STATE OF THE ELECTRICITY MARKET – SPRING/SUMMER MARKET OVERVIEW

Electricity spot prices in Q419 (October to December) were softer than the prior two Q4’s in Calendar Year 2017 and 2018. Q419 prices continued to be relatively mild following on from Q319’s performance. We did start to see a little more volatility creep into the spot prices towards the end of the year mainly due the bushfire disaster around the NEM and also with heatwave conditions starting to form.

Figure 1: Historical prices for Spring/Summer

(Source: AEMO)

Throughout October and November 2019, we saw milder temperatures and above average wind generation in both VIC and SA with the Bureau of Meteorology (BoM) indicating that a longer than expected Negative SAM (Southern Annular Mode) event was resulting in cooler than expected temperatures and stronger and more frequent westerly winds which was only helping drive solid wind generation levels in the southern NEM regions. As a result, both VIC and SA experienced multiple negatively priced half hours during the daylight hours, with interconnector constraints really dragging down SA’s spot price causing an oversupply in the region; however, cooler temperatures in VIC drove peakier morning and evening peak prices, keeping its spot price for October at least relatively elevated.

SA did however receive a taste of Summer peak pricing and demand, with extreme temperatures leading to a max of 44.8 degrees in Adelaide 19/12. Overnight temperatures on the 19/12 were above 33 degrees in Adelaide at 7pm encouraging the use of air-conditioning and leading to a ramp spike in demand which encouraged a full hour of VoLL (value of loss load) pricing at $14,700/MWh.

Assisting VIC’s peak pricing was the continued downtime of AGL’s Loy Yang A2 unit and Origin’s Mortlake Unit 2 with Mortlake making a return in December 2019, and Loy Yang A2 back for Christmas, offline again shortly after, then offline again for the remainder of the 2019 calendar year. Assisting VIC’s spot price for the quarter was a surge in price in Tasmania for October 2019. With Basslink offline the entire month of September 2019, it would seem both the Basslink operator and Hydro Tas had to play catch-up, keeping the spot price elevated for majority of the October 2019 month, allowing Tas to come away with the highest spot price for October 2019 of all NEM regions.

QLD experienced relatively mild demand and temperatures for the Spring months, and with an already oversupplied market, the introduction of Clean Co and their remit from the QLD government to run down spot prices, and Shell’s take-over of ERM, challenging the market dynamics, resulted in softer than expected spot prices for October and November 2019.

NSW had an interesting run over Q419, sharing in the spoils of the elevated spot prices in VIC and Tas in October 2019 with multiple baseload generators out of action for maintenance, to then dealing with the bushfire crisis in late November through December 2019, resulting in demand losses and cutting generation off from the NEM. Snowy Hydro’s Upper Tumut Pumped Hydro and Tumut 3 Hydro units dispatched frequently throughout the quarter, particularly in December 2019 also choosing to spill at relatively weak spot prices around the $70/MWh mark. I do wonder if we will continue to see Snowy spill at such weak spot prices with water levels at lake Eucumbene starting to plateau at ~30% after a steady incline throughout the last Quarter.

Obviously, impacting all regions in December 2019 was the holiday season shutdown of workplaces and schools, driving lower demand throughout the month.

Figure 2: Average monthly spot prices in the NEM

(Source: AEMO)

Friday the 22^nd of November saw The Council of Australian Government’s Energy Council meet in Perth to discuss the current and future state of Australia’s Energy network. The key focus for COAG’s energy council was energy security and reliability focussing on Summer 2020 in the near-term and potential changes required for future state surrounding those two variables and of course how to make energy more affordable. Additionally to this, the COAG Energy Council also threw its support behind a National Hydrogen Strategy as laid out by Australia’s chief scientist, Dr. Alan Finkel. AEMO presented to the council outlining how they have prepared for Summer 2020, however COAG’s Energy Council has put forward a call for the Energy Security Board to reassess and to re-jig the current reliability standard (a measure used to ensure enough spare capacity is in the grid to cope with extreme demand days).

Fed Energy Minister Angus Taylor was seeking tougher reliability standards with the rapid influx of renewable generation that now makes up a significant chunk of Australian energy supply, whilst Victorian Energy Minister Lily D’Ambrosio wants tougher standards to deal with the ailing coal-fired generators in her region; either way both were seeking the same result.

There is however the push for higher reliability standards will lead to further ‘gold-plating’ of the network and inevitably higher energy prices for consumers. Probably one of the more surprising outcomes of the COAG Energy Council meeting was the vast support for a National Hydrogen Strategy as put forward by Dr. Alan Finkel and supported by Angus Taylor on the 22^nd of November. $370 million dollars will be committed by the Clean Energy Finance Corp (CEFC) and the Australian Renewable Energy Agency (ARENA) to kick start and bankroll “electrolyser” projects, which can convert electricity to hydrogen and allow energy to be stored and transported. Mr Taylor’s support for a national hydrogen industry was met with some backlash however with the Energy Minister stating investment in the technology should be fuel neutral, ie. produced via any means including utilising coal-fired generation to produce the fuel rather than purely utilising renewable sources. The call however was also backed by the need for the hydrogen to have a certificate of origination attached to the sale of the commodity.

