Know your NEM: Please sir, can I have some more? | RenewEconomy

Know your NEM: Please sir, can I have some more?

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A NEG is worth having only if the ambition can be (easily) lifted, otherwise it’s worse than useless, locking in a do-nothing policy for a decade.

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In our view, the fundamental reality around the National Energy Guarantee is that federal energy minister Josh Frydenberg has very limited – as in zero – authority to negotiate.

A NEG is worth having only if the ambition can be (easily) lifted, otherwise it’s worse than useless, locking in a do-nothing policy for a decade. Locking in no change for a decade won’t help manufacturing  or any other electricity intensive industry (think data centres) get the new supply its going to need .

Victoria’s renewable energy target is legislated, Queensland’s is not. The federal renewable energy target was legislated.

Personally, I could live with legislation if there were say – and this is a thought bubble – mandatory reviews every three years, the target could only go up, and the Federal Parliament explicitly renewed and put into the legislation its broader commitment to the COP 21 agreement.

And that means that there is the economy wide effort to keep global warming below 2°C and best efforts  to below 1.5°C.

I doubt Frydenberg can deliver any change to what’s on the table.

Coag Communique moves the ISP from plan to reality

We quote the communique

“Council requested that the ESB report to the December 2018 meeting on how the Group 1 projects identified in the ISP can be implemented and delivered as soon as practicable and with efficient outcomes for customers. The ESB will also report on how the Group 2 projects will be reviewed and progressed. Any modifications that may be needed to existing processes for these projects to be delivered should be clearly identified and a way forward recommended.

Ministers also asked that in addition to the consultation on the current ISP that is underway, the ESB should identify a work program (including possible changes to the RIT-T) and convert the ISP to an actionable strategic plan. The ESB Chair should take the lead on its delivery and report back to the December 2018 meeting”

That’s a strong endorsement, so it’s worth thinking what it means.

  1. Group 1. The key part of the $500 m Group 1 is augmentation (increase)of transmission capacity in Western Victoria.  However none of this will be complete before 2022.
  2. So development in the region will remain an issue for the next few years. Specifically the stand alone Horsham to Ballarat upgrade is scheduled to be complete by 2024. That’s a long time in the renewable energy space.
  3. Group 2 is the major action. The key parts are:
    1. A 378 MW increase in QLD-NSW transmission (this will allow QLD PV and coal generation to supplement NSW increasing reliability in NSW and helping QLD spot prices). It will put pressure on NSW coal stations.
    2. The Riverlink 750 MW line between NSW and South Australia. This is a big deal. It will reduce power prices in South Australia for sure but it will also mean a far more limited future for any of the dispatchable plantseither in existence or planned for South Australia eg  the existing gas plants, Barkers Inlet, the Solar Reserve project and the four pumped hydro proposals. On the other hand it will facilitate more variable renewable energy [VRE] ie wind and PV in South Australia and South West NSW. RiverLink could be up by 2022 but history suggests the 2025 time frame is more realistic.

Spot electricity prices in the past week were volatile. There were quite steep negative prices in South Australia every day but despite that average spot prices in the NEM were higher than last week.

REC prices were unchanged and spot gas eased a touch but still above last year.

The market action

Futures prices in general rose this week. Most of the action was in the March quarter of 2019, 2020 and 2021.  The market is now more concerned about tightness in those traditionally high price Summer months than it was. We don’t know, but we think this heightened concern reflects:

  1. Emerging awareness of the difficult that transmission constraints might place on some new projects
  2. Tarong power station has been impacted in the past by water restrictions and could be again. Southern Hydro likewise.
  3. Coal prices. These remain elevated.
  4. Gas prices have stayed up.

All of these factors are positive for peak power prices even as the increasing VRE supply pushes down some other prices. Consumption was up a touch on last year but not so as you’d notice.

Figure 1: Summary
Cap prices
Figure 2 Cap prices. Source: NEM Review

Internationally, US 10 year bond rates once again retreated from the 3% level, oil prices did little but still are high enough to keep pressure on domestic coal prices as indeed does thermal coal.  We will revisit the China stats soon but the drought in China essentially helps to push up electricity prices in Australia. We live in a global village, we really do.

Commodity prices
Figure 3: Commodity prices. Source: Factset
Share Prices

AGL’s guidance of essentially flat FY19 profits  came as a shock to the market. Like others we’d expected some growth moderation but not that fast or that much.

It’s the cost increases that will be of most concern to investors because there is high visibility on the price outlook but only occasional visibility, at results time, into costs. Retail costs were up, but its generation costs in both NSW and Victoria which are most important to the longer term outlook.

Selected utility share prices
Figure 4: Selected utility share prices


electricity volumes
Figure 6: electricity volumes

Base Load Futures, $MWH

Base load futures

Baseload futures financial year time weighted average
Figure 11: Baseload futures financial year time weighted average

Rec Prices

REC prices
Figure 12 Source: Mercari

Gas Prices

STTM gas prices
Figure 13: STTM gas prices
30 day moving average of Adelaide, Brisbane, Sydney STTM price.
Figure 14: 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.

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