Whats interesting at the moment
We cover AGL’s plans in NSW, the Fed Govt’s plans for Snowy, and note finally some new renewables investment for NSW.
AGL announced its plan to replace Liddell. I assessed this plan from the point of view of Tomago Aluminium smelter. Tomago needs broadly 1 GW of power 24×365. If power to the potline is cut for more than a few hours, it’s all over rover.
From that point of view we find the AGL proposal vague and lacking. A windfarm in Queensland (Cooper’s Gap) is unlikely to be of much help in NSW, just for instance.
More importantly, it’s clear that AGL’s “plan” is no more than a concept. Two PARF projects, Silverton and Coopers Gap totaling 650MW is committed but that was not originally marketed as Liddell replacement.
The plan says a further 300MW of 3rd party PV offtake is approved by AGL, but AGL doesn’t put any capital into that, and interestingly you could argue it’s competing with PARF. No doubt the 100MW Bayswater upgrade will be approved and probably 250MW of gas peaking.
It’s no wonder AGL is being cautious on plans to invest in NSW. As we show below the move of the Federal Government into large scale generation and retail investment is likely to have significant implications for everyone else.
Either the ESB/Frontier or AGL have their costs and forecasts wrong
AGL’s investment plans have an LCOE of $83/MWh. Once again we contrast with that with the ECB/Frontier Economics view that the electricity price is going to be $50/MWh in the 2020 to 2030 period.
AGL won’t be investing at $83 if the market price is $50. If the market price is $50, or even $60/MWh Tomago, presently the largest single site consumer of electricity in the NEM let alone NSW, probably does have a future beyond 2028. If the price is $83, it’s going to be a lot tougher
Federal Govt moves to swing producer in NSW and Vic via Snowy 2
The media this morning state that the Federal Govt may end up owning Snowy by this Christmas: Apparently, the NSW Govt. now needs the money from Snowy so it can build sports stadiums.
This kind of speaks for itself. Some of us might have been hoping that if the Snowy was sold the NSW Govt. would put the money into energy security in NSW. It could do this by running reverse auctions in the same way as Victoria and Queensland are doing.
Still, let’s look at the implications.
1. Federal Government becomes a new player in the NEM. It could use Snowy if it wanted to buy up other generation assets, to buy other retailers, to increase its share of the wholesale retail market.
It will be the only Government owned retailer in the NEM, outside of momentum in Tasmania. Many RenewEconomy readers will probably see Government ownership of generation and retail as a “good” thing and acting as a countervailing power to the inherently “bad” private sector.
However, your analyst is not so relaxed. With private enterprise you know where you stand, the business is basically out to maximise its return on capital subject to achieving sustainability and other goals.
Regulations and laws and competition hopefully keep the return on capital to somewhere around the right level. We would argue that in electricity in Australia that more or less is what’s happened. However, when the Government invests in competition with the private sector there are significant risks.
The Government may do things for many reasons besides return on capital. The Government may make laws or not make laws to protect the interests of its investment rather than looking at the broader picture. You only have to look at COAG and the State owned network businesses to see that.
a) In generation Snowy Hydro currently has around 3.5% of the combined NSW/Vict electricity market measured by energy delivered. Snowy has pricing power in the NEM though as its maximum power represents about 18% of the NSW or Victorian markets
- b) In retail Lumo/Red has about 1 m customers or about 11% of the total 9 m making it the 4 largest retailer, by customer numbers. Of of those maybe abut 400,000 are in NSW and 410,000 customers in Victoria, where Lumo/Red has about 18% of the household market, although its share of the small and large business market is much smaller. In terms of energy sold, ERM is easily the number 4 player.
2. Snowy 2 deserves its own article. Here, we note that if Snowy 2 has a further 2 GW of capacity then Snowy’s peak output from all sources could be as much as 6GW or about 25% of the NSW/Vic market.
Sunraysia 250 MW PV plant gets a PPA
We estimate this brings PV plants under construction or extremely likely to go ahead to about 400MW in NSW and 2500MW in total. Adding in wind, including Hornsdale, Ararat and those projects that have started this calendar year gets my total to about 5500 MW of utility scale investment, making this an absolute banner year in the Australian renewables scene.
Then of course we can add in maybe another 1 GW of behind the meter PV investment. State schemes will produce more.
Our cautionary note remains that 36% of the new investment is in QLD, the State which frankly from a price and security perspective has the least need for it.
In addition, the limited transmission out of QLD makes its power of relatively low value in NSW and particularly Victoria. In short NSW still needs a lot more generation and we need energy minister Don Harwin to start winning a few more cabinet battles against his National “colleagues”.
Turning to the weekly (in)action
The main feature of an otherwise dull weak market wise was the very soft volumes, down 5% across the NEM, 8% in NSW and 7% in QLD.
That’s due, we think, mainly to milder weather, probably coupled with the ongoing uptake of behind the meter PV.
Another trend of course, at least in the Capital cities is the increase proporortion of units for new residential dwellings. Units typically have much lower energy requirements than detached houses.
In aggregate across the NEM grid delivered electricity consumption will be flat this year on PCP despite strong population growth and ongoing GDP growth. Australia’s success at energy efficiency, partly managed and partly accidental remains underappreciated both by Australians and the wider world.
In this respect at least the USA in general and Texas in particular has a lot to learn.
Gas prices rose a touch, futures prices haven’t moved in a month or more, and REC prices show around $45-$50 even in 2021 although liquidity still seems low.
We now wait to see what Summer heat and demand do. We expect the AEMO to have done enough, but we can’t be certain. We particularly worry about the 4 coal generators in Victoria where there is little margin for error and all have to run hard, all the time.
Base Load Futures/$MWH
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 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.