Winter energy price shock: regulators and policymakers to blame

[ad_1]

Wholesale electricity prices have gone up for a variety of reasons, and it will cost consumers money, possibly an additional $ 200 million in Queensland alone.

While not much can be done about rising commodity prices or cold, wet winters, Australia’s inefficient transition to clean energy can be directly addressed by policymakers, decision-makers and the system operator.

The policy of the federal government is, of course, a national and increasingly international disgrace. Queensland, however, isn’t much better. He is committed to 50% renewable energy by 2030, but no policies to achieve it, and he is desperately in conflict.

Likewise, the rules of the Australian Energy Market Commission mostly belong to the previous century. The policy framework for energy security boards is about as unimaginative as it gets. Yet even changing these things won’t have much of a short-term impact on prices.

The one thing that perhaps seems the most easily controllable for improving the efficiency of the energy transition is for AEMO to step up and determine how to work with project developers to connect projects in a timely manner. No political support is needed for this, just talent and hard work.

This is unlikely to be AEMO’s only problem, but it is their overall responsibility to be seen as an efficient operator with a reputation for capacity.

One of the many issues with the login process is that the nature of the issues is not disclosed. A little fresh air on what is delaying the commissioning of the Stockyard Hill and Moorabool wind farms could allow others to progress a little faster.

Commodity prices remain high

As usual, the problem tries to forecast the outlook, and as usual, we resort to familiar tools, supply and demand, fuel costs and market structures.

Over the past 30 days, spot prices are on the rise compared to last year. In fact, they are about four times higher in Queensland and New South Wales, and more than double in Victoria.

Figure 1. Source: NEM review.

In our view, the price increases reflect a cold, wet winter that increases demand and lowers solar production, as well as much higher prices for coal and gas, and the Callide C accident.

A surprise was the news that it will take 18 months before the replacement of Unit 4 of Callide C, if the current schedule proves to be reliable. This has raised more than a few eyebrows as to the rationale for replacing the unit given that Queensland has a 50% renewable target by 2030, which it is currently far from reaching.

Other than CleanCo and its initiatives, the Queensland government does not have an explicit policy to achieve the goal.

The replacement of Callide requires the agreement of the state government and its wholly owned company CS Energy, as well as Intergen, a partner of 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.

Recent high prices mean spot prices for the calendar year to date are higher than last year in Queensland and New South Wales.

It’s surprising that Queensland, which essentially has a large excess of capacity over demand, has been so vulnerable to the loss of a power plant.

FY23 futures are up $ 20 / MWh. This rise began long before the explosion of Callide. I would say this is at least in part due to the lack of clear politics in Queensland.

As we have often noticed, Queensland tries to be everything for everyone – to go for coal and renewables simultaneously. Ultimately, a lack of explicit policy and direction towards state-owned generators will not work better in Queensland than at the federal level.

Figure 3. Source: NEM review

Depending on how you count, there is around 60 TWh of demand in QLD, so the $ 20 / MWh price hike represents $ 120 million in additional bills paid by QLD consumers large and small.

Spot gas prices have skyrocketed, along with many other commodities. Basically, if your product isn’t 100%, you’ve underperformed.

Figure 4. Source: AEMO, average of STTM prices from 3 states

This reflects both international demand for gas and developments in Australia. Specifically, the price of carbon in Europe is also very high, resulting in a shift from coal to gas, the same way it would in Australia if we had a carbon price.

The demand for gas for power generation in Australia has increased slightly over the past 30 days, in New South Wales and Victoria it is actually down in Qld, but not enough, in our opinion, to cause something like this change in gas prices.

Figure 5. Source: NEM review

Wind and solar production has really gone down, as is usually the case in winter.

Regular readers may recall that we at ITK have been suggesting for over 12 months that the annual peak in Australian prices was going to move away from the March quarter to July. And while we really expected this to not become evident for a few years, we are already seeing signs of what a reduction in the supply of VRE for the price means.

Figure 6. Source: NEM review

The flip side is that in about 4 to 5 weeks, ERV production will start to increase and the demand for electricity for heating will start to decrease.

Figure 7. Source: NEM review

Referring to Figure 4, it is interesting to see its actually Victorian coal production which is lower than last year. It turns out that this is due to Yallourn which is down by around 300 MW last year compared to June and July to date. Yallourn is also climbing around 10% to peak this year, it will be interesting to see if he can do more.

Meanwhile, the Mexican standoff between AEMO and the predominantly Goldwind-developed wind farms in Victoria – Moorabool and Stockyard Hill – continues and contributes to high prices.

Victorian and elsewhere all NEM consumers pay higher prices because the combined 860 MW capacity of these two completed wind farms is still only producing at a combined maximum rate of 70 MW, almost a year after the completion of construction.

It is $ 2 billion of capital that remains inactive. The lack of production is also reflected in the REC (Renewable Energy Certification) prices which have, where applicable, increased over the last 12 months.

The NEM is pregnant with an additional 6.7 GW of projects

According to ITK’s own database of projects that we just completed updating, there is still around 7 GW of power to be commissioned over the next 2-3 years before any roadmap supply. NSW is not taken into account.

It is true that there are a few projects such as Tilts Rye Park that have yet to reach the final investment decision, but we are reasonably confident that they will move forward. Of course, anyone can guess when they will go live in this current environment.

Figure 8. Source: ITK

Maybe when some of them are ready, AEMO will have found a way to do more than one project at a time. It’s kind of like asking for a faster rollout of vaccines, I guess. Participation certificates only.

David Leitch is a regular contributor to Renew Economy. He is a director at ITK, specializing in electricity, gas and decarbonization analysis, drawing on 33 years of experience in stock market research and analysis for UBS, JPMorgan and predecessor companies.

[ad_2]