Know your NEM: An average week in an oligopoly

Week ended August 5, 2016: An average week in a tighter, oligopolostic market. Reporting season is upon us.

Volumes : Volumes rose during the week driven by NSW’s 2% year on year increase. Victoria was flat in year on year terms and QLD showed its consistent 4-5% year on year growth.

Future prices: Futures prices in the near years recovered some of last week’s losses and remain significantly above last year. The prices reflect tightness of the market. The tightness is partly natural (less gas generation) and partly the lower level of competition in the market.

Spot electricity prices:. Spot electricity prices were higher this week but the extreme levels of July have passed. Volatility is high

REC. Notional out year REC prices fell but the FY17, FY18 prices were unchanged. Volumes in the REC market are very thin and small retailers will be keen to avoid having to pay penalty prices in FY18.

Gas prices : gas prices were up on last week using the seven day moving average but only marginally so.

Utility share prices: The share market generally has been strong in the past month, up 10%, and utility shares, generally regarded as defensive, have struggled to keep up.

Share prices

A couple of bits of news from relatively recent company announcements.

Origin Energy’s quarterly: disastrous gas price received by APLNG, but should improve

ORG’s June quarterly relates to its Oil and gas activities and the annual reserves report is also released. Of interest in this report were:

1.  The average price APLNG (ORG owns 32.5%) received for its gas was a humbling A$3.90 per GJ on a 132 PJ (100% basis) of gas. The price was low because the price of oil was low. What’s really at work here is a contract APLNG signed in haste years ago for sales of APLNG’s share of gas to QCLNG (now part of Shell). Shell deducts a heavy fixed infrastructure charge from that contract so when the oil price of low the gas price for that output is terrible. That contract ends over FY17 and depending on the price of oil APLNG’s average price for gas received should go back to at least A$8 GJ.
2.  APLNG’s 3P reserves declined from 16 to 15 exajoules (000 pj) and 2/3 of the 6% decline was due to reserve declassification. In turn this was due to lower prices. At full production of 9 mtpa LNG consumption is about 550 PJ per year so well over 20 years life.
3.  ORG contributed A$1.2 bn to APLNG during the year but only $76 m for the quarter. The remaining expenditure on train 2 should be financed out of the JV cash proceeds. Still the low oil price is crippling the economics and without a better oil price APLNG funding and ORG’s balance sheet remain under pressure.

CLP’s Australian result

CLP presented its Australia results “waterfall” as follows:

From our perspective what we see is continued decline in mass market volume per customer and “only” a 4% growth in the EBITDA number (proxy for operating cash flow) with the improvement in wholesale offset by higher overhead costs. Still, you could choose to interpret this as signs of “steadying of the ship” after an extremely rocky couple of years.

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.