Know your NEM: Firming output in South Australia

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South Australia remains the most fascinating market, with all sorts of competing ideas and technologies to firm the state’s wind and solar output.

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Figure 12: Baseload futures financial year time weighted average
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What’s interesting this week – South Australia firming

South Australia remains interesting. South Australia’s base load futures are higher than those of other States and show no sign of moving, or trading.

They don’t trade much because, let’s be clear, AGL has lots of influence in South Australian electricity. Its investment in the State is minimal, less than $200 m for the retail business back when it was loss making and maybe another $100 m cash as the price  net of the 150 MW station in Victoria for TIPS  in 2007, but it has paid off.

I think it’s reasonably well understood that baseload prices are high in South Australia because either gas or imports from Victoria set the price most of the time. Wind is a price taker, gas is a price setter. (Ed: I’d add lack of competition).

Well over 1GW of project talk, but only Barker Inlet committed

As usual, entrepreneurs of all flavours see the high prices in South Australia as an opportunity.

First off the rank was the Hornsdale battery, but, as expected, this has of course done nothing to average wholesale prices. That’s not its job.

However, several new projects will have some battery storage. Individually they may not make a difference but in aggregate they could take the edge off arbitrage pricing.

Second is 210 MW, $245 m, 210 MW  gas fuelled reciprocating engine Barker Inlet power station. This plant could do a lot to influence power prices, but because its owned by AGL, it’s likely to be used quite strategically.

We expect this plant on its own to improve AGL’s profitability but not to have much impact on price. Its flexibility might influence AEMO decisions about how much reserve gas needs to be operating in the State.

Next up we have firmed renewable options. These include 4 pumped hydro proposals totaling 745 MW and 5.6 GWh of storage.

Figure 1 Pumped Hydro proposals in South Australia. Source: The Lead, ITK

Obviously, not all of these will go ahead. Delta’s Goat Hill has arguably the best economics, low environment impact, simplest technology,  and is the most advanced of the projects.

But Delta has no real presence in South Australia. So it could perhaps sell the project if someone made it the right offer.

Pumped Hydro  needs somewhere between $70-$90MWh difference between buy and sell price.

One problem in South Australia, is that if gas is required for backup and is setting the price, it may be harder to get the daily arbitrage potential that the wind and PV alone naturally provides.

Next there is the SolarReserve, Aurora concentrating solar project, 150 MW, 1100 MWh plant.  The plant may go ahead despite its technology risk thanks to strong Government support.

If it does work  it will take some of the market that might otherwise have been available to say one of the pumped hydro projects.

Then we have LNG import plans. These have been driven by the mining industry, but particularly BHP. BHP’s Olympic Dam project was hurt by South Austalia’s blackouts.

According to Matthew Stevens in the AFR, Olympic Dam was within 10 minutes of molten metal freezing in its smelter requiring a $3 bn rebuild.

As a result there are two proposals to put floating LNG off the coast near Pelican Point and the gas sold to a new gas fired power station of, according to the AFR, 750 MW.

ITK estimates that the capital investment would be closer to $2 bn than $1.5 bn. Olympic Dam though only uses 125 MW or around 7% of South Australia consumption.

You can’t base $2 bn of capex on that.

Nor on some long mooted but never committed potential Olympic Dam extension.

Unlike NSW there is an arbitrage opportunity in South Australia

Repeating the same exercise for South Australia as for NSW that we recently did, we downloaded half hourly prices over the past 12 months, sorted these into a 365 x 48 table of daily half hourly prices and then sorted the days from low price to high price.

We see that for 4 hours storage a comfortable margin of $119 MWh could be had on average but this was influenced by a few high price events and the median returns were materially lower. 6 hour median return were not that different to NSW.

Figure 2 Daily price differential in South Australia past 12 months. Source: NEM Review, ITK

So many projects but no commitment except from AGL

Only the Barkers Inlet 210 MW is committed. AGL’s market power gives them the confidence to make that commitment.

We’ve written about the SolarReserve project before. In our view the publicly available evidence suggests there is still some technology risk. But because of Federal and State backing it may still go ahead.

So far none of the Pumped Hydro projects are committed. The usual obstacles remain in an energy market to going merchant. What will the other players do?

If there is an arbitrage return in South Australia for one plant there may not be enough for two plants. The usual way around this is via some capacity contract.

South Australia though is a special case where there is no one much to contract with. No one wants to contract with AGL because AGL will get by far the better end of the bargain.

This really only leaves, individual corporate PPAs such as the Gupta steel works and Olympic Dam. These too are difficult contracts.

The South Australian Govt took itself out of the picture by awarding its contract to SolarReserve. We think, with the benefit of hindsight, this was a risky decision, but it’s done now.

The market action

There was a brief price spike in South Australia and Victoria for half an hour but weekly average spot prices were broadly in the low $70s MWh across the NEM.

Consumption was essentially seasonally normal and broadly unchanged from the past couple of years.

Out year REC prices continued to dive, and we expect renewable developers to have to seek alternative revenue under the NEG in that period. Gas prices were lower than last year but the gap is if anything narrowing a fraction.

