Know your NEM: Showdown looms on CET

News of the week

We are moving into company reporting season. We have already had advice from Infigen that results will be soft due to lower than expected wind energy volume in the June quarter.

Today, we saw Origin Energy (ORG) release its “quarterly”. This deals only with the volumes of gas and oil produced and the price received.

The average domestic gas price received was $5.68 GJ for the June quarter and compares with $5.64 GJ received on average for FY16. Both numbers exclude gas sold by APLNG to other LNG producers in Queensland, but do include some higher price gas sales to NZ customers from the Kupe field.

The average price that APLNG received for its LNG shipments in the June quarter was US$6.97 MMBTU = A$8.60 GJ.  What this shows is that contrary to endless hype APLNG is on average not selling gas overseas for less than the Australian price.

That’s not to say that some spot price or new contract offers in Australia aren’t higher than spot prices overseas,  but on average ORG is getting less for its domestic gas than its 37.5% owned APLNG JV is getting for its gas.

As a shareholder you would hope that’s the case considering the some thing like $15 bn invested by APLNG into its Curtis Island facilities.

ORG’s gas production from the Otway Basis (offshore Victoria and South Australia) increased to 13.6 PJ in the June quarter and 42 PJ from the year (more than double 2016). Some of that gas is likely finding its way into electricity production in Victoria and South Australia.

Policy and new supply

Actually everything has gone quiet on new supply and policy. The Victorian Govt disappointed by not introducing its RET legislation. New investment is still running behind requirments in Victoria by probably 0.5-1.GW and some reverse auction action would be a welcome activity.

What we see at the moment is lots of projects getting approved but not getting to the crucial stages of having PPAs and financing. We’ve been here before and we know that approved projects look good in Government and company glossy brochures but are otherwise meaningless.

Federally, to the extent it matters, CET policy work has gone underground. Josh Frydenberg asked for time but it won’t be long before inconvenient and awkward questions re emerge.

There was and is a very clear consensus from COAG down towards getting the Finkel report implemented.

Without some Federal action that “vibe” will dissipate and the Federal Govt. will lose the initiative it actually has on the matter.  In the end a showdown is coming. Either the forces in favour of a CET in the coalition partyroom have the numbers or they don’t.

It could well be that both the Victorian and QLD Govts will wait for a while on the CET but move unilaterally if it isn’t forthcoming. Other big ticket items such as Snowy 2 and the sale of LYB are also likely to be influenced by CET  policy and in the end markets will move irrespective.

If the Coalition wants credit for the policy the time is now, otherwise it will just be a(nother) piece of the agenda where the ALP will carry the centre.

And lets’ not get started on vehicle policy.

Turning to the weekly action

• Volumes: were soft across the board this week but particularly soft in Victoria and South Australia Fig 6 puts the week in perspective.
• Future prices have clearly started to strengthen again particularly in NSW. We extended our annual financial year average data out to FY21 notwithstanding that trading in that year is non existent and that so much policy will happen between now and then.
• Spot electricity prices were higher this week although relatively soft in QLD.
• REC. prices were unchanged

Gas prices  Gas spot prices have averaged about $8 GJ through Winter almost $4 GJ less than last year. That said prices for the week were similar to PCP and were9% higher in the Sydney market.

• Utility share prices. It was a poor week for the share market. Overall we hear offshore fund managers telling us its a boom market but we see the ASX 200 up just 2% for the CYTD and find it hard to call that a boom. Interest rates in the USA have trended very modestly upwards and it seems that interest rate concerns have fed through to a relatively sharp cumulative 6-9% price fall for AST, SKI and APA over the past 30 days. AGL’s down a similar amount but we suspect that is more profit taking after almost three years of sustained outperformance.

Figure 3: Summary

Share Prices

Figure 4: Selected utility share prices

 

Figure 5: Weekly and monthly share price performance

Volumes

Figure 6: electricity volumes

Base Load Futures

 

Figure 12: Baseload futures financial year time weighted average

Gas Prices

Figure 13: STTM gas prices

 

Figure 14: Thirty 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.