Know your NEM: Spot electricity prices double this time last year

• Spot electricity prices in the week to June 18 were more than double those for the same week of last year and at levels that must give enormous encouragement to those seeking to finance new renewable investment. That encouragement will be deepened by futures prices which are up 10% or about $5 MWh on the levels of 2-3 months ago. A NSW wind or solar farm is looking at base load futures price of $50 for three years, no negative correlation because wind and solar are still a small share of the market, and a LGC price of $83/MWh. At a total $130/MWh its astonishing we aren’t seeing daily announcements of new wind farms.
• Volumes rose over the week and NSW and VIC volumes are up 1-2% for the calendar year to date, outperforming forecasts.
• REC prices were flat on the week, but at $83 participants probably hope they stay flat to 2030. It is electricity consumers who are paying the high prices and its business customers that will feel it the most.
• Gas prices rose and in QLD were more than 100% up on last year’s abnormally low levels. Gas prices will continue to rise and should the oil price go up to the expected level of about US$70-US$80 over the next two years, gas prices in Australia will be higher and gas will be tough to get for local consumers. Not impossible, just tough. This too should provide encouragement for wind and solar PV entrepreneurs.

Share prices

It was a softer week for utility shares although the majority outperformed the ASX 200 during the week. Since the ASX 200 was down 4% that’s only a “relative excitement”. Genex (GNX) shares came crashing down 29% and are in fact down 6% since Jan 1.

Yield based shares such as DUE and SKI did relatively well in the week. APA shares have been relatively soft for a while now, give that stocks years of good performance. We think investors remain somewhat concerned about ongoing regulatory changes following on from ACCC enquiries.

Despite the very strong pool prices evident in recent months and increase in baseload futures, AGL shares have been only modest performers for the year, albeit outperforming the ASX200 by 14%. Our share price data only goes to Friday. The weekly update is a day late due to some technical issues.

Monday a bad day for EPW shareholders

If we had included Monday’s share price movements we’d have seen the Origin (ORG)share price up 9% and the ERM Power (EPW) share price down a sickening 25%. The jump in the ORG share price doesn’t appear related to any public news (minor move in oil price, no asx announcements) but the fall in EPW is explained by management’s advice to the market about the profit outlook for FY16 and FY17.

When companies issue profit advice to the market (“guidance”) it can be an upgrade or a downgrade to expectations. It’s the downgrades that are subject of some wry amusement to analysts. Invariably the downgrades, no matter how severe, are accompanied by many positive statements about how well x or y is going. Then somewhere near the end of the announcement typically there is something that would be in small print were that allowed, generally put in obscure fashion that when properly read amounts to a downgrade. So it was in this case.

EPW stated that while it would meet guidance for FY16 (ebitdaf = 81-$85 m) the company went on to say how well the USA segment is going but then stated that the gross margin for FY17 in Australia was expected to be around $3 MWh. The company doesn’t explicitly point this out but when you multiply the gross margin in Australia by the “guided” Australian volume of 18.5 TWh you get to $55 m of ebitdaf and with the USA earnings roughly cancelling out the head office overheads you don’t have to be Warren Buffet to see that FY17 will likely be well down on FY16.

In this analyst’s view EPW does a good job but retailing into the wholesale market with no natural generation hedge is tough.  Management also stated that FY16 has benefitted from running down the book of RECs. Of course selling your back inventory at good profit can only be done once. EPW has never, to our knowledge, sponsored a single renewable project, never signed a renewable PPA, despite being the 4^th largest retailer in the NEM by volume.

It simply shifts the obligation for organizing renewable certificates onto its customers. Other retailers with access to ongoing renewable PPA’s can, if they wish, use some of the inbuilt profits currently available to win market share. Its no wonder that much of the time investors prefer “gentailers” to either retailers or generators.

Finally management stated that the Oakey power plant (an open cycle gas generator) in QLD will underperform expectations in the June quarter. It/s not immediately clear why this should be case as pool prices were quite strong in Qld in the June quarter.

 

Figure 3: Weekly and monthly share price performance

Volumes

Volumes were up during the week as compared with the same week and month a year ago ,although it doesn’t show so much on the chart below. The numbers we focus on most are those for NSW and Victoria and for the calendar year to date [CYTD]. These are up 2% in NSW and 1% in Victoria. Not big numbers but still  likely to be above forecasts made a year ago.

Basslink restarted during the week and got straight back to the business of exporting power to Victoria to the tune of about 20 GWh for the week. This is ironic since, during Summer, when the drought was on and the link was down, Tasmania had to take extreme measures to keep some of the lights on. As soon as it rains and there is  plenty of hydro power the link is fixed and Tas Hydro goes back to exporting.

Figure 4: electricity volumes

Base  load futures

Futures prices we strong this week with FY18 numbers edging up 3% across the board. In our view the stronger futures markets reflect the higher spot prices. Basically NSW baseload is over $50 for the next couple of years which is an encouraging price if you are looking at new investment.

It’s way short of what gas needs, not far off what coal needs, not that anyone is going to build a coal plant and represents about $130 an hour for a new wind or pv plant when added to the REC price. Compared to 22 April when we started collecting this data for RenewEconomy, baseload futures for FY17 and FY18 are up 10% although the outer years are unchanged. This will show up as an increase in consumer and business prices, much as the increase in REC prices will.

Spot prices  remain way up

Spot prices remain at levels that generators could only have dreamed of a year ago. The 7 day moving average is over $80 in every State and prices in NSW, Vic and of course South Australia were above those in Queensland. Prices were up on last week despite Basslink restarting. We’ve already discussed the high prices several times and in our view there is no one single factor causing them. Nor do we expect these prices to last indefinitely, but while they do last, and that could be 12-18 months, they will have a big influence on futures prices and generators will make a lot more money.

Notwithstanding that every retailer will tell you they are fully hedged, the fact remains that generators themselves typically don’t fully hedge all their output. That’s because if they are fully hedged and a unit breaks down the generator with the broken unit is very exposed. The broken unit causes a further increase in price and the affected generator has to buy out of the market to cover their hedging obligation. We expect the increase in prices in Victoria where we suspect there is less hedging will be causing retailers the most concern. Origin Energy for instance has no baseload generation in Victoria and relies on hedging and Mortlake for its coverage in the State.

In the end high prices are a big positive for the renewables industry as they open up headroom for new renewable projects.

In our view the fact that maximum prices for the week in all regions other than South Australia stopped just short of $300 MWh is “interesting”. Prices over $300 generally trigger “caps” where the generator gets no benefit from the higher than $300 price.

Gas prices

Gas prices rose again during the week. The weekly average was impacted by one very strong day when prices were above $9 GJ. Once again we note that gas prices can be expected to strengthen further as the two additional LNG trains start up towards the end of this year.

Figure 13: STTM gas prices, 30 day moving average