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

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 9^th 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.

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:

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

 

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.

Figure 5: Selected utility share prices.

 

Figure 6: Weekly and monthly share price performance.

Volumes

Figure 7: electricity volumes.

Base Load Futures, $MWH

 

Figure 12: Baseload futures financial year time weighted average.

REC Prices

Figure 13 Source: Mercari

Gas Prices

Figure 14: STTM gas prices.

 

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.