Know your NEM: King abdicates, pipeline owners bet on higher gas prices

Volumes : In the week to September 9 volumes were down on last year, fractionally. NSW seems to be completely flat for the week, and the year with Victoria and Tasmania in decline and Queensland up. Volumes decline quite strongly seasonally with the exact pace being driven by exactly when Spring starts. The bigger picture is that overall volumes are struggling to show much growth despite the extra 800 MW or so of demand from QLD CSG. Recent network driven price increases to NSW consumers will be showing up in bills around now and may have households and businesses once more cracking the whip on “turning the lights out”.

Future prices:. Surprisingly futures prices continued to rise despite all the risks that we see in the market and despite the fact that spot prices are falling. Perhaps in contrast to some other markets we see spot prices as leading futures prices rather than the other way around. If we look at NSW as the largest volume market and by virtue of its interconnections it is effectively the hub of the NEM we see that prices rose strongly to July and then have edged up since:

There are around 70 TWh of consumption in NSW and by FY19 most NSW customers will see that cost increase passed through to them adding $0.7 bn to industry and household costs. More broadly, the rise in futures will add by itself around $2 bn to NEM wide cost of electricity. Increases in network costs will lift that further. The rise in South Australia is about twice the NEM wide average.

Spot electricity prices: Fell sharply this week and at times there were quite lengthy periods of negative prices in South Australia when wind generation was strong. We need to look at this further but we suspect that South Australian pool prices actually have quite an impact on NEM wide pool prices.

REC prices were unchanged

• Gas prices : continued to fall although they remain above last year’s level. An interesting announcement during the week was that APLNG will pay APA to build a pipe to connect APLNG’s western gas fields into APA’s gas transmission network making it easier to shift more gas from QLD to the Southern States. APLNG wouldn’t be doing this unless it saw that spot or contract gas prices in Eastern Australia may be higher than export parity price for gas LNG. In one way this could be read as a sign that APLNG is less confident about longer term oil prices but the bottom line is that when built there may be more, albeit expensive, gas available for the domestic market.
• Utility share prices: were weaker. Investors pushed down prices globally last week and utilities broadly underperformed the market. AGL and Redflow both continued to be weak. ORG however performed reasonably strongly because…..

Company news

On Friday in a long expected move Origin Energy (ORG) announced that Grant King will be retiring. It was slightly surprising to see that long serving head of energy markets segment Frank Calabria was elevated to the top job. Prior to being head of Energy Markets Mr Calabria was CFO of ORG. On the day the sharemarket took all of this as good news pushing the ORG share price up 4.5%.

It’s interesting to reflect on Grant King’s time at ORG. He took the company from a market capitalisation of less than $1 bn to at its peak $15 bn with the height of success at the time the then BG Group made a takeover offer. However, the long draining years of building APLNG, an investment with gross book assets over $40bn, and then the halving of the oil price have seen his once exceptionally high regard diminished. Neither will Mr Calabria be seen as having an outstanding track record either. Although Energy segment gas gross profits have increased sharply the electricity segment has only just got to the point after four years of struggle to where year on year profits are flat.

ARENA winners: Genex, ORG, and APA of listed companies all won some ARENA money for utility scale solar. Of those, the money will mean the most to GNX. This small company with a market cap of just $30m won $8.9m, helping the company to be won of the best performers for the week.

Know your NEM: Data for week ending 9 September 2016

Volumes

 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.