Know your NEM: California leads way with cleaner grid, lower bills

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Data from California Public Utilities Commission clearly shows that energy efficiency and decarbonisation don’t have to mean higher consumer costs. You pay more, use less, and end up better off.

Figure 12: Baseload futures financial year time weighted average.
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What’s interesting this week – California higher prices, lower bills

The wind and solar PV plant generation commencing announcements of the past week are exciting, of course, but in the near term most, if not all, of that plant is in commissioning phase and of more interest to engineers than day traders. That will change as the year goes on.

Policy development in Australia no doubt continues, but it’s behind closed doors – although we do, of course, look forward to the Integrated System Plan being unveiled in June.

So over the next week or two I thought maybe it was worthwhile looking at a couple of recent US studies.

The first was by CPUC, the California Public Utilities Commission.

California is by some measures the 9th largest economy in the world, and also has ambitious decarbonisation efforts and is making good progress. An ongoing issue for California will be managing its “duck curve” as gas generation retires.

However, the CPUC paper only touches on this tangentially. It’s more concerned with the financial stability of electricity utilities in California being reduced by customer choice.

As usual, grid reliability is at the heart of the discussion. Whether it’s the closure of Liddell, behind the meter growth in Australia, or the rise of wind and PV in Europe, grid reliability is always at the forefront of policymaker worries.

Essentially the CPUC paper was arguing that all the expensive and unprofitable bits of the grid were being left with the investor-owned utilities and the new bits were going off to CCAs (Community  Choice Aggregation).

If you are an electricity nerd, there are a number of interesting elements to this discussion. But I only want to focus on price and energy efficiency. Due to energy efficiency efforts, California has a materially lower level of energy usage per capita compared to the rest of the USA.

California per capita electricity use
Figure 1: California per capita electricity use. Source: CPUC

Of course this could be because high electricity prices caused all the energy intensive industry to move out of the state.

CPUC notes that in California, in a residential monthly bill of say $US70, distribution is $US31 and transmission is $US5.68.

In total, “delivery charges” are $US39.50 or more than 50 per cent, with generation at just $US30.50. So an even higher wires and poles cost percentage-wise than in Australia. However, the table that most interested me in the CPUC report was this one:

Residential electricity comparison
Figure 2: Residential electricity comparison. Source: CPUC

Note that this is of interest to households. Business and industry face different issues, often with less volume flexibility, and where price is even more important.

Still, it does clearly show that energy efficiency and decarbonisation don’t have to mean higher consumer costs. You pay more, use less, and end up better off.

The market action

Cooler weather than last year may have been part of the reason why electricity consumption and spot prices rose this week. Consumption was up on last year, driven by Victoria, but spot prices remained well down.

Futures prices in the out years continued to drift

Domestic gas prices have yet to respond to the sharp rise in international oil prices. Contract LNG prices in Australia are clearly linked to oil prices, typically, if not invariably, to a basket of oil imports in Japan known as the JCC.

This average price is only reported with a lag. In AUD, though, spot oil is now trading over $A100 a barrel. Actually this price is more or less in line, in AUD with the assumptions used when the QLD LNG projects were built – all $70 billion of them. If these prices persist then the LNG projects will show significantly higher profits than last year.

Spot LNG doesn’t necessarily trade on an oil-linked basis, but probably reflects supply and demand. Although we talk about domestic gas prices in Australia having to match export parity, or the arguably higher import parity if an LNG terminal is built, it’s not clear precisely what export parity is.

Generally a domestic contract might be perceived as lower risk and get a discount, and probably it is spot LNG that drives the domestic gas price.

Figure 3: Summary


Commodity prices
Figure 4: Commodity prices. Source: Factset

We already note the 19 per cent lift in USD oil prices over the year, but the USA 10 year bond continues to slowly rise.

Share Prices

Lithium shares, having been on the nose for a couple of months, have staged a recent recovery. AGL has been one of the worst performing shares this year, for reasons that are unclear. As foreshadowed last week, speculation lead to Tilt’s shares rising 11 per cent on the week.

Investors are yet to be convinced by Redflow and rising yields remains a concern for APA and AST investors.

Selected utility share prices
Figure 5: Selected utility share prices.


Weekly and monthly share price performance
Figure 6: Weekly and monthly share price performance.


electricity volumes
Figure 7: electricity volumes.

Base Load Futures, $MWH

Baseload Futures


Baseload futures financial year time weighted average
Figure 12: Baseload futures financial year time weighted average.

REC Prices

Figure 13 Source: Mercari

Gas Prices

STTM gas prices
Figure 14: STTM gas prices.


Thirty day moving average of Adelaide, Brisbane, Sydney STTM price
Figure 15: Thirty day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO


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.

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  1. Andy Saunders 8 months ago

    David, LNG contract prices are typically burner-tip parity (BTUs) with JCC (Japan Crude Cocktail – weighted average of Japanese import blend) plus a 15% LNG conversion factor, but with caps and collars – which is typically where the negotiations get intense. Plus loads of talk over destination clauses (prevents most trading of cargoes), renegotiation points, take-or-pay conditions etc etc.

    Mind you, that’s just Japan contracts – there have been some flat priced China contracts.

    Spot LNG is a smallish portion of the actual cargoes. Usually supplied by either the uncontracted portion of LNG plant capacity (often only 80% or so is forced to be contracted to get plant finance), or from old LNG plants where the original contracts have expired, or by running the LNG plant over the name-plate capacity.

    Rather than export-parity, domestic pricing is usually referred to as LNG netback, as the internal transport costs (pipelines) in Australia can be high.

    • David leitch 8 months ago

      Thanks Andy. I used to model caps and collars but these days I find it simpler to just use a simple slope, say 13% of A$ Brent and then a 5% discount to get from MMBTU to GJ. In fact most of the QLD LNG is sold to China and not Japan, I guess some of the Shell product goes to Singapore and 1 mtpa of APLNG goes to Korea.

      My point was that the contract volumes generally don’t set the domestic price as with the exception of Shell/BG there is limited ability to substitute LNG ex Australia with LNG from the contract portfolio. As I read it the destination clauses were a response to buyers insisting on origin clauses, I guess to ensure the gas spec.

      So import parity, or netback if you like is set by the surplus conversion capacity at Curtis Island. There the choice is to incur a small tolling cost and the shipping cost to say China or to ship gas South from say the Wallumbilla Hub. So its this “spare” gas that arguably sets the marginal price in Eastern Australia. All of this is before politics of course.

      I think you are correct to say the domestic transport costs can be “high” adding say $1 GJ maybe $2.00 to get from Walumbilla to Sydney or Adelaide. I actually forget the proper number. Perhaps a bigger issue than the actual cost is that much of the pipeline capacity is rented all year round by ORG, AGL and to a lesser extent EnergyAustralia. I don’t know the terms of their contracts but they may see a lower shipping charge because they already rent the capacity. That could occur if the actual volume was less than contracted MDQ.

      We don’t talk gas often enough on this site. And yet its such an interesting topic. 3rd largest contributor to global warming and all.

  2. George Darroch 8 months ago

    Oil price rises should help focus consumer minds on EVs and efficient vehicles more broadly. The foot has been taken off the gas, and this should help accelerate things (so to speak).

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