Know your NEM: Policy uncertainty is costing us billions

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When the Prime Minister announces things, they have to be taken seriously. So Turnbull has certainly succeeded in producing Fear, Uncertainty and Doubt (FUD). Congratulations.

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Fiddling while we burn

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Policy uncertainty is  costing Australians $billions of dollar even while climate change is making daily life a misery in the process.

The FY18 electricity baseload futures price in Qld is $90MW/h. Pool prices have doubled, REC prices are around the theoretical maximum. Gas prices have likewise doubled hitting $12 Gj in QLD last week.

The misery comes from record heat in Sydney. In outback NSW, places such as Moree have posted temperatures of more than 35c ever day so far in 2017, and are facing the virtual certainty of significantly worse to come in years ahead.

A big job lies in front of policy makers managing a major energy transition and dealing with the challenges of climate change. So what do we get? A thought bubble about USC (modern coal plants) power stations. No green paper, no white paper. No thinktank study. If it was a good idea lets have an emissions intensity scheme and see how it goes.

What will be the outcome? No such USC power station could be in operation for years and in the meantime all it’s going to do is act as another deterrent to the investment that could take place in the short term.

When the Prime Minister announces things, they have to be taken seriously. So he’s certainly succeeded in producing Fear, Uncertainty and Doubt (FUD). Congratulations.

The renewables industry will be up in arms, and based on media reports to date will find support from the existing generators.  What should have been announced was further funding to extend the Finkel Report into deeper analysis and model of the future electricity supply system in the NEM.

This report should be informed by modelling such as done for Massachusets in their “State of Charge” report or Brattle Group for Oncor in the Ercot market. However, in Australia we need even more than those reports produced. We also need to model how to integrate high renewables share into the system at minimum cost. That’s what we are going to get eventually and it needs to be planned.

  • Do we want more transmission links?
  • Should there be household storage incentives?
  • How expensive is dispatchable renewables and where should it be built
  • Can or should anything be done to accelerate development of some proved economic gas reserves in QLD?
  • Should network tariffs be reformed to incentives peer to peer trading?
  • Should wind farms be incentivized if they are less correlated with other wind farm output? This could be easily done with a simple revision to the MLF rules
  • How can the State renewable targets be managed to line up with a Federal target and our COP 21 commitments. (A commitment we have zero chance of achieving based on evidence from the last week or two).

Those are the sorts of questions the Prime Minister could commission answers to from the Finkel Group or from a reformed AEMC.

Meanwhile, start saving for your next electricity and gas bill. If you live in an apartment bad luck about rooftop PV but you can still buy a battery.

  • Volumes : In the week ended February 3, NEM wide volumes were up 7% on PCP (previous corresponding period) for the week, driven by NSW up 18%!  Of course, hot weather was too blame. Volumes in mostly hot QLD were up 3% and down in the other States.
  • Future prices: rose 7% and 8% in QLD and NSW for FY18. FY19 futures prices were up 4%-5% in just the one week. Baseload electricity will cost close to $90 MWh in most States in FY19. Its business which will feel the increase the most because the bigger you are as a business the smaller transmission and distribution is as a share of the final price. So for instance if you Tomago Aluminium smelter you can forget about renegotiating the price with AGL.  The question for business is whether to lock in FY19 prices now or take the chance they will go down over the next 12 months.
  • Spot electricity prices were double last year’s level. Spot prices in QLD averaged $319 for the week. A little more competition in QLD would be a good thing. We think the Queensland State owned Generators are having a lend of consumers and should be broken up and sold off. The QLD Govt if it follows through on its 50% renewables policy will likely eventually destroy their value so why not sell them now, as individual units that have to compete with each other. The following chart shows that in 2017 year to date the pool price averaged $886 at 4:30 pm, and $1322 at 5:00 Pm.  Some dispatchable renewables are urgently need in QLD. The Kidston pumped hydro is years away, but battery storage could be done in less than 6 months.
Figure 1 QLD pool prices by time of day in 2017. Source: NEM Review
Figure 1 QLD pool prices by time of day in 2017. Source: NEM Review
  • REC prices were unchanged
  • Gas prices : Up 100% on PCP. As stated above gas was $12 GJ in QLD and $9 GJ in NSW.
  • Utility share prices: . Not much to report here. The star performer recently has been EWC a little know company that owns a power station in Indonesia, is building a gas fired station in the Philippines using a purpose built LNG import and regasification facility owned by EWC  and intriguingly is building a low cost, low capacity LNG train in Indonesia.  AGL shares have also done well.  Bond rates have gone up again recently.
  • REC prices were unchanged
  • Gas prices : Up 100% on PCP. As stated above gas was $12 GJ in QLD and $9 GJ in NSW.
  • Utility share prices: . Not much to report here. The star performer recently has been EWC a little know company that owns a power station in Indonesia, is building a gas fired station in the Philippines using a purpose built LNG import and regasification facility owned by EWC  and intriguingly is building a low cost, low capacity LNG train in Indonesia.  AGL shares have also done well.  Bond rates have gone up again recently.
Figure 2: Summary
Figure 2: Summary

