Know your NEM: Looking forward, after looking back

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The worm is starting to turn, as wind and solar power become widely acknowledged as the forthcoming mainstream suppliers of energy into the NEM. But can governments and regulators keep pace?

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Wind & solar start to drive in 2018 but are not yet really steering

2018 will eventually be remembered as the year when wind and solar power became widely acknowledged as the forthcoming mainstream suppliers of energy into the NEM. Market share of wind and solar doubled to end the year at 15 per cent of the mix and future growth is assured.

Figure 1: Wind & PV share of NEM generation. Source: NEM Review

 

 

Figure 2: Wind & PV share of NEM generation. Source: NEM Review

Looked at from another perspective, though, pricing power still remains with hydro and gas. Although the market share of these two dispatchable fuels is declining it hasn’t yet declined to a level where price competition is manifest. We’ll have more to say on that later. For the time being the worm line shows:

Figure 3: Gas & hydro combined share of NEM generation. Source: NEM Review

ESB – New transmission is 12 months behind schedule. Is there enough revenue for coal generators to get to 50 year life?

In a document released Dec 20, 2018 that I’ve not seen reviewed, the ESB outlined where the ISP is up to and some of the ESB priorities for the year ahead.

The first point is that of the three Stage 1 projects with a budget of $650 m

  1. SA system strength project is on schedule
  2. The Queensland NSW stage 1 upgrade is 18-24 months behind schedule. To get it back on schedule requires both a recommended rule change and for the transmission operators to order equipment before regulatory approvals are received. To me this just shows what a mess stransmission upgrading is in this country. The ESB says the project can be brought in on schedule. Apparently the AER has to assess the preferred option. What qualifications the AER has for assessing transmission options is not that clear to me.
  3. The Victoria NSW interconnect needs to be sped up by one year.
  4. North West Victorian renewable integration can be done in less time with faster planning approvals. Well Doh. Perhaps that’s unfair but the point is this process requires easements and land acquisition. That’s never a fast process and the ESB implies that even the planning hasn’t been completed so we don’t know what easements are required.

In this respect the good news is that the ESB recognises there is a problem and that things do need to be sped up. However its still not clear to me that the proper processes are in place to get the job done efficiently and on time. The time line is important because the closure of Liddell will increase NSW’s reliance on imports from both Victoria and NSW.

The ESB makes a number of recommendations that will, in my opinion, have a minor impact on Stage 2 and stage 3 transmission upgrades.

The ISP is likely to become the default transmission planH

The process the ESB outlines is:

  • Scenario developmenent by AEMO including demand forecasts and generation technology costs;
  • Needs are identified by Govt, Transmission owners, AEMO;
  • Credible options are developed (basically by AEMO with input from stakeholders)
  • Consultation and analysis followed by modelling.
  • Consultation on draft result.
  • ISP published with projects identified in three priority groups. If you are in priority one you get fast tracked to the extent that Govt underwriting is considered. Govt underwriting can also be considered for stage 2.

Renewable energy zone [REZ] development

The key REZ recommendation is that Govt fund the initial transmission development and recover the money from generators as they connect.  Well again Doh! Also there is a suggestion, not fully developed, that the MLF factors run for more than one year. However its fairly disappointing that the ESB is not pushing for more disclosure  and transparency of the connection queue.

ALP’S $5bn infrastructure development fund is already on the table

Lets be honest whether intended or not the ALP’s infrastructure fund proposal dovetails right in with the ESB thinking. Not much more can be said about it. Its unclear what the current Federal Govt thinks about the plan because its never been heard to mention the ISP that I can recall.

ISP to be extended to even adequacy modelling

The ESB notes

The assumption that thermal generators will retire at the end of their technical lives is considered particularly problematic given the revenue stress that many aging coal-fired generators are likely to experience in the short-medium term. Similarly, more flexible plant with better ramping capability may remain in the market longer than expected. “

AEMO will publish analysis on the impacts of early coal retirement

The ESB stated in the context of “project Marinus” (another link between Tasmania and Victoria)

AEMO intends to publish further analysis on the implications of early coal retirement and theimpacts of storage in the first half of 2019. All of these projects will also be incorporated into the next ISP, which AEMO hopes to publish in December 2019

NSW – Don Harwin goes for virtue signaling but no action

At the last COAG meeting the NSW Govt  put forward a last minute proposal to plot a National pathway to net zero emissions by 2050. The South Australian Govt then followed through with a more realistic proposal to have the COAG Energycouncil consider such a proposal at a special COAG Energycouncil meeting in February.  Specifically:

Council discussed a proposal to integrate climate and energy policy and whether to task the ESB to draft an emissions obligation for introduction into the NEL for consideration by COAG Energy Council as soon as practicable. SA has proposed this request be considered out of session in February 2019

If such a February session is held its likely to have some political implications, contrasting Federal Govt with State Govt beliefs and priorities but no short term implications.

As Victoria, and in theory Queensland, are showing its entirely possible for the States to act unilaterally. If NSW was serious it would do more than talk.

Dutton forces kneecap themselves – terrible politics never mind policy

2018 will also be remembered in politics as the year when the Coalition blew a great opportunity to wedge the ALP and the renewables industry via the NEG.

The identity issue of being unable to give any ground whatsoever on climate change meant that the Dutton forces threw away an NEG that had been designed by the ESB and its members. The ESB is a  who’s who of the electricity industry, ie the AEMC, AER and AEMO.

The NEG was also supported by the big players in the utility business, was supported by the public, and was supported by big business. It was also supported to a greater or lesser extent by the State Govts. Even the renewables industry was in two minds as to whether to support or oppose.

And yet the policy did nothing to actually incentivize any new renewables. The Coalition had everything,  absolutely everything they could have wanted and yet they could not bring themselves to let it happen. Talk about perfection being the enemy of good.

And incredibly Dutton claims that Turnbull was a bad politician!

As a result the Government has got offside with  all of the NEG supporters. In particular they’ve upset business groups, their main funders and the ESB constituency. Large utilities not just gentailers but network companies aren’t fans. We would also argue that the Coalition has shown little respect for the rule of law, or for the laws of economics. However those are opinions as opposed to the facts.

The ESB was left with nowhere to turn except to the AEMO and the Integrated System Plan [ISP]. We expect that all of the ESB constituency will be fairly PO at all the wasted work.

The market action

Consumption recovered driven by growth in Victoria where spot prices averaged over $100 for the week. Still in the end the system coped.

Spot gas prices continued to be riculously strong

Figure 4: Summary

 

Figure 5: Commodity prices. Source: Factset

Coal prices continue to retreat but the good news is that ten year bond rates have fallen significantly in both the USA and Australia in the last two months. The market is in two minds. We will say more about China later, but it’s the big swing factor.

Volumes

electricity volumes
Figure 8: electricity volumes

Base load futures, $MWH

Baseload futures Financial year average
Figure 9: Baseload futures Financial year average. Source: ASX

Looking at FY22 is misleading as there is no trade. One thing South Australians can be happy about is that in FY21 electricity prices there are about the same as in NSW and Victoria despite the reliance on gas. Near term futures are rising in NSW and Victoria in particular.

Quarterly futures
Figure 10: Quarterly futures. Source: NEM Review

Mr Turnbull keeps saying what a good job he did on gas, but frankly if the short term trading market is a guide I’d hate to see what a bad job looked like.

Gas Prices

30 day moving average of Adelaide, Brisbane, Sydney STTM price
Figure 11: 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO

Mr Turnbull keeps saying what a good job he did on gas, but frankly if the short term trading market is a guide I’d hate to see what a bad job looked like.

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