chart below summarises the results expressed as $MWh.

The two points that jump out are

• Melbourne network costs are still below Sydney and Brisbane but the gap is much smaller than a couple of years ago. Typically wires and poles make up half the bill and this creates the arbitrage gap for rooftop solar and storage.
• Even though the online “discount percentage” is apparently much higher in Melbourne at something like 33% as compared to Sydney about 16% the fact is the retailer makes more margin in Melbourne. That’s particularly the case as the wholesale cost of electricity (see the baseload futures data) is significantly lower in Melbourne than Sydney.
• That explains why retail competition is higher in Melbourne historically and will probably continue to be so.
• We think, and we expect readers to disagree, that prices in Melbourne are fair. There are lots of retailers competing with each other, and that typically produces a fair price. But if prices in Melbourne are fair, and profits for retail in Sydney are smaller than in Melbourne it implies that as full deregulation in Sydney and NSW takes place from July this year that prices may well go up and not down.

David Leitch was 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.