Know your NEM: Rising cost of coal, rooftop solar makes its mark

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Coal costs are rising; rooftop solar is now 9% of South Australia generation, and the latest odds on the federal election.

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“And tsf you expect you’ll gain anything from us by your way of approachin’ us,

you’re jolly well mistaken.

That’s all. Good-nigh.” Rudyard Kipling, Stalky & Co  1899 (a book I loved as a kid)

Coal costs, the info from Banpu

Banpu is a Thai company. One of its major assets is the Centennial Coal Group in Australia which is a major supplier to the NSW coal generation industry. Banpu is also a significant coal producer in Indonesia and also  produces 10 mt in China. Banpu’s  2018 Annual Report was released in February.

The following Figure compares prices and costs in the three countries. The information is still only partial as clearly Banpu has yet to get its business in all three countries to report using the same accounting classifications.

Figure 1 Banpu unit price and cost data. Source: Company. AUD 1= USD 0.72

Banpu’s China segment has to be treated with caution. 10 mt is respectable by Australian standards but trivial in China production of over 3.5 billion tonnes.  Also I can’t be sure that the China segment reflects just thermal coal. That said note that prices in China are higher than in Australia and Indonesia.

Note that costs have been rising quickly in both Australia and Indonesia even as prices have risen. Total costs include management, SG&A as well as depreciation so mostly overheads are excluded from project analysis, but those costs still have to be recovered.

Rising costs is consistent with industry cycles I observed over many years with products as diverse as concrete and oil. Costs follow prices with a lag.

When prices rise and volumes increase  labour, not just workers but administration, sales and management, all feel entitled to be paid more and the business can pay them more. Capacity utilization rises which initially pushes unit costs down but then you start doing overtime, maintenance costs go up. shortages emerge and you get into scarcity pricing and costing.

Then when prices go down, miraculously a year or two later costs fall. The oil industry shows this. I bet oil companies are making more or less what they were when oil was $100/barrel. But in any event as things stand the coal industry needs current coal prices to make a return.

If we look at Banpu’s Australian results total costs, including royalties, SG&A and depreciation are $89/t. Cash costs are $14/t less but it’s unlikely that a new coal mine could get away with less than $90/t as required price.

Banpu also reported that there were coal geology problems (which undoubtedly means higher costs  at its Springvale mine. This is significant because that mine is pretty much the sole supplier to  EnergyAustralia’s Mt Piper plant.

EnergyAustralia is yet to commit to the capex to build a rail loader that would let Mt Piper access coal from other mines. The quote from the presentation was:

Both longwall mines in full production during the quarter, albeit Springvale continued to experience lithology difficulties

Lithology2 at Springvale has adversely impacted mined coal quality and increased saleable coal costs due to additional washing costs. Operation of the longwall is being carefully managed to minimise these impacts

Probably no more than a standard issue but because of the dependency it bears monitoring. Another example was the Chain Valley mine which does some supply to Vales Point.

That very old underground mine went broke because it couldn’t profitably supply coal at the contracted price to Sunset  and Sunset Power had to take it over. Sunset may have represented this as a positive but I doubt they’ll have been too happy about it.

NSW – Lets see the “Empowering Homes Program” [EHP]

I suspect your analyst is not the only person monitoring delivery of election promises post election. NSW Govt made the EHP announcement during the election to provide up to $14,000 of interest free finance for the installation of home solar and or batteries. I

n Victoria the Govt’s solar scheme has closed temporarily due to excess applications, but I can’t find so much as a website, let alone an application form in NSW. I guess it’s early days.

Sydney’s Northwest Metro, the payoff from selling networks, lets reinvest the Snowy money

The Northwest Metro – a $7 billion rail infrastructure program – finished $1 billion under budget and is about to start commercial operations.

Years ago I wrote a piece “Good for the State, bad for the budget” that opined that NSW selling some of its interests in NSW transmission and distribution was basically a good idea even thought it would lead to a long-term worsening of the NSW budget position.

I stand by that note today and it’s great to see the NSW Metro as the first major dividend to Sydney residents from that sale. Those driverless trains run every 4 minutes, and bring proper public transport to a region of Sydney that really needed it.

That said, the NSW Govt also received $4.15 bn from selling its interest in Snowy Hydro. You can argue that with the benefit of  hindsight Macgen and Sunset Power were sold too cheaply, but using my imperfect foresight I want to suggest that NSW got a great price for Snowy. Always nice when you have a motivated buyer.

The Federal Govt is getting into owning  electricity, assets and driving energy policy,  the NSW Govt is getting out of the business. NSW Govt policy is to invest the Snowy proceeds into regional NSW, for water  security, digital connectivity, road and rail freight.

Nothing about the jobs from regional solar and wind power or transmission. And some may be skeptical of the water security commitment.

Just like Sydney real estate, it’s easy to sell the electricity assets, but perhaps hard to get back in.

Federal election odds – The Federal Govt matters to electricity and decarbonisation

These odds  are just a sentiment measure.

Figure 2 Source: Sportsbet

This Washington Post article suggests betting markets may not even be as good as opinion polls, at least in the USA,

The market action
Figure 4: Summary

Spot prices are softer than last year, but we have passed the annual seasonal low in demand and start to move into Winter.

Figure 5: Commodity prices. Source: Factset

Compared to last year only Australian bond rates have fallen materially. Coal prices remain high but figuring where they are going is of major importance.

Generation by fuel

The key point is the fall in hydro generation a los of 6 TWh annualized compared to PCP and offsetting 2/3 of the growth in VRE (variable renewables).

Figure 4 Generation by fuel. *30 day annualised, ** Variable renewables. Source: NEM Review

Of interest is rooftop solar is now 9% of generation in South Australia. Our table takes no direct account of exports or imports or losses.

Equally of interest is the decline in Tasmania Hydro production, probably more a short-term feature but clearly contributes to price action. Hydro generally is well down.

Figure 5 VRE share by State. Source: NEM Review

 

Volumes
Figure 6: electricity volumes. Source: NEM Review
Base Load Futures, $MWH
Figure 7 Baseload futures Financial year average. Source: ASX
Figure 8 Quarterly futures Source: NEM Review
Gas Prices
Figure 9 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO

 

 

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