Falling electricity prices could favour shift to “mega” wind and solar projects

Murra Warra wind farm

Australia’s wholesale electricity prices are forecast to continue to fall over the short and medium term – due to the combined impacts of the Covid-19 pandemic on demand, and the growth of renewables on supply – and will likely shift investments towards new “mega” projects over smaller wind and solar farms.

Energy market analysts RepuTex on Thursday released a new study that suggests the coronavirus pandemic has helped create a “perfect storm” in Australia’s main grid, known as the National Electricity Market (NEM), because it has cut demand, and lowered gas prices.

This, combined with the commissioning of large scale wind and solar projects currently under construction, is likely to depress electricity prices by an average 20 per cent for the next two years, depending on the depth and duration of lock-down restrictions.

“This could see the NEM wholesale price average around $69 per megawatt-hour (/MWh) for 2019-20, declining toward $55/MWh over the next two years, slightly higher than current futures prices,” Reputex says, noting that some state markets have already fallen to an average of  $40 per MWh in recent weeks.

RepuTex’s outlook for medium- and long-term wholesale electricity prices suggests that electricity consumption over April and May 2020 may decline between 10-40 per cent before rallying in line with a possible quick ‘v-shaped’ rebound in consumption, or a later ‘u-shaped’ recovery, depending on the extent and duration of the current lockdown.

This, however, has implications for developers of new wind and solar projects. Analyst Bret Harper says smaller capacity projects – particularly those looking to buy equipment with weaker Australian dollars, may struggle at these price points.

Mega projects, such as $1 billion MacIntyre wind farm being built by Acciona in Queensland at sub-$50/MWh prices, are likely to be OK because the developers have deeper pockets, and in the case of Acciona handle the manufacturing pipeline and the currency risk.

“This could see a shift in investment towards more new mega-projects, at the expense of more marginal smaller capacity”, Harper said.

“We expect smaller projects to be more adversely affected by negative factors such as the lower Australian dollar and associated supply chain costs. For these projects the low wholesale price environment is likely to be far more disruptive.”

RepuTex notes that around 1.6 GW of solar and wind capacity has been commissioned in fiscal 2019-20, and it continues to forecast a total of 6.1 GW of large scale solar and wind, along with 1.2GW of new rooftop PV for calendar 2020, which is likely to further weigh down prices.

“We expect utility-scale solar and wind commissioning could hibernate for the next one to two quarters due to COVID-19 disruptions, but these additions will eventually further supress wholesale electricity prices, particularly in Victoria and Queensland”, Harper said..

“Combined, the confluence of COVID-19 demand cuts, lower domestic gas prices, and the commissioning of large renewable energy projects is therefore expected to depress wholesale prices over the medium-term”, he said.

Demand is the big variable in the Australian market, which is yet to see some of the spectacular reductions witnessed in some European markets, where strict lockdowns have cause manufacturing to stop and demand to fall by 20 per cent or more.

“While electricity consumption volumes are not yet depicting a steep decline, we anticipate a relatively sharp but temporary reduction in electricity demand over the April and May shoulder, substantially affecting electricity prices for financial year 2020-21,” Harper says.

“Depending on the timeframe for when restrictions will be eased, we expect a possible return to ‘normal’ electricity consumption in around 12-months”, he said.

Gas prices are also down, due to the sharp decline in global oil demand, coupled with increased production uncertainty from OPEC+ countries. Oil prices have fallen by half, and pushed domestic gas prices down accordingly, in turn lowering the fuel costs for gas-fired generators, and reducing the chances of sharp price spikes that are often witness in the Australian demand.

“Combined with soft demand, we expect low gas prices to depress electricity prices in 2020-21 relative to recent years. This is forecast to affect gas-dependent Queensland and South Australia the most, but also dampen peak prices across all regions”, Harper said.

Indeed, South Australia, often ridiculed for high electricity prices that are blamed on its pursuit of renewables (in fact, South Australia’s electricity prices are highly dependent on the gas price), is now showing lower futures price than either coal dependent NSW or Victoria.

RenewEconomy and its sister sites One Step Off The Grid and The Driven will continue to publish throughout the Covid-19 crisis, posting good news about technology and project development, and holding government, regulators and business to account. But as the conference market evaporates, and some advertisers pull in their budgets, readers can help by making a voluntary donation here to help ensure we can continue to offer the service free of charge and to as wide an audience as possible. Thankyou for your support.

 

Get up to 3 quotes from pre-vetted solar (and battery) installers.