ESB paper: Strange, sloppy results suggest agenda at work

Sometimes assumptions in official documents are questionable and so too are the conclusions. In this latest document from the Energy Security Board – the “final decision” paper on the National Energy Guarantee -there is a big emphasis on price outcomes.

We hate to say it but there seems to be an agenda at work.  In most important documents there are rarely obvious errors.

This latest ESB document (see it in full here) includes some strange results. We note the ESB has neither officially released the document, even though it’s in all the press, and perhaps more importantly it hasn’t released the ACIL Allen modelling report cited within.

The document states that

1. There is a less than 1% of total Australia wide emission reductions as a result of the NEG, or indeed even if there isn’t a NEG. The extra emission reduction as a result of the NEG compared to a no NEG policy are 4 mt. Giddy up.
2. If there is no NEG the analysis claims there will be no new large scale generation between 2022 and 2030. Just rooftop PV. Hands up if you believe that, because I have a Harbour Bridge you might like to buy. We would argue that a “strawman” has been set up to justify the conclusions, but we do respect that ACIL Tasman is a noted modelling firm and widely respecting. We just don’t agree with the conclusions. We think they are at odds with history and economics.
3. If there is a NEG, NEM wide pool prices will be between $40/MWh and $50/MWh from 2022 to 2029. That’s despite the closure of Liddell. More importantly it’s despite the fact that gas prices are way higher than last time electricity prices were at those levels and right now export coal prices are also much higher. On our numbers, Vales Point and even Eraring will struggle mightily at those prices. Gas generation won’t be running much either.  AGL investors will be running for the hills. The document also contains at least one error or a contradiction between the text and the underlying charts.

Sloppy errors result in  deeply misleading statement on emissions reductions

“The Guarantee is expected to deliver the emissions reduction target for the NEM, with an additional 38 MtCO2-e abatement over 2020-21 to 2029-30 relative to a scenario without the Guarantee.” Page 23 of the document.

38 mt is about 7 per cent of Australia’s approximately 550 mt emissions, so that would indeed be fantastic.

Unfortunately, the ACIL Allen Chart 9 which accompanies it shows only about a 4 mt reduction i.e. less than 1%. And that’s relative to ACIL Allen’s straw man status quo which we will get to in a minute. The absolute reduction in emissions from FY20 is about 5 mt, still less than 1% of total emissions.

Of course writing 38 mt could be just a sloppy piece of writing, but it has the impact  of leaving readers with a very misleading view of the facts. How can COAG rely on this kind of stuff?

Fantastic…….

Figure 1 Modelled emission reductions. Source: ESB

No  NEG Generation strawman

The document is big on the stated price reduction results, but very short on providing data or facts to justify them. Both the price reductions and price in the no-NEG scenario are not justified in the document in any practical way. Price is the outcome of supply and demand.

The ESB shows a change in supply graph in the no-NEG “strawman” case. The graph only shows power, that is gigawatts, and not energy. According to this graph there will be no new capacity other than rooftop solar if the Guarantee is not approved.

How credible is that? There has never been a five year period in the history of the NEM with no new capacity. That’s even before we think about potential closures of other stations, State renewable targets or just entrepreneurs taking a punt.

The no new generation forecast comes despite  the fact that without the guarantee prices would be rising throughout the same five years, to levels above current wind and solar PPA prices.

The price forecast charts are wonderful.

Let’s look at the no NEG case first. The following figure is amended by me from ESB’s Fig 3. I’ve blocked out the history, added in some grid lines and added the arithmetic baseload futures average of NSW, QLD and Vic for FY21 and FY22.

Figure 3: Adapted from ESB Chart 3

Retailers have to pay above baseload for power. Even so the figure clearly shows that in FY22 Futures are sitting at $10/MWh above forecast and are also above the FY21 forecast.

The futures could be wrong and the modelling correct. Or both could be wrong. I’ve added in  red line showing the PPA price for new wind and PV in Fy18, never mind FY23.

Now let’s look at the price forecast with the guarantee. Apparently the price is lower mainly because there is more contracting.

Figure 4 Source: ESB grid lines added

This basically predicts prices between $40/MWh and $50/MWh with the guarantee between 2022 and 2028. The ESB hasn’t let us know what the new supply forecasts are with the NEG.

Let’s look at Vales Point though and bear in mind AEMO says there is an expensive refurbishment due in FY22. The electricity price is forecast to be say $46/MWh average.

Let’s say the coal price that year is $80/t, half the export spot price. Vales Point would then be making on my numbers about $11 m of ebitda.

Goodluck Brian Flannery selling that power station for $700 million, Jeff Dimery at Alinta will be beating the door down I’m sure. I’d question whether you’d do the refurb at all. It would probably just get put off.

The Victorian and NSW State forecasts will also be unpleasant reading for AGL and Energy Australia. We only show Victoria. Seven years of $40/MWh prices will do wonders for Yallourn and LYA profits.

Figure 5: Victoran prices. Source: ESB

Would you be spending money on reliability capex at those prices. Costs at Victorian brown coal generation have increased quite significantly over the years.

Even leaving aside the strong increase in state royalties that was the final nail in Hazelwood’s coffin you have to remember the coalmines get further away from the power station every year and overburden increases.

Not to mention labour costs. Heres a chart from AGL’s 2016 investor presentation on LYA overburden.

Despite the politics, despite the pain are low prices even a good thing?

Now we’re standing on shaky ground, but we reckon much of the coal generation is going to close by 2035 and that lots of new generation needs to be built ahead of time to manage that.

Low prices of the sort that the ESB is putting forward won’t assist that. Nor will they do anything to encourage energy efficiency or disincentivise consumption.

However, industry will love the ACIL forecasts. Great for data centres and anything energy intensive. The price forecasts are lower than say the actual prices in China in Calendar 2017.