Know your NEM: AGL’s cheap wind deal, and falling cost of storage

Volumes: For the week ended Jan 20, were it not for Portland smelter being 2/3 closed NEM wide volumes would be well up. As it is despite NSW volumes 4% up on last year and QLD volumes up 13%, the 14% decline in Victoria has left NEM wide volumes flat.

The increase in volumes is due to warm weather and QLD LNG. Qld daily volumes on hot days in QLD are within touching distance of total volumes in NSW. Qld is becoming ever more important as an electricity market but transmission links to and from QLD have been neglected.

In our view QLD’s electricity industry is sharply anticompetitive with too much Government ownership of generation and networks. QLD generators regularly exploit the market and the rules in QLD. Their primary victim is QLD retailers particularly ORG, but in the end all QLD business and consumers pays excess price for electricity. QLD’s renewables plans are fantastic but slow to be implemented. Meanwhile over reliance on gas to provide peaking and shoulder power is going to be costly now that gas prices have doubled.

Future prices:

Victorian Premier Daniel Andrews was apparently quoted as saying that the subsidies to keep Portland open wouldn’t have any impact on the electricity price. A schoolkid could tell him that if you increase demand price will increase.  Victorian futures prices were up 8% during the week. NSW and QLD futures prices were up 5%.

Welcome to the real world. The Victorian FY18 price was up $8 MWh and FY19 $5 MWh. Over about 40 TWh of Victorian demand that’s $200 m a year. But it’s worse because of the flow on impacts to NSW where prices are up $7 MWh in two weeks! Portland may be a beautiful town and aluminium export dollars welcome but the timing of this subsidy could not have been worse. As the stock market adage goes, “the cure for high prices is high prices”. High prices will encourage energy efficiency and provide an incentive for new investment.

However, with Federal Govt locked in its “gordian knot” over energy policy and generation, developers are going to be especially cautious. We think the blame for high electricity prices and falling energy security can be more reasonably laid at the feet of those forces trying to get the present RET repealed. That is what is killing new investment.

A call reported in “The Australian” today for the CEFC to provide money for “clean coal” in Victoria is perhaps the ultimate exemplar. Clean coal in Victoria is frankly genuinely amusing as an example of what I believe is “cognitive dissonance”. As for using the CEFC for coal investment the mind truly boggles but it does point to the fact that the CEFC (i) needs a strong chief executive appointment ASAP and (ii) if you don’t spend your budget someone else will nickel and dime it away from you.

Spot electricity Prices were high this week averaging $124 MWh in Qld and $70 MWh in Victoria despite the decline in demand. This is becoming very much a supplier driven market. Over the past 5-7 years competition within the NEM has been reducing and we believe the big players are getting a tighter grip.

The biggest winner from keeping Portland open will probably be CLP. Its Yallourn power station – virtually as bad in terms of emissions as Hazelwood – has traditionally been a major supplier to the Victorian industrial market. That plant has been written down to very little by CLP but will now see a doubling of revenue and a bigger percentage increase in profits over the next few years.

REC prices were unchanged

• Gas prices : These continued to increase. Basically you were paying $9 GJ- to $12 GJ for gas in the spot market last week. These prices undoubtedly make new gas fired generation more expensive than new wind plants, but it remains true to say that the gas plants would achieve a significantly higher electricity price than an a wind or PV plant.
• Utility share prices: Were mostly stronger and most utilities beat the broader index. We have replaced Duet with Tilt as Duet is in the process of being taken over. Tilt is a windfarm owner and developer with a largely safe revenue stream 1/3 sourced from New Zealand and 2/3 sourced from Australia. We expect it to grow in Australia although it seems to have a very much safety first attitude. Safety first doesn’t get you too far in the Australian market. Elsewhere we expect the Alinta IPO to be back “on the go”.

• Industry news..

Outside of the Portland subsidy the main news last week was:

• The $65 MWh contract for the Silverton wind farm. This is a very low price. Unfortunately its always difficult to be confident in the arms length nature of a price struck between related parties. What is for sure is that AGL is going to get some cheap power from that wind farm. What’s in it for QIC, AGL’s 80% partner in the Powering Australia Fund [PAF], is much less clear. We can understand low prices for long term contracts but this one is only for 10 years (5 years plus 5 year option). Still it does show that when it’s the QIC involved the banks are willing to help.
• Equally the construction costs quoted for PV plants are now well below wind. The Clare PV farm at $1.78 watt compares with the $2.50 watt AGL quoted for Silverton. PV farms are also very fast to build.
• Over the Xmas period the Kauai Island Electric Coop and AES announced a 28 MW solar plant with a 20 MW, 100 MWh battery for US$0.11 KWh or US$110 MWh. That’s down from a 2015 price quoted by SolarCity (Tesla) for US$145 Wh for a smaller system. US$110 MWh is still not as cheap as combined cycle gas in Australia (which is at maybe US$65 MWh) but its getting closer. Also the gas price is still more likely to go up than down in Australia in the next year or two as the oil price will probably increase a bit.
  Figure 4: Summary

VOLUMES

BASELOAD FUTURES

GAS PRICES

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.