Figure 3: Summary

Oil prices strengthened and if maintained this will drive up the gas price in Australia as LNG exports will have a greater incentive to export.

More importantly perhaps, US 10 year treasuries have fallen back below 3% and various investment banks are once again re evaluating global prospects.

Leaving aside USA growth and inflation the other key variable in the world economy is always China’s housing growth.

China builds about 15 m houses a year, 20 m in some years and this produces a massive demand for steel, cement, plastics, electricity and subdivisional roads, notwithstanding that the buildings are high rise and small.

The residential demand in China produces corresponding commercial property demand. At the moment residential floor space starts are showing a 12% growth rate  and this essentially will prop up the Chinese economy pretty much all by itself.

Figure 4: Commodity prices. Source: Factset

SHARE PRICES

20% of Tilt Energy changes hands. This morning Mercury Energy, a $4bn  listed NZ gentailer, 51% owned by the NZ Govt announced it had purchased 19.9% (just below the takeover threshold) from a NZ electricity consumer trust.

Investors will wonder if this is a prelude to Mercury seeking to control Tilt. It’s a national sport for New Zealand companies to venture to Australia, Powershop is already active, and can Contact be far behind?

Tilt may look to accelerate its investment plans here. There is not much point on Mecury sitting on 20% of Tilt as a passive shareholder.

Figure 5 Selected utility share prices

 

Figure 6: Weekly and monthly share price performance
Figure 7: electricity volumes

Base load futures, $MWH


Figure 12: Baseload futures financial year time weighted average

 

Figure 13 Source: Mercari

Gas prices

Figure 14: STTM gas prices

 

Figure 15 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.

David Leitch

David Leitch is a regular contributor to RenewEconomy.com.au. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.

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7 Comments
  1. Paul 7 months ago

    Stevens report sounds massively exadurated

  2. BushAxe 7 months ago

    The Outer Harbour Power Project sounds like a MK2 version of the original as it will use the existing substation and is of similar size. However it’s location wouldn’t have helped BHP in the Sept blackout, better use of the resources (natural) at Olympic Dam would give BHP alot more energy security than a new plant 600km away. There’s been significant moves since AGL announced the staged closure of TIPS A; Origin are also looking at developing a small LNG import terminal and more OCGTs at Quarantine; Alinta are looking at up to 300MW of OCGTs at Temples.
    You forgot Tilt’s Highbury PHES (300MW/4.5hrs) too David.
    Ultimately I think the industry players are lining up projects in anticipation of a decision on the NSW-SA interconnector giving access to a much bigger market.

  3. George Darroch 7 months ago

    Victoria’s projections keep improving on the back of their renewable targets. Meanwhile, NSW is getting closer to SA’s wholesale prices.

  4. Jonathan Prendergast 7 months ago

    It is obvious to all that at least 1, if not 2 of these SA Pumped hydro projects ‘should just happen’.

    But it is a challenging investment for private investors or company, as:
    – Future revenues are very uncertain
    – These are long term (50 years +) assets, beyond the investment horizon of typical private companies
    – The business model is self canabilising, in that its operation will reduce its own arbitrage opportunities
    – A lot of the value in reducing volatility and increasing pricing stability, which is transferred to SA electricity and electricity customers via reduced electricity prices, rather than returned to the project

    I think only government, or some financial contracting innovation can really make this happen

    • Mike Westerman 7 months ago

      It’s an interesting discussion point Jonathan. If both Vic and SA move to a strongly solar + wind future, then both will face the twin peaks in winter/large evening peak in summer demand profile, with shoulder seasons having lessor twin peaks. Both will on most days have surplus solar during the day squeezing out everything else and producing very low prices for storage vendors to purchase. Overnight, SA seems to typically seems to require 15-20GW between when the sun goes down till it comes up again (say 4:30pm to 8:30am). At the moment, when the wind isn’t blowing this is coming from imports from Vic or gas. If lignite has mostly or even largely left the Vic market then both will be looking for overnight supply from gas peaker or storage. The total storage in all the proposed SA PHES is still only a fraction of this figure, so the price would be set by gas peaker ie around $120 or storage at $100 till it runs out of water. The lowest cost lignite could run all day at a loss and still be profitable if able to get these prices at night, but a modest carbon price would squeeze them out of the market, leaving only gas or storage to make up the supply when the wind is not available. When wind is available on sunny days the price would go negative if they didn’t want to be curtailed providing further opportunities for storage to buy cheap, which eventually must squeeze gas out of the market (since the peaks would eventually be running for such short periods they would be running on spot rather than contracted gas). There will be periods when the market doesn’t clear the imbalances efficiently, and to get thru this I can’t see how you can avoid intervention eg thru capacity reverse auctions.

  5. Ian Fordham 7 months ago

    What’s happened with Pelican Point, been offline entirely some weeks now, I think since it tripped at the same time as one of the Loy Yang units?

    • BushAxe 7 months ago

      +1 One GT was already down for major work when the second unit ‘failed’. I’ve heard it’s major overhaul/modifications but unable to confirm any details unfortunately.

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