Know your NEM: Gas sends energy prices soaring in Qld, NSW

Volumes:  In the week ended Nov 11, warm weather, particularly in Queensland, drove volumes up strongly up 2 per cent for NEM compared to PCP and 9 per cent in Queensland, where at times Queensland volumes were close to NSW. Victorian volumes were soft, down 3 per cent leading to sharp differences in regional electricity prices.

Future prices: Near-term contracts fell sharply but there was little change in the 2018 and beyond numbers. It’s not entirely clear why the near-term contracts, normally the most active, have moved down so much this week.

Spot electricity prices averaged around $90 MWh in NSW and QLD for the week  (up about 150% on PCP) but just $33 MWh in Victoria. Around 10%- 20% of  QLD electricity is produced by gas and the higher gas price is contributing to the higher spot prices.

REC prices were as usual unchanged and towards the theoretical maximum. No new renewable projects were announced and the rise in global bond markets will increase the cost of capital for investments of all kind, but is extremely negative for renewable energy investments.

Gas prices:  The NSW gas price is up just 28 per cent on last year but in Queensland it’s now up 200 per cent to $6.90/GJ and in South Australia its over $2/GJ. It’s now starting to emerge that because Queensland is experiencing not just high but predictably high afternoon pool power prices in Summer that this will lead to plenty of gas generation and perhaps lead to gas prices in Summer being stronger than what we are historically used to.

Utility share prices:  Have been severely impacted in the short term by the rise in global bond rates. USA 30 year treasury rates are up about 40 bps (from 2.1% to 2.5%) since the election of Donald Trump in the USA. This is an extremely sharp move in such a short space of time, wiping around US$1.3 trillion of the value off the US$50 trillion global bond market and the worst weekly move since 2009. Global bond markets also sold off after Brexit but then recovered. Since Trump has zero prior record as an elected official its difficult to know how his policies will turn out. However in regard to debt some observers point to his record in the private sector where much of Trump company investment was debt financed.

Industry news

AGL released an investor presentation today. News in the presentation to us includes:

– AGL is entering the WA gas Market aiming to acquire 100 K customers over 24 months

– AGL is investing $17 million as part of a potential $200-$300 east coast LNG import terminal! Investment decision expected in FY18-FY19. Could be ready by 2021. Amazing how the wheel turns

APA also held an investor day last week. Points catching our eyes included:

– Gas supply swing factors: how hard will GLNG run train 2?; When will Arrow will further develop its reserves?

– As outlined in our podcast with Mick McCormack, APA is looking at the renewable power generation market. Its also looking at the $28 billion midstream (gas processing plants) gas market in Australia. Carvouts from say LNG producers to low cost capital providers such as APA have proved successful in the USA.

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.