Summary
The long dormant LGC market finally woke up, to find itself in free fall in what was otherwise a quiet week. According to Mercari, the source of our week LGC price data, FY19 futures fell 27% in just one week to $52 from the prior week’s $70.
The LGC market is notoriously thin and we certainly don’t think the posted prices are anything more than indicative. That said, they are the market indication. This calendar year the FY19 price has dropped from the mid $80s to $52 and may well go lower.
Figure 1: Cal 19 LGC prices. Source: MercariAlthough around 4.4 GW of new and just completed build is underway on ITK numbers we estimate at least 0.6 GW is voluntary surrender and won’t count towards the RET.
The Clean Energy Regulator earlier this month stated that around 4GW of new projects in FY17 and FY18 were required to meet the target. I haven’t done the numbers to work out how much of the 4.4 GW of commited new supply was actually committed in 2016.
However, we think it’s now a very arguable position that the target will be met. It may even be exceeded.
Readers may like to contemplate what will happen to the price of certificates if the target is exceeded. Rationally, it could drop towards zero. The only reason it would be above zero is if buyers believed there would be a new or larger scheme. So those players exposed to the spot market without a long term contract might well be keeping a close eye on these prices.
This emphasises our firmly held view that the RET is a bad way to procure renewable energy. Reverse auctions providing certainty to buyer and seller will produce lower overall costs, steadier new production and enable participants to more reasonably plan their future.
Policy Development
- Federal Court judgement on NSW distributors: We have that news now.
- Release of the Finkel Report: This is expected in June. It’s a major input into the policy framework Australia will take towards its international commitments
- Release of the Final version of the Mugglestone Report in Qld. Why is the QLD Govt. sitting on this? Is it different to the draft report? We’d like to see this report. It’s fairly important to many in the electricity industry
- Release of draft legislation for the Victorian Renewable Energy Target. This legislation is due shortly and has assumed new importance from an energy security point of view post Hazelwood.
- NSW Renewable Energy Target development. We will have more to say on this down the track.
Turning to the weekly action
- Volumes: In the week to May 26 were down and are flat for the year. Warmer weather in Victoria contributed to softer volumes there. QLD continued its recent relative softness.
- Future prices Continue the recent decline
- Spot electricity prices Were lower this week than last though still well above last year. In recent weeks prices in NSW and QLD have been markedly lower than those in Victoria and South Australia.
- REC see discussion above.
- Gas prices . drifted up although we remain in shoulder season. Prices in QLD were noticeably softer than in the Southern States.
- Utility share prices were largely unchanged. ORE was the best performer although this is only a partial recovery from its March Quarter dissappointments. ORG has been stronger than AGL recently as the market takes a more optimistic view of the oil price and ORG’s balance sheet.
Share Prices
Figure 3: Selected utility share pricesVolumes
Figure 4: Weekly and monthly share price performanceFigure 5: electricity volumes
Figure 6: Seven Day moving avg year on year temp change. Source: BOM
Base Load Futures
Figure 11: Baseload futures financial year time weighted averageGas Prices
Figure 12: STTM gas pricesFigure 13 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.