“The tumult and the shouting dies;
The Captains and the Kings depart:” Kipling 1897
New generation needs to be built in the NEM
A 10 year old debate about the future of generation in the NEM continues to this day. A 9 per cent fall in consumption enabled the decisions to be deferred for several years but now consumption is once again rising and plant closures means that the market will ensure solutions. In this note we just look at the near-term supply backdrop. The economics of new generation are deferred to a forthcoming piece. There is much being said on the topic.
Supply is tight, coal costs rising, not enough new renewables
- Rising population, growing GDP, not enough energy efficiency in new apartments and houses, global warming are all increasing electricity demand
- But supply capacity is falling, obviously with the closure of Hazelwood but also a bunch of other cutbacks that we have previously discussed.
- Thermal fuel costs have risen pushing up the cost of thermal electricity. That’s very obvious in the case of gas, but its also the case for NSW thermal coal.
- We think some NSW generators particularly Eraring, Vales Point and possibly even Mt Piper are relatively tight for coal supply and if they expand output in response to the closure of Hazelwood may be forced to the expensive spot market.
- Transmission flows are going to change, although the implications are not yet that clear.
- About 1.6 GW of new wind and about 0.7 GW of utility PV is under construction or fully committed. Most of this will come on line by June 2018. Over two years there might also be another 1 GW of rooftop PV. However the energy from all of this won’t even replace what is lost from Hazelwood.
- Futures prices can be expected to embody all this information and have risen considerably but our conclusion today is that its more likely that prices will rise further, and volatility will remain high.
Where did our network supplied electricity come from last year?
Fig 1 shows the electricity market share by power plant for plants covering 90% of NEM output over the past 12 months. We’ve aggregated water and wind plants by region.
These 22 “generators” account for 90% of output last year. Hazelwood is the 5th largest with a 5.3% share. The largest 8 are all coal and account for 49% market share.
Capacity utilization in the top 10
Once Hazelwood goes the question is what will replace it? Not in the long term but over the next 2-3 years. We will get on to new generation in a moment but to start with the obvious place to turn is the existing large (as measured by market share) power stations. The chart below is colour coded by State. Clearly Victorian generators operate at > cap use than QLD > than NSW. This reflects variable cost. NSW coal is more expensive than QLD which is more expensive than Victoria (without a carbon tax). NSW also benefits from strong transmission connections.
We calculated theoretical capacity as nominal capacity (not distinguishing between Summer and Winter) and multiplying by hours in year. We used energy sent out in the past 12 months as the numerator. The numbers are only approximate and only meant as an analyst’s guide.
Thermal power stations don’t generally run at 100% of theoretical capacity utilization for extended periods. ITK’s guess is that some power stations such as Bayswater and Eraring might manage 85% capacity utilization over a two year framework and others like Vales Point and Liddell might struggle to achieve much over 75%.
NSW thermal coal is export parity priced and relatively tight
All of this assumes adequate coal availability. NSW thermal coal availability has been limited by some older mines petering out, and a failure to develop new mines. Specifically the Cobbora coal scheme was abandoned in 2013. ORG and Vales Point (then Delta Coast) received compensation for the abandonment but the upshot is they have to scramble to find thermal coal. The current thermal coal price is around $125/ t up from $75 t a year ago. At around .47 t/MWh this can add $10 MWh to the cost of electricity. A coal plant in NSW that paid the export price of coal would have a fuel cost of $47 MWh.
We would argue that the NSW generation plants most capable of lifting output, Eraring and perhaps Vales Point face sharply higher marginal fuel costs. That is they will have some contracted coal but depending on size of stock piles will have to pay spot prices to lift output on a sustained basis. This might take 12 months to show up in the case of Eraring but we guess more quickly for Vales Point. Of the other NSW generators Liddell has had long term technical issues. Mt Piper was going to be coal constrained but the closure of Wallerawang has probably freed up some supply. Even AGL will be conscious that lifting Liddell output overly will impact the longer-term coal position of Bayswater.
So the conclusion here is that NSW generators have some capacity to lift output but that it will be far from costless.
QLD generators particularly Stanwell and Tarong can also lift output. However the QLD market is also very strong and prices in NSW have to be higher than QLD to get QLD electricity to NSW. In Summer in the afternoon in Qld that’s going to be difficult.
Our understanding is that historically overnight power flows into NSW from lower variable cost Victorian and Queensland power stations. Queensland has historically supplied a significant portion of power to NSW. However over the past couple of years that flow has started to decline and even reverse during the Sunshine State’s early evening peak. We have several times drawn attention to the emerging “duck curve” in QLD and our expectation that this would push up late afternoon and early evening prices, particularly in Summer. Fig 3 shows the March quarterly average flow by time of day.
By contrast flow from Victoria to NSW runs at a consistent 400 MW average during the day and then doubles in the overnight market.
Most of that flow is going to go away once Hazelwood closes.
Renewable energy supply
Renewable energy is getting very cheap. The Silverton wind farm’s $65MWh (increasing with inflation) is a beacon as well as being a significant boon to NSW. Compare that to ERM which is paying $85MWh plus the cost of black electricity, so probably around double AGL’s cost.
However the total quantity of renewable supply is still not enough. Basically you need about 2.5MW of renewables for every 1MW of brown coal in terms of electricity produced.
So to replace Hazelwood’s nominal 1600 MW needs around 4000MW just to maintain the same status quo. Never mind the other power stations that have closed.
We don’t ignore rooftop PV, it’s incredibly important, but in our view 700MW of new rooftop PV per year basically doesn’t even offset population growth.
Wind projects committed, not yet operational
We can count about 1.5 Gw of new wind projects that have been announced and we expect a couple more to be announced. Frankly the prices of $73 MWh fixed for 20 years at Hornsdale Stage 3 and the $65 MWh real for Silverton NSW are still pretty attractive prices. The good news for energy security is that we are seeing these wind farms being developed in NSW, QLD and Victoria reducing the “synchronous nature” of over concentration in South Australia. Still the MW being developed are insufficient. Some of these projects are developed using the Victorian purchase of LGCs, some for the ACT Govt 100% renewable program and some under the Federal scheme.
Its not easy keeping track of the list of PV projects, however on our numbers we can only get to 678 MW of utility projects definitely proceeding. Even that includes a couple of projects only confirmed in the last couple of days.
There remain 300 MW of PV farms that have ARENA funding but nevertheless have not yet gone ahead. The largest of these is ORG’s Darling Downs project.
As time emerges the benefits to AGL of the Powering Australia Fund and in particular its strong financial partner in the form of QIC are increasingly apparent. AGL is getting low cost energy and getting projects built. Talk remains long and action short from a number of the major retailers. ORG which is sitting on Stockyard Hill for many years and now Darling Downs PV is not getting very far. For CLP progress is also very slow. And we now know the ERM story.
Conclusion – Not enough renewable energy is being built to even replace Hazelwood.
Confirmed renewable projects won’t produce enough energy to replace even Hazelwood, never mind the reduction in gas fired output and the closure of Northern power.
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.
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.