Wholesale electricity prices have shot up for a variety of reasons, and this will cost consumers money, perhaps an extra $200 million in Queensland alone.
Although not a lot could be done about rising commodity prices or cold, wet winters, the inefficiency of Australia’s clean energy transition can be owned squarely by policymakers, rule makers, and the system operator.
Federal Government policy is, of course, a national and increasingly international disgrace. Queensland, however, is not a whole lot better. Its got a commitment to 50% renewables by 2030, but no policy to achieve it, and it is hopelessly conflicted.
Equally, the Australian Energy Market Commission rules mostly belong in the previous century. The Energy Security Board’s policy framework is about as unimaginative as it is possible to be. Still, even changing those things won’t have much near-term impact on prices.
Perhaps the one thing that seems most easily controllable to improve the efficiency of the energy transition is for AEMO to get its act together and work out how to work with project developers to get projects connected in a timely fashion. No policy support is needed for this, just talent and hard work.
It’s unlikely to be AEMO’s problem alone but it is their overall responsibility to be seen as an efficient operator with a “can do” reputation.
One of the many problems with the connection process is that the nature of the problems is not disclosed. A bit of fresh air on what is holding up the commissioning of the Stockyard Hill and Moorabool wind farms might let others progress a bit faster.
Commodity prices remain high
As usual, the issue is trying to forecast the outlook, and as usual we resort to the familiar tools, supply and demand, fuel costs, and market structures.
In the past 30 days, spot prices are way up on last year. In fact, they are about four times higher in Queensland and NSW, and more than double in Victoria.
In our view the price rises reflect a cold and wet winter driving up demand and driving down solar production, along with much higher coal and gas prices, and the Callide C accident.
One surprise was the news that it will be 18 months before Callide C unit 4 is replaced, if the current timetable proves reliable. It’s raised more than a few eyebrows as to what the justification of replacing the unit is given that Queensland has a 50% renewable goal by 2030 which it is presently nowhere near achieving.
Other than CleanCo and its initiatives the Queensland Government has no explicit policy to achieve the goal.
Callide replacement requires agreement from the state government and its wholly owned CS Energy, and also Intergen, a partner in the station. Intergen is itself jointly owned by China Huaneng Group and Sev.En Energy, originally a Czech coal company and now owned by Pavel Tykac.
The high recent prices mean that spot prices for the calendar year to date are higher than last year in both Queensland and NSW.
It does surprise that Queensland, which basically has a large surplus of capacity over demand has been so vulnerable to the loss of one power station.
FY23 futures are up $20/MWh. This rise started long before the Callide explosion. I’d argue it’s at least partly due to the lack of clear policy in Queensland.
As we have often remarked, Queensland tries to be all things to all people – to simultaneously go for coal and renewables. In the end a lack of explicit policy and direction to the state-owned generators will work no better in Queensland than it does federally.
Depending on how you count, there is around 60 TWh of demand in QLD, so that $20/MWh price rise is $120 million of extra bills paid by QLD consumers big and small.
Spot gas prices have gone through the roof along with many other commodities. Basically if your commodity isn’t up 100% you’ve underperformed.
This reflects international demand for gas as much as developments in Australia. Specifically, the European carbon price is also very high driving coal to gas switching, the same way it would in Australia if we had a carbon price.
Gas demand for power generation in Australia is up a little bit in the past 30 days, in NSW and Victoria, it’s actually down in Qld, but not enough, in our view to cause anything like that gas price change.
Wind and solar production has really sagged, as it usually does in winter.
Regular readers may recall that we here at ITK have been suggesting for over 12 months that the annual Australia price peak was going to move away from the March quarter towards July. And although we really expect that not to become obvious for a few years, we are already seeing signs of what a reduction in VRE supply means for prices.
The flip side is that in about 4-5 weeks VRE production will start zooming up and heating electricity demand will start falling away.
Referring back to Figure 4, it’s interesting to see its actually Victorian coal fuelled generation that is less than last year. It turns out this is due to Yallourn which is down about 300MW on last year over June and July to date. Yallourn is also ramping about 10% trough to peak this year, will be interesting to see if it can do more.
Meanwhile, the Mexican standoff between AEMO and the mostly Goldwind developed wind farms in Victoria – Moorabool and Stockyard Hill – continues and is contributing to high prices.
Victorian and for that matter all consumers across the NEM are paying higher prices because the combined 860MW of capacity of these two completed wind farms is still only producing at a combined maximum rate of 70MW, effectively close to a year after completion of construction.
That’s $2 billion of capital sitting idle. The lack of production also finds its way into REC (renewable energy certification) prices which have, if anything, increased over the past 12 months.
The NEM is pregnant with another 6.7 GW of projects
According to ITK’s very own project data base that we have just finished updating there is still about 7GW of power to commission over the next 2-3 years before any NSW Roadmap supply is accounted for.
It’s true there are a couple of projects such as Tilt’s Rye Park that have not yet reached final investment decision, but we are reasonably confident they will go ahead. Of course, when they will commission in this current “cant do” environment is anyone’s guess.
Perhaps by the time some of these are ready, AEMO will have worked out a way to do more than one project at once. It’s a bit like asking for a faster vaccine rollout, I guess. Participation certificates only.
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.