Know your NEM: Gentailers give corporate Australia “the bird”

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Australia’s corporate renewable energy power purchase agreement market is taking off. But do gentailers care?

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We are fond of saying that the cure for high prices is high prices. In a similar fashion the large gentailers, AGL, ORG and EnergyAustralia have more or less given corporate Australia the bird in recent years.

For instance all three of the big Gentailers adopted a post-Abbott strategy of trying to control the LGC market during the time that market was in trouble. The companies essentially went on new project strike while they tried to maximise the value of their REC books and existing renewable projects  built up in prior years. It wasn’t the Gentailers that kept the market going at this time but the ACT Govt.

The strategy came undone when offshore funded developers responded to not just high REC prices but high pool prices following the closure of Hazelwood and starting building projects left right and centre.

The big  Gentailers were quite public that they had enough REC cover for the household market but corporate Australia could row its own boat.  The Gentailers did much the same thing in gas, look after the household market and forget the rest.

Gentailers  had little incentive to help corporate Australia because they don’t make much money out “Business electricity”.  We can see this by looking at the results of AGL and ERM for the six months to Dec 17. Orgin’s disclosure has worsened in recent years and they no longer report business profitability.

Figure 1 Selected business customer retailing. Source: Company results six months to Dec 17

The figure shows that AGL only made $20 m from retailing to business customers and made only $4 MWh on the business a little over 2.5% gross margin, ERM did a bit better but was still only making $5 MWh before overheads.

Origin’s gross margin per overall electricity gross margin is about 19% and this is an indicator of the better profits in the household sector. Of course bad debt, customer acquisition and retention and overhead are much higher in the household sector but the fact remains mass market retailing once you get to scale (over say 1 mn customers) is a far more profitable business than electricity retailing to large business.

So corporate Australia being left to itself has taken to the corporate PPA market. The Figure below shows some deals we can readily identify in the past 18 months. Most of them are in the past 12 months and cover over 1 GW of power.

Note that some PPAs tend to be of short duration. More importantly its almost certainly cheaper if Gentailers would provide the same service. Retailers can manage load as a portfolio. Even though one customer may shift the overall load is somewhat predictable. Therefore retailers can afford to write long term PPAs with wind and solar plants and achieve the lower prices that long term PPAs provide. Similarly retailers can use a book of hedging contracts to firm up load and in theory do that more cost effectively. This includes things like gas transmission pipeline rental.

So in essence the emergence of the corporate PPA market is a sign that big Gentailers have done a poor job and in essence have hurt their long term brand and have let a genie out of the box.

We suspect most corporates would rather not be doing corporate PPAs if they didn’t think their big, not very friendly gentailer wasn’t trying to leg them over. What corporate really thinks its core business is buying and hedging electricity?

Figure 2 Selected corporate PPAs. Source: “Awordaboutwind”, “Reneweconomy”, ITK

Renewable growth tracker

We will try to update the figure below, which compares aggregated wind & PV including rooftop solar with a year ago. The figure shows the anualised, average rate for the last 30 days. Because the data is not seasonally adjusted the use of annualized data is defective but I still find its more useful than the raw number. Also the seasonal adjustment doesn’t matter for year on year comparisons. Solar is up 1/3 on last year and wind 19%. By the time we get to March 2019 look for a further big  jump in solar and ongoing wind growth.

Figure 3 VRE growth and output. Source: NEM Review

The market action –

Electricity volumes were flat for the week. Spot electricity prices were down on both the week and last year. Gas prices particularly in Qld and South Australia were well up on last year and the three state, 30 day moving average was around $10 GJ. REC prices were mixed with a sharp fall in calendar 2019, but near term spot prices were quoted higher. Weather was touch warmer at the airports than last year other than Brisbane.

Figure 4: Summary

The ongoing drought is sure to be putting some pressure on hydro supply and this tends to increase power prices and actually be profitable for hydro generation suppliers. This time around though the effect may be masked by all the new VRE supply.

Figure 5 Cap prices. Source: NEM Review
Figure 6: Commodity prices. Source: Factset
Figure 7: Selected utility share prices.


Share prices were mostly weak but yield based utilities did the best and don’s seem to negatively impacted by the ACCC report.

Figure 8: Weekly and monthly share price performance
Figure 9: electricity volumes
Figure 14: Baseload futures financial year time weighted average
Figure 15. Source: Mercari
Figure 16: STTM gas prices
Figure 17 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO
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  1. Geoff James 1 year ago

    “We suspect most corporates would rather not be doing corporate PPAs if they didn’t think their big, not very friendly gentailer wasn’t trying to leg them over. What corporate really thinks its core business is buying and hedging electricity?” Such an obvious yet overlooked argument! Thanks David for this clarity.

    • Ralph Buttigieg 1 year ago

      Surprised someone hasn’t come in to act as a middleman between the renewable energy providers and the corporate sector.

  2. Craig Allen 1 year ago

    Why are other gentailers with a focus on renerables, like Diamond Energy, not willing or able to move in and do this?

    • Jonathan Prendergast 1 year ago

      New renewables need a 10-15 year commitment. Retailers only have month-to-month or 2-3 year contracts with their customers, so don’t have that long term certainty. Powershop have done it though:

      • David Osmond 1 year ago

        The ACCC recommendation that the Government provide low price contract guarantees for years 6-10 or 6-15 for new ‘firm’ generators could be very useful if we see a good market for ‘firming’ of renewables.

  3. Jonathan Prendergast 1 year ago

    One of your best David!

    A couple of comments on the PPAs:
    – Ararat Wind Farm has a PPA with ACT government for around 40%, which helped it reach Financial Close. Burra’s PPA would be much smaller than 240MW, maybe 1-20MW
    – CUB took around 37 MW of Karadoc by my calcs

  4. Ray Miller 1 year ago

    Thanks again David for getting to the core issues.
    The boards of the gentailers have a lot to answer for and when the chickens come home to roost they will reap their dividends.

    Over time it is a source of wonderment for me that the existing players have not seen the future coming like a freight train. They have failed to come on board undermining their own long-term interest, instead all we have is incompetent, self centred, corrupt, inefficient and greedy bushiness.

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