Share Prices

Figure 3 Selected utility share prices.
Figure 3: Selected utility share prices

 

Figure 4: Weekly and monthly share price performance
Figure 4: Weekly and monthly share price performance

Volumes

Figure 5: electricity volumes
Figure 5: electricity volumes

Base Load Futures

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Figure 10: Baseload futures financial year time weighted average
Figure 10: Baseload futures financial year time weighted average

Gas Prices

Figure 11: STTM gas prices
Figure 11: STTM 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.

 

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10 Comments
  1. Chris Drongers 3 years ago

    Genex’s Kidston pumped hydro (1500MWhrs at 250 MW) should be able to both be profitable at 7pm ($1200/MWhr according to Fig 1 above) and knock a significant chunk off that peak.

    • Peter F 3 years ago

      Depending on how much it knocks off the peak it will significantly reduce the price as well so it might need to budget on long term peak price being $100-200

    • Malcolm M 3 years ago

      If the Wivenhoe pumped storage were put up for separate sale, it would be competing in much the same market, and reduce the business case for Kidston. Wivenhoe is under-utilised at present because its owner CS Energy also operates several coal-fired power stations, and if Wivenhoe were used at peak periods it would knock the prices for the coal-fired power stations. Wivenhoe has a 5000 MWh storage capacity at 500 MW.

      I believe there is market space for both, but that Kidston would be better off aiming for the FCAS market (like the Murray and Upper Tumut stations) rather than energy storage alone. Most of the FACS in Queensland is supplied by the Gladstone power station, but this is difficult for a coal-fired power station because of the lag between adding more coal and increased generation. However for hydro it’s only a few seconds between further opening the top water controller and increased electricity output. With several large solar stations planned for Queensland, there would be an increased requirement for FCAS. If a cloud moves over a 100 MW solar array, output could drop to 20 MW within a minute, so there needs to be some rapid response backup.

  2. Peter F 3 years ago

    David.
    1. Would it be too much trouble to put a YTD power price in your state by state comparison as well as week by week
    2. What sort of capital structure and WACC would you think is appropriate for a new coal power station. In my calculations I use 20% equity with a target ROI of 12% and 80% debt over 35 years at 6.5%

    • David leitch 3 years ago

      Well normally I’d use a debt cost of 5% (250 bps over the 10 year govt bond rate). If 70% debt funded the weighted after tax cost of debt is about 2.5% The beta depends on a PPA and fuel cost. In qld with a captive mine and a PPA the beta might be around 0.85 (still have to allow for carbon risk). These points are debatable. So the cost of equity might be 10.1% and the weighed cost of equity 3%. So the total WACC is 5.5% on that basis. You couldn’t borrow for 30 years in Australia, maybe from the private placement market in the USA but not for a generator. The key things are the PPA and the fuel cost and what you think about carbon.

      The above really ignores carbon risk. I don’t know how you allow for that in a WACC calculation.

      • Peter F 3 years ago

        Thank you David
        One other issue with all plants is construction finance. I fed your figures into my model with the equity raised at the start and debt drawn down from yrs 2 to 6. If we adjust the average US and European USC plant development costs for local conditions it is around A$4m per MW. plus another $500m in other infrastructure in overnight costs

        At the end of a six year development process a $4.5b project has a capitalised cost of $6.2b Then you have to pay that off. The interest and amortisation works out at about $720m per year. If the plant is running at 70% utilisation that works out at $115/MWhr just for financing costs and I think a long term CF of 70% is a pipe dream

  3. Stewart Rogers 3 years ago

    *counts cash with both hands*

    It’s good to be invested in gas peakers. That is all. Ideally I’d want the RET removed but whilst everyone is incompetent I will invest in gas peakers to arbitrage these massive price swings. Batteries won’t make a dent for at least 5-7 years.

    • trackdaze 3 years ago

      Id be cautious its not all taken away by aemo fines first. Anything over 5k is investigated.

      200Mw of small scale energy storage this year alone which is coincidentially about the size of energy australia gas plant that copped a $20K fine.

      • Stewart Rogers 3 years ago

        Depends if you’re the market maker or taker. There was huge demand. Over 13000MW in NSW and over 9000MW in QLD. Not unreasonable to demand such a high price. Especially when diesel was in use as well.

        Don’t like huge price spikes? Don’t encourage more renewables (read: unrealiables) to be connected to the grid.

        • trackdaze 3 years ago

          I didn’t now i am free from high gas prices. With just a 2kw of battery.

          Tens of thousands will be doing the same this year.

          Thanks.

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