Know Your NEM: Wind and solar take 22 pct market share in early Spring clean

Where are the songs of Spring?

Wind and solar, or variable renewable energy (VRE) has taken off in what is still only early Spring, to push their share of total demand to around 22 per cent across the NEM in the last month.

Figure 1 Source: NEM Review

As the table above shows, and as everyone has been forecasting for years, because of the lack of a carbon price, it’s gas that is getting displaced with its share of the Victorian market having more than halved. Even in South Australia gas generation supply is down by one quarter.

All this when the gas price is far lower than anyone, even energy minister Angus Taylor, could have imagined a year ago. Coal generation supply is actually up.

Figure 2 Source: NEM Review

The increase in supply and demand, which is down a touch, has decimated spot prices, with the average for the week falling below $6/MWh in South Australia. Yes, all those wind and solar plants are sure resulting in high prices and blackouts.

Figure 3. Source: NEM Review

Things are going to get very tough in the spot market as the year draws on. It’s very clear here at ITK that November and December are going to see a relatively large VRE supply compared to demand with prices in several State likely to be very soft.

Equally, curtailment will be an issue in those months.

The following figure is taken from a presentation to last week’s Smart Energy Conference. It was a great conference, with the Smart Energy team putting their heart and soul into showcasing what the industry has to offer.

Where it says supply on the graph, it’s supply of VRE, not total supply. Demand and supply are expressed as an index relative to the 12 month average of each.

Figure 4 Source: NEM Review

Plenty more where that came from, like another 7G

Of course, there is still plenty of VRE curtailment in the NEM thanks to the transmission debacle and the dumb refusal of policy makers – and I’m looking at you in the AEMC, ESB and Federal Government – to realise that if you want to build a house its generally a good idea to build the foundations first. In this case the foundations are a properly planned long term transmission system.

Anyway, that’s an old song and this section is about new supply.

This figure from a couple of weeks back is still showing just 2.3 GW, just 2.3GW, committed so far in 2020, but since then we have had another 200 MW as a result of ACT Government tender and announcement of a further 800MW to come in Victoria.

Excluding, the Victorian 800 MW we still see comfortably over 7GW of basically committed new wind and solar.

Figure 5 source: ITK

Yes another 7GW, much of which is more or less scheduled/on track over the next 12 months. Stockyard Hill, on our list for years and years, may finally get to start generating.

Figure 6 New supply, commissioning profile. Source: ITK

And there will be more announcements. The NSW policy pretty much locks that in.

We actually think that consensus price forecasts, as observed through flat load futures, could be too high,

Figure 7 Source: ASX

But we also need to allow for problems, and possibly the early closure of a coal station or an aluminium smelter.

To put these electricity prices in longer term context, we can look at the following chart taken from Paul Simshauser, CEO Powerlink’s, presentation to the Queensland transmission planning update. There is a lot more to be said about this but it will have to wait.

The chart shows, inflation adjusted prices (2020 is nominal base) with Qld transmission costs added, but excludes last mile distribution costs.

So, if you were a very large energy user, such as an aluminium smelter or a coal mine, or a data centre, this is the unsubsidised price you’d have faced over the past 15 years. As you can see, the 2020-2022 prices are right at the lower end of the scale.

Figure 8 Source: Powerlink

So, if any politician tells you that electricity prices are high in Queensland because of renewable energy, give them the bird. It’s BS.

A final word: the big Gentailers and their industry organization

AGL, ORG, EnergyAustralia, and no doubt the QLD Govt owned generators, are the major members of the Australian Energy Council [AEC]. It’s pretty much known in the industry that you wouldn’t go to the AEC if you wanted to learn about the good part of renewable energy.

You go there to hear the good things about coal and gas generation.

AGL and ORG have to sell themselves to investors . That requires not just a very consistent message, but also clear evidence that the company does what it says. It “walks the walk”.

If management  of a large listed company say one thing but act in a different way, either explicitly or implicitly, then investors will learn that behaviour and price it in. What they will price in, is that management don’t really care. They are just management.

If you  want to enjoy a strong  share price in today’s  low interest world where cash flows in 20 years time are worth as much as cash flows today, you have to have a credible growth story.

Coal generation is not a credible growth story. Neither, frankly is gas generation, although I’ll concede I’m on lower ground there.

If your industry association goes lobbying for coal generation, that gets noticed. Who in the end wants to own the last horse drawn taxi, no matter how good the horse is?