Most energy related commodity prices are at double last year’s levels. And that’s not just a base rate effect in comparison to the Covid impact, they are at high levels in absolute terms. This reflects, in ITK’s view, the massive expansionary impact of very low interest rates and monetary stimulus.
Inflation concerns are heightening as seen by the increase in the US 10-year treasury rate from 0.8% this time last year to 1.6% now, but 1.6% is still a level that says the market is relaxed.
The better bet, in this amateur’s view, is that the balloon will deflate of its own accord rather than being punctured, but we shall see. For now, the message is much stronger and for a bit longer. And this means higher electricity prices.
The Newcastle “Japan spec” coal prices is $A154/tonne. If you are the Vales Point or Eraring power stations and looking at those prices, that equates to $60/MWh, just in the fuel cost.
But look also at the European carbon price close to A$85/t. Global carbon emissions are something like 35 billion tonnes. If that $85/t applied to every metric tonne the global annual carbon cost is something like $A3 trillion per year.
That is comparable to the total point of production ex carbon value of all the world’s annual coal, gas and oil production.
Gas prices in Australia have also jumped – from A$6/gj to A$9 – in just the past month and basically jumped $1.50/GJ post the Callide coal plant explosion.
Markets don’t waste a crisis
It’s well known that the Australian electricity market is completely cut throat. This is well illustrated in Queensland, where the outage at Callide has resulted in a price explosion as the remaining gas and coal exploited a close to 1GW reduction in average coal output.
Not only that but generators in NSW have found they can also exploit the Queensland situation, even though there has been only the most moderate reduction in supply to NSW.
One lesson from this is that it is the threat of exports from Queensland to NSW that drives NSW prices as much as the actuality of those exports. When that threat is removed NSW producers go to town.
We start with daily average prices by time of day, comparing May 1 to May 29 in Queensland, with May 30 to June 5, 2021
Prices for every time interval are higher but it’s the scarcity pricing when the solar goes away that provides the opportunity for gas producers to clean up. The chart incidentally shows a fantastic battery arbitrage opportunity, even before the Callide blow up, but that’s for another day.
The next chart shows that it was an almost perfect time for the competitors of CS/Intergen (the owners of Callide) to have Callide explode. As we go into an unusually cold early Winter, demand is up and wind and solar are down a bit.
You can see in the graph below that – compared to the pre Callide situation – gas has picked up the vast majority of the load and priced accordingly.
Electricity futures prices are also looking up
I look forward to a press release from Angus Taylor claiming credit for the Federal Government policies that have led to the recent increase, to accompany the many releasees claiming credit for the declines in the previous year.
Operational demand is above last year, but nothing unusual in its over all context. Certainly, though, demand is more of a price strengthener than subtractor this Winter.
Finally the commissioning pace of new supply remains glacial
ITK’s database has about 2.8 GW of projects that are expected to be energised and or commissioned in calendar 2021.
We estimate that the process is about 35%-40% done, but we highlight that a remaining 900MW or more of wind in Victoria, including Stockyard Hill, Bulgana and Moorabool, as well as Biala in NSW, will make a significant difference to the overall market.
David Leitch is a regular contributor to Renew Economy. He is principal at ITK, specialising in analysis of electricity, gas and decarbonisation drawn from 33 years experience in stockbroking research & analysis for UBS, JPMorgan and predecessor firms.