In December 2019, it was reported that the Australian Energy Market Operator (AEMO) has procured record volumes of energy reserves for what the Bureau of Meteorology (BoM) is forecasting to be another record Summer in terms of temperatures on the East Coast of Australia. The BoM is forecasting a hot and dry Summer 2020 leading to concerns, particularly for VIC and SA that the two regions could see a repeat of the conditions that inspired both regions in the Summer of 2019 to reach the market price cap after several hours at VoLL (Value of Lost Load) ~ $14,500/MWh ceiling on 24^th and 25^th of January 2019. The concern that we could see a repeat of these conditions has resulted in AEMO securing 1,600 MW of emergency reserves to assist in keeping the grid energised through summer 2020. The large volume of reserves has not come cheap with an estimated cost of $44 million of which is obviously not guaranteed to be required at all. AEMO has stated that almost 1,000 MW of the reserves secured is available in VIC and SA which have been identified as the “trouble zones” come Summer, with the remaining 600 MW located in NSW/QLD for those extreme conditions days.

The above spot price outcomes resulted in a significant decline in furtures pricing with all curves around the NEM regions and across multiple CAL and Quarterly products all falling away with weaker than anticipated expectations for Summer 2019/2020.

Looking Forward:

Figure 3: Calendar year 2020 forward contracts

$/MWh

NSW

QLD

VIC

TAS

24-Jan-19

$ 70.32

$ 56.36

$ 66.35

$ 71.79

$ 84.96

(as at 31/12/2019)

(Source: ASX)

If you would like to discuss the electricity market outlook and potential impact to your electricity portfolio, please contact our Manager Wholesale Clients and Markets, Alex Driscoll on 07 3905 9220.

World Economic Forum – EU’s proposed carbon border Tax

The World Economic Forum was held late last week in Davos (Switzerland) with foreign leaders all around the globe coming together to talk about the global economy and hopefully generate some fruitful action.

Probably one of the more market shifting proposed schemes put forward at the World Economic Forum was that of European Commission President, Ursula von der Leyen. Von der Leyen’s proposal is a daunting one from Australia’s point of view, as it could have a significant impact on the country’s vast economic dependence on exportation of minerals and goods.

The proposed scheme, labelled the ‘carbon border adjustment mechanism,’ would be a tax applied to carbon-intensive good from those countries that are not pulling their weight as to lowering emissions under the Paris climate accord.

The economy likely to feel the brunt of this proposed tax-scheme would be China, with the scheme’s proposed first target industries being steel, cement and aluminum. Von der Leyen did however message the scheme could expand into the mining and resources sectors.

Although Australia’s most prominent trade partner in the resources sector is China, Europe was a big receiver of coal exports from Australia in 2019 and could very well be in the firing line with constant debate between Australian politicians and other world leaders as to whether Australia is indeed pulling their weight per the Paris agreement.

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.

Water – a top priority for Tarong Power Station

Current weather conditions are placing an increased reliance on the diminishing water catchments across Australia. These water catchments store water for use by various parts of the local community including drinking water for residents, irrigation and Electricity generation.

Stanwell recently announced water sustainability is a top priority for its Tarong Power stations located within the South Burnett region.

Water is an essential necessity for thermal power stations to make electricity. The water is used for steam production and cooling.

Tarong power station consisting of 4 X 350MW thermal units and a 443MW supercritical unit. These units obtain their water from two sources, the primary source is Lake Boondooma and secondary from a pipeline using water from Lake Wivenhoe or recycled water produced under the Western Corridor Recycled Water Scheme.

Stanwell corporation is focusing on mitigating the impact on the South Burnett community by reducing the usage of water from Lake Boondooma to ensure the South Burnett community have access to drinking water. Initial initiatives used at the power station to reduce the reliance on Lake Boondooma water include the use of recycled water from the ash dam and stormwater.

Tarong Power Station have access to water from Lake Wivenhoe if Lake Boondooma drops below 34%, currently the Lake Boondooma’s level is 22.95% as of the (Source: SEQWater 2020). Lake Wivenhoe water also comes at an added cost. Water is currently the highest operating cost for Tarong Power Station.

An alternative to using Lake Wivenhoe water is the use of purified recycled water from the Western Corridor Recycled Water Scheme. The scheme is not currently in operation, however when operating and supplying water to Tarong Power Station it will add significantly to the costs of generation.

Tarong Power Station first used purified recycled water from the Western Corridor Recycled Water Scheme in June 2008 following a similar water supply limitation brought on by the 2008 drought.

