Know your NEM: Post-Trump rate spike making renewable projects more costly

• Volumes for the week ended Novemebr 18 were soft, down 4% on last year, largely due to relatively cool spring weather in NSW and  Volumes were down versus the previous corresponding period in every State and for the calendar year to date over the NEM are essentially flat compared with 2015. As we move into the hotter weather more volatility is likely both in volume and in price.
• Future prices:. NSW and QLD FY17 and FY18 continued the upwards move that we’ve seen most of the year and which accelerated with Engie’s Hazelwood announcement. The key FY18 market moved up 1%-3%  depending on which State you look at.  Figs 6-9 below show the movement quarter by quarter even over the past four weeks and also show how the “action” is concentrated the near years. Futures traders seem to be one of the few smart groups of traders out there that don’t put to0 much faith in their ability to predict longer term prices.
• Spot electricity prices were soft in all States except NSW during the week reflecting the lower volumes.
• REC prices were unchanged.
• Gas prices : Of interest is that gas prices in Qld are now over $7 GJ. As we wrote last week QLD is rapidly becoming a Summer peak market as far as gas prices go. The warmer weather leads to strong air conditioning demand even after the PV starts to decline each day. The gap is filled by gas and the gas has to compete in the export LNG market. We’ve said it before and we’ll say it again, QLD is going to be a much more interesting market than either South Australia or Victoria over the next few years with likely very good returns for dispatchable renewable generation. Every afternoon pool prices surge. The high gas price is reflected in high pool prices.
• Utility share prices: A number of utility shares were strong this week lead by EWC, ORE, GNZ and ORG (disclosure: the Author’s SMSF owns ORE). AGL has continued its outperformance against the broader market index and we still don’t think all the upside is priced in yet. EWC was queried on its share price rise by the ASX as far back as 19 October and responded that it was not aware of any information that could explain the price rise. EWC’s price is still down on last year. The company has not made any price sensitive announcements that we can see since then, but nevertheless the share price has continued to increase.
• Industry news.. Other than the election of Donald Trump and what that might mean there has not been any significant company news. The 30 year USA bond rate is up 0.5% bps to 3% over the past month, an enormous move, of which more than 30 bps occurred since the USA election. This wiped over US$1.3 trillion off the value of the global bond market and will flow through to the cost of capital for renewable energy projects. We see this rise in interest rates as of more significance than most Mr Trump’s policy pronouncements.

Share Prices

Figure 3: Selected utility share prices

 

Figure 5: electricity volumes

Volumes

Figure 5: electricity volumes

Base Load Futures

Figure 10: Baseload futures financial year time weighted average

Gas Prices

Figure 11: STTM gas prices

 

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.