Know your NEM: NEG’s windfall for big three power utilities

What’s interesting at the moment

One of the criticisms levelled at the proposed National Energy Guarantee is that it will entrench the position of the large gentailers, specifically AGL, ORG and EnergyAustralia.

Investors seem to have taken the same view. Over the past month AGL shares are up 11 per cent and ORG shares 15 per cent, far outpacing the rise in the ASX 200 of 4% over the same period.

There will be more to say about the NEG but not before other events have run their course. The key events we look for are:

• COAG Energy ministers meeting November 24. This meeting will tell us whether the Labor States will support the Federal Govts’ proposal. We assume that NSW will support the Federal Govt. Frontier Economic’s modelling of the NEG will be presented at this meeting. Much will be made of the modelling but with one exception we expect it can safely be ignored. The reasons for ignoring the modelling are:

• Most of these models are out of date before publication and based on a 20^th century world view. It’s rare to find one of these politically motivated models that turn out to be useful to anyone other than politicians. We feel somewhat sorry for the modellers who have to produce such nonsense. The money’s good but the work is soul destroying. So much talent being wasted on dross.

• Unrealistic assumptions. Again the excessively high estimates for the cost of wind & solar PV are already documented but more importantly no coal or gas generator is going to build capacity based on a view that emissions policy is going to end in 2030. It’s rubbish and a waste of money getting the modelling done on that basis.

• It won’t do a good job of capturing behind the meter impacts and the competition they provide to grid delivered electricity.

The one area that the modelling might help with is giving us some of the actual numbers that gentailers will be required to meet for the reliability part of the guarantee. At the moment there is nothing on that whatsoever other than that estimated dispatchable power has to be measured relative to estimated gentailer peak demand.

• QLD election. This will be held on November 25

This will be held 1 day after the COAG meeting, Opinion polls suggest a hung parliament with the ALP presently in front of the Coaltion but, even with Greens support, unable to command a majority of seats. Sportsbet puts the ALP as narrow favourites to form the next Government.

The Premier has found a way to cripple a controversial potential $1 bn loan from the Northern Australia Infrastructure Fund [NAIF] to the Adani coal mine, thus making the Adani mine less likely. The premier did this without directly coming out against the Adani proposal.

The current opposition coalition in QLf heavily favours coal whereas the present Govt has an unlegislated but clear target to move QLD to 50% renewable electricity by 2030.

Projects like powering North Queensland, Kennedy 2 and potentially the Genex pumped hydro project as well as many other PV projects under construction and likely to be built will likely fare much better under a regime that supports more renewable energy.

All we can say is that it is no wonder the Nicholls opposition coalition is doing badly if the rest of its policies are as backward as its electricity policy.

That said QLD electricity under the ALP doesn’t have all the answers either. In the end it will likely have to privatise its networks and its generators to raise the funds needed to properly restore the QLD Govt balance sheet and to allow sector policy to be set independent of financial outcomes. You can’t have the referee owning one of the teams.

Turning to the weekly action

REC prices weakened this week

Electricity demand strengthened marginally relative to last week but is flat on last year. It’s worth pointing out that Australia has grown GDP about 20% since 2009 and grid delivered electricity consumption has fallen 8% over the same time frame.

Figure 1 Breaking the GDP & Electricity link. Source: ABS, NEM Review data to June 2017

Gas prices moved very little but were softer in QLD.

Spot electricity prices were lower than last week and in some States not all that much above last year. The average spot price in South Australia this calendar year is now neck and neck with that in Qld. South Australia showed some sharp negative prices this week.

Figure 2: Summary

Share Prices

 

Figure 4: Weekly and monthly share price performance

Volumes

Figure 5: electricity volumes

Base Load Futures, $MWH

 

Figure 10: Baseload futures financial year time weighted average

Gas Prices

Figure 11: STTM gas prices

 

Figure 12 30 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.