As a result, the increasing marginal cost to generation caused by the higher water cost, Tarong Power Station may change its operation and reduce generation or dispatch its units at higher prices. Under either scenario this may increase the cost of wholesale energy in Queensland.

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.

Retailer Reliability Obligation triggered in South Australia

The SA Government (South Australian Minister for Energy and Mining) has the power (under South Australian Legislation) to trigger a Retailer Reliability Obligation (RRO) upon informant from AEMO of a one-in-two year peak demand forecast shortfall event as published in the South Australian Gazette 17 December 2019, with the AER confirming and publishing the notice 9 January 2020. For the avoidance of doubt this means that unlike all other regions which require the Electricity Statement of Opportunity (ESOO) to predict an unserved energy event, SA can act independently without approval as such from the AER.

The RRO was trigged for South Australia on the 9 January 2020 for the following periods:

First Quarter (Q1) for Calendar Year 2022
First Quarter (Q1) for Calendar Year 2023.

The periods of concern according to AEMO’s forecasting includes:

each weekday from 10 January 2022 – 18 March 2022 for the trading periods between 3pm and 9pm EST;
- **(Peak demand expected to be 3,030 MW)
each weekday from 9 January 2023 – 17 March 2023 for the trading periods between 3pm and 9pm EST
- **(Peak demand expected to be 3,046 MW)

A T-3 Instrument has been created and the Market Liquidity Obligation (MLO) of the SA region’s largest generation businesses, Origin, AGL and Engie have been called upon and are to begin trading exchange-listed (ASX approved products) for Q12022 and Q12023 from 7 February 2020.

With the triggering of the RRO, the South Australian Minister has made a T-3 instrument (under NEL Part 7A 19B (1)):

Q1 2022: This T-3 Reliability Instrument applies to the South Australian region of the National Electricity Market for the trading intervals between 3pm and 9pm Eastern Standard Time each weekday during the period 10 January 2022 to 18 March 2022 inclusive. The Australian Energy Market Operator’s one-in-two year peak demand forecast for this period is 3,030 Megawatts.
Q1 2023: This T-3 Reliability Instrument applies to the South Australian region of the National Electricity Market for the trading intervals between 3pm and 9pm Eastern Standard Time each weekday during the period 9 January 2023 to 17 March 2023 inclusive. The Australian Energy Market Operator’s one-in-two year peak demand forecast for this period is 3,046 Megawatts.

With the T-3 instrument created by the SA Energy Minister, this has triggered the MLO, effectively a market making obligation on the parties identified above to reasonably offer liquid exchange-listed products for the identified shortfall periods.

Obligated MLO participants such as Origin, AGL and Engie will from 7 February 2020 begin offering exchanged-listed products for both Q12022 and Q12023.

The triggering of the RRO means retailers and large load consumers can start procuring volume for their forecast demand for Q12022 from as early as 7 February 2020, and no later than 31 December 2020, the T-1 instrument implementation date (13 months prior to the shortfall period identified).

If you would like to know more, please contact Edge on 07 3905 9220.

Semi-scheduled and Intermittent Non-scheduled Generators urged to advise of De-ratings

A new market notice within the National Electricity Market (NEM) posted by the Australian Energy Market Operator (AEMO), one we have not see before was issued to all market participants on the 23/12/19. The market notice requested and served as a reminder for all semi-scheduled and intermittent non-scheduled generators to ensure they update their market availability bids, update their SCADA Local Limit or, if unavailable, advise AEMO control room to implement a quick constraint to the reduced available capacity level; and update intermittent generation availability in the EMMS Portal to reflect reduced plant availability as is required under the National Electricity Rules (NER), per NER 3.7B(b).limits.

This was an interesting constraint for AEMO to issue as it was due to extreme heatwave conditions across the south east coast of Australia, and as with most generating plant, under extreme heat, some form of derating on its physical capacity and output can occur. On the 23/12/19 AEMO’s weather service provider was forecasting extreme high ambient temperatures across all NEM regions, hence AEMO’s market notice to these participants to remind semi-scheduled and intermittent non-scheduled generators to advise AEMO of any reduction in available capacity caused by temperature derating.

Particularly interesting is that the often “set and forget” approach to renewable generators such as solar and wind generators, as classified by AEMO as semi-scheduled generation is being watched with greater scrutiny, particularly after the events of 2016 in SA where a state wide blackout was triggered by a severe weather, damaging more than 20 towers, downing major transmission lines, and with multiple wind farms currently shouldering some of the blame for the state going black due to the wind farms switching off when the transmission lines went down.

Semi-scheduled: A generating system with intermittent output (like a wind or solar farm), and an aggregate nameplate capacity of 30 MW or more is normally classified as a semi-scheduled generator unless AEMO approves its classification as a scheduled generating unit or a non-scheduled generating unit. AEMO can limit a semi-scheduled generator’s output in response to network constraints, but at other times the generator can supply up to its maximum registered capacity (AEMO 2014).

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.