“2017 will be about getting the AEMC to commission some forward looking rather than backward looking modelling”
- Volumes in the week to Dec 12 were down 5% across the NEM. Sharp falls in Victoria, Tasmania and South Australia more than offset a flat NSW and 1% growth in Queensland.
- Future prices: Prices rose another 1% in FY18 continuing the virtually relentless rise seen since the end of March. Most noticeably is that the out years in NSW have continue to climb since the Hazelwood closure announcement. South Australian prices are very high in the out years, above the cost of new generation, QLD prices are also high. Victoria’s 40% renewable by 2025 plans are fairly visible and the damage to the Portland Smelter has to be factored into prices. In NSW though not much is happening in the way of new supply since a burst of announcements much earlier in the year. Further, we are seeing more NSW electricity heading up to QLD, the opposite direction to the normal flow and this is all providing a positive signal for NSW futures.
- Spot electricity prices rose a touch on last week but with the exception of QLD were actually below last year. This reflects mainly the warm weather in QLD, underlying high baseload demand, as well as the cooler weather in the Southern States and strong wind generation in South Australia.
- REC prices in the near term were a touch softer but since there is no trading its all a bit theoretical
- Gas prices : Reflecting the demand for gas fired generation in both Qld and South Australia gas prices were $8.70 a GJ in QLD and $9.6 GJ in South Australia. We haven’t had a chance to look at whether supply issues may have contributed to these prices but we always expected prices to rise when all the LNG trains operate and electricity and gas supply come under pressure in that State.
- Utility share prices: Best performing shares in the week were Redflow, ERM power and Orecobre. Worst performers AGL, Infigen and Genex (Genex following its equity raising). For the year the three best performers are likely to be Infigen, Orecobre and AGL. Most of the share price gains for these stocks occurred earlier in the year. The back half of the year and particularly since the Trump election has been marked by a rise in global bond rates. Even in Australia ten year bond rates have risen sharply in the past month.
- Industry news
The debate over industry costs driven by Frontier Economics’s emissions intensity modelling for the AEMC and AEMO remains a sticking point in that results of the modelling showed new gas fired generation replacing coal and next to no new renewables.
To many people these modelling results were surprising because:
- Most fundamentally they are at odds with a view that decarbonization requires getting rid of most of the world’s gas consumption over the next 30 years;
- Despite many attempts, gas fired generation has never made much progress in Australia even when gas was very cheap and plentiful. Gas is neither cheap nor plentiful in Australia anymore.
- The modelling seemed to make overly conservative assumptions about the cost of PV or wind.
- The modelling suffers from the disadvantage of relying on a continuation of Government policy, not something much evident in Australia.
- The modelling had no concept of distributed generation, storage, or the integration of networks and generation. In this respect the modelling is very old fashioned. The AEMC really needs to get its act together in terms of being a bit more forward looking in terms of its approach to modelling. It’s not Frontier Modelling’s fault that they produce the modelling commissioned by the AEMC. It’s really the AEMC that needs to wake up to itself and take a more modern view of how the NEM is going to work in the future. Perhaps this is the greatest challenge the industry faces in 2017, that is getting the AEMC to wake up to itself.
However, one point that the modelling does capture and which does get at the achilles heel of renewables is that renewable generation is not dispatchable. Whatever the cost of gas generation is, at the moment it gets on average, about the highest price per MWh for pool generation in just about every State.
Wind, at least so far in 2016, gets a significant discount not just to gas, but to just about every other form of generation.
At the moment PV pool price data are only available for a couple of plants in NSW and those plants get a small premium. However PV is no more dispatchable than wind. When the share of PV generation increases, and particularly in QLD we anticipate “duck curve” price issues to be very important. Dealing with this is likely to be the big emerging issue for the renewable industry in 2017 and 2018.
Base Load Futures
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.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.