“If you start me up
If you start me up I’ll never stop
You can start me up
You can start me up I’ll never stop”
Start me up, Rolling Stones (PC version of Brown Sugar)
Thermal generation didn’t step up in January
As we remarked in mid January, before the heat really took hold, electricity prices have been higher than expected given the increase in wind and solar supply.
The following chart compares total output by fuel for January 2019 compared to January 2018. Across the entire NEM demand was 2.4% higher but maximum demand hit 33.3GW compared to 31.3GW the previous year. That’s a 10 per cent jump.
In face of this higher energy demand, brown coal output in Victoria declined 9 per cent. Wind output was up 16 per cent, utility solar up 141 per cent and rooftop solar up 27 per cent. Essentially, the high prices were the result of the decline in coal output in Victoria.
The waterfall chart below puts Figure 1 in perspective, but of course it doesn’t show how peak demand was met, or not met, and nor do we show demand response anywhere as that’s not recorded in our data. Solar in the chart below excludes rooftop as we focus on pool price drivers.
On the one hand, the lack of reliability in Victorian brown coal is not unexpected. AEMO, for instance, had drawn attention to the continual increase in forced outages in recent years. Secondly, hot weather and such problems go hand in hand.
On the other hand, there will always be questions of who made and lost money and whether performance could have been better.
Pool revenue and price, it’s just the pool not the P&L
Next we turn to price and revenue outcomes in the pool. It’s important to understand that pool outcomes are unlikely to reflect actual P&L (profit and loss) outcomes either now or in the future because of hedging and changes in the market structure.
Specifically, a generator such as Yallourn showed a 14 per cent volume decline this January compared with the same period a year ago, but its pool revenue was nevertheless up $49 million, or 44 per cent due to higher prices.
If however it had hedged 100% of its output (again extremely unlikely) it could actually be a loser through having to purchase in the pool to fulfil hedging requirements. Since details of hedging arrangements are vague at best, it’s wise not to draw too many profitability conclusions.
What we can say is that if you were uncontracted and exposed to the pool and operated efficiently you had a great month. Some renewable generators may fall into that category. Also, due to issues around rooftop solar and pool revenue that would take time to resolve I’ve excluded solar revenue and price from the January analysis.
Let’s start with some context from FY 18. The following figure shows price by fuel in that year. I’d be cautious about the solar number but it’s likely to be broadly correct.
The main message from this chart is what a grand time hydro and gas had in FY18, particularly in Victoria.
Arguably had the Federal Government being inclined to direct Snowy to bid lower into the market it could have driven pool prices in that State down.
We do not advocate this as we think high prices will ultimately work to lower prices in the long term. Repeat after me “ High prices in the short term lead to low prices in the medium term”. High prices last for a couple of years, new investment lasts for 20 years.
Now, let’s turn to the January comparison.
Once again it’s the marginal dispatch fuels gas and hydro that have creamed the market, achieving a $320-$330 MWh price and hydro grew its pool revenue 119% in the month.
However, the most interesting number for a data nerd like myself is that gas made more pool revenue at $662 million than either NSW or Victorian coal. Of course, that’s NEM wide gas compared to individual State coal but it’s still something you won’t often see.
What are the implications
The main thing for us is the unreliability of brown coal in Victoria.
Yallourn was written down in EnergyAustralia’s accounts years ago when pool prices were low. The power station has had problems with flooding of its coal supply from the nearby river and has proved unreliable this Summer. The station will struggle on, maybe with capital spent it can be made more reliable but it’s future remains questionable in our eyes.
New supply in Victoria is still coming. Stockyard Hill and Moorabool alone will add 0.9 GW of wind capacity plus there is the output procured under the VRET. More supply from South Australia will also assist.
The household battery program in Victoria can also assist.
Those proponents that want to build new gas plants in Victoria have to think not only about gas supply, not only about the serious transmission issues in the short to medium term, but also about Snowy 2.
Whatever you might think about Snowy 2.0’s economics there is no doubt another 2GW or power in the evening peak would have had a major impact on price in the month.
Management isn’t deaf, dumb and blind
Of course, it’s not just the unreliability but the inevitable questions about gaming the market. The fact is that not only are there just 3 coal power stations in Victoria, there are also only 3 owners of those stations and management would have to be deaf, dumb and blind not to notice that lower output results in higher revenue for all.
The market structure is what it is and there is little point in debating gaming, in this analyst’s view. Better to rely on the market magic to work.
Producers game in the short term, prices rise, new supply is incentivized. That’s the real game. Management will nearly always prefer profits and a bonus today over the long term. Management isn’t around in the long term.
Because of the new supply coming we doubt that this year’s Summer pricing bonanza will have as much of an impact on next year’s futures price and consumer prices as it would in other circumstances, but let’s look at the data.
The market action
US 10 year bonds and Australian bonds are well down in interest rates on where they were a year ago. Meantime, coal prices in US$ are down 5%. Some Australian coal imports (mostly metallurgical) have been held up at China ports so this may impact markets. Floods in Townsville could also impact mining operations of all sorts but particularly coal.
Perhaps its imagination but is there a trend for these January volume spikes to be getting more pronounced?
Base Load Futures, $MWh
In NSW and Victoria there has been a slight shift up in the futures curve in the past few weeks, but it’s not too dramatic.
Share prices and company news
AGL has marginally outperformed the market this calendar year, Origin has easily outperformed but this reflects the oil price recovery. The big winners as you might expect are APA and SKI (Spark Infrastructure) which have benefitted from the fall in bond rates.
Genex has talked up its pumped hydro plant but its share price is down 10% on a year ago, underperforming the market and news about progress is painfully slow.
We move into earnings season this year and AGL reports this Thursday. The table below shows full year expectations. By and large over the last six months analysts have sharply marked down the earnings outlook for both AGL and ORG in FY19 through to FY20.
AGL is not expected to show any growth from here. We see this interim result as the first real opportunity for new CEO Brett Redman to get out there and put his view of the company’s future to the market. Steady as she goes, the first mantra of many a CFO is rarely enough for a CEO. CEO’s have to offer a way forward.
David Leitch is a regular contributor to Renew Economy. 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.