Know your NEM: More renewables, lower prices, questions over battery storage

Figure 1 Source: ASX

ITK forecasts that the time weighted spot price average in Victoria for the March 2020 quarter will be lower than the current futures quote, but price forecasts are inherently subject to error.

The price forecast has fallen despite the fact the weather forecast continues to be terrible. Seeing climate change problems emerging as predicted won’t make anyone happy.

In front of the meter (that is demand for utility sourced generation) continues to fall, or be flat at best.

Figure 2 Source: NEM Review

That’s because high prices and reliability concerns have driven acceleration of rooftop solar.

VRE at 21% of supply, including rooftop solar at 8%

Variable renewable energy (wind & solar) output in the NEM is now running at a 30 day annualised total of 42TWh, more than 100% higher than the total of two years ago (18.1TWh) and 41% higher than last year. VRE is now 21% of total NEM demand.

Figure 3 Source: NEM Review

Figure 4 Source: Nem Review

Of that 36TWh, wind is about 18TWh, Rooftop solar 16TWh and Utility solar 8TWh. Coal market share in both Queensland and NSW has dropped from around 83% last year to around 77% this year.

Regrettably, ITK anticipates the increased VRE output will have a much bigger percentage impact on the NEM wholesale electricity price than it will on Australia’s total CO2 output.

It’s way past time to bring back a carbon price for Australia.

Renewable energy share close to 35% of NEM supply by June 2022

ITK expects 4000MW of wind and solar capacity to start up between December 1, 2019 and June 30, 2022  from projects already under construction, or like Cattle Creek, have just started production.

The expected annual energy output from these projects at full operation is about 11-12 TWh. ITK can’t see rooftop installations continuing at 2000MW a year for ever. Let’s assume that 2200 MW are built between Jan, 2020 and Jun, 2021.

At a 14% full year capacity factor that’s another 2.6TWh of energy.

Figure 5 Source: ITK

Figure 6 Source: NEM Review

Solar batteries

We think the Grattan Institute was wrong when it criticised household feed in tariffs. Its incorrect view has contributed to slow uptake of rooftop batteries

Australia is a world leader in rooftop solar, that leadership came at a cost as for a year or two feed in tariff subsidies were excessive, and had to be paid for by consumers that didn’t their own rooftop solar (eg business).

But those same subsidies were the making of a world beating installation industry in Australia, and as a result of the firm foundations the industry has gone from strength to strength to the point where it is a major driver of supply in the NEM.

Similarly, in the UK, offshore wind industry policy support was accompanied  by sky high feed in prices in the first round of auctions, but the subsequent dramatic fall in cost make the subsidy now seem like a good idea and makes a significant contribution to the UK being essentially coal free in terms of electricity production.

In Australia, household batteries are yet to take off. Hardly a day goes by when I don’t read someone quoting a BNEF forecast about falling battery prices. Yet the installed price of household batteries in Australia has barely changed in 3 years. Installers don’t want to put them in.

They don’t make enough money to justify the extra training and complexity. Or at least that’s my impression.

Household batteries are likely to be an important part of the resilient, zero inertia, highly distributed NEM that we are rapidly moving towards and yet policy support remains small.

Only in South Australia is there real support. NSW’s scheme is yet to see the light of day and is one of the reasons why I treat NSW energy minister Matt Kean’s impressive speeches with caution. Talk is cheap, you have to “walk the walk”.

Thermal fuel prices fell sharply in 2019

Figure 7 Source: AEMO

Even in South Australia the spot price is down 29% on last year at this time and more in NSW and QLD. This of course kills the impetus for imported LNG.

Figure 8 Source: Factset

Coal prices have been stable recently but are 32% down on last year.

Figure 9 Source: Factset

Where will the spotlight fall over the next 12 months?

This will be a topic for a separate note. Right now we point to:

How utility solar developers can earn a return when they have to compete with rooftop?

How much dispatchable power is needed?

Dispatchible power but particularly thermal generation has a (good for the environment) missing money problem. If renewables are 20%, then thermal gets 70% of the volume. As renewables go to 35% then thermal only gets 65% of the volume and the price when it has to compete with renewables will be lower. There won’t, despite what some consultants say, be enough revenue for all the thermal generation users.

Can the energy only market design continue to provide reliability, achieve decarbonisation and “efficient” prices? The answer is going to be no and we will see the ESB’s preliminary view on this.

Can the NSW Govt puts some money where its mouth is in terms of the REZ, getting transmission built, and actually introducing its household solar and battery zero interest scheme rather than just talking about them in fancy speeches and press releases?