Know your NEM: Policy uncertainty is costing us billions

Fiddling while we burn

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.

• 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.

Share Prices

Volumes

Base Load Futures

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.