STATE OF THE ELECTRICITY MARKET – Q118 MARKET OVERVIEW

By Thomas Dargue, Edge Manager of Markets & Advisory

In this summer edition of the market update we look at some of the issues which is causing price differences in wholesale prices across the east coast of Australia. Since the start of summer, the divide has mainly been across the Murray river with QLD and NSW to the north and VIC, SA and TAS sitting to the South.

The summer started in December with modest spot prices across all the regions. The region with the highest price was TAS at $90.96/MWh with the lowest price being QLD at $76.56/MWh. The interconnectedness of the market means that prices in NSW was similar to QLD while SA and VIC were closer to TAS. The prices in NSW started deviating from the southern market as the interconnector with VIC became increasingly constrained. Throughout January there were large price spikes in SA and VIC increasing the average price south of the Murray. The constrained interconnector meant that the prices never travel north and both QLD and NSW had modest prices.

Tasmania had similar prices throughout the three months however these seem to be too high for the State Liberal Government. There is an election in Tasmania 3 March 2018 and one of the policies put forward by the State Liberal Government would be a split from the NEM. TAS would still be physically connected through Basslink however would not be subject to the price setting mechanism set out for the NEM. The State Liberal Party is expecting this to result in lower wholesale prices for TAS.

Prices for summer to date has been higher in SA than any other state however there haven’t been any black outs. This is in part due to the operation of a new 100 MW battery installed by Tesla which provides energy during peak times as well as support for frequency. With an election in SA 17 March 2018 the incumbent State Labor party made its own electricity policy announcement. It would seek to further partner with Tesla to install 50,000 rooftop solar panels and batteries. When combined this would create a virtual 250 MW power station.

The Energy Security Board (ESB) realised its Draft Design Consultation Paper on the National Energy Guarantee (NEG). The NEG seek to find a balance between affordability, reliability and carbon reduction which could be politically acceptable. With the number of schemes already rejected by the Federal Government, the ESB has managed to come up with a scheme which could get bi-partisan support. At this stage there is quiet optimism however there are large concerns over the effect on contracting going forward. The ESB is looking for written submissions by 8 March 2018 and have the final design by the second half of 2018.

The forward prices generally reduced for 2019 as spot prices were less volatile than seen in previous years over summer. The exception was SA where there is still uncertainty around security of supply.

Table 1: ASX prices for Calendar Year 2019

	NSW	QLD	SA	VIC
1 DEC 2017	80.75	68.11	92.94	86.55
28 FEB 2018	76.38	64.03	94.36	82.90

The forward prices were lowest in QLD where we expect a large amount of new renewable generation to be built. Concerns over sufficient supply in other regions kept prices higher.

Despite higher forward prices and the highest average spot prices in the NEM, a hydrogen electrolyser will be built in Port Lincoln, South Australia. This will produce hydrogen using excess wind and solar (i.e. when prices are low) to produce hydrogen both to power a 10 MW gas turbine but also for export purposes. By using power intermittently, it is able to ramp up during low prices and not run during high spot prices which will also stabilise the grid and allow more wind generation to be dispatched in the region (wind in SA is currently being curtailed by AEMO to avoid frequency issues). It seems counterintuitive to put an energy intensive industry in SA however for very flexible consumption of electricity who are able to take advantage of low, or even negative, spot prices there is opportunity in the state.

If you would like to discuss the electricity market outlook and potential impact to your electricity portfolio, please contact Thomas on 07 3905 9226 or on 1800 EDGE ENERGY.

Gas Market Update

ACCC GAS INQUIRY – INTERIM REPORT

The ACCC released the second interim report into gas supply arrangements in December 2017. In the initial report (released September 2017) it was reported that there would be shortages in gas supply available to east coast consumers in 2018. The report found that buyers of gas were receiving offers from a reduced number of suppliers and that prices offered were above the ACCC’s benchmark prices. It was also noted in the report the lack of participation from the QLD LNG producers in the domestic market. This reported lack of participation from the LNG producers prompted the Federal Government to act. The result was the creation of a Heads of Agreement with the LNG producers which would see additional gas allocated to the domestic market. According to the second Interim Report (released in December 2017), since September 2017 the QLD LNG producers contracted 42 PJ’s of gas under long-term supply agreements to domestic buyers for supply in 2018. The majority of this gas was sold to aggregators and retailers. The ACCC’s forecast for the balance of gas was also updated in the second interim Report and resulted in an improved balance of 75 PJ’s. The change in balance has been driven by a 12 PJ increase in supply and the lower demand from the LNG producers (63 PJ). Whilst on face value the market has gone from deficit to surplus, the balance remains tight and subject to gas producers meeting forecasts.

Table 1. Gas Balance

	September Expected Domestic Demand Scenario (PJ)	December Expected Domestic Demand Scenario (PJ)
Supply	1,901	1,913
Domestic demand	642	642
LNG demand	1,314	1,251
Projected Balance	-55	20

Source: ACC Gas Inquiry Report – Second Interim

According to the report, there continues to be a shortage of production in the southern states to meet demand (SA, NSW, ACT, VIC and TAS). As a result, these states will continue to rely on gas transported from QLD. Additional costs to transport gas from QLD to VIC and SA are currently between $2/GJ and $4/GJ. Transporting gas south from QLD is not only expensive but due to limited firm capacity in key pipelines is not always feasible. Firm capacity in these key pipelines is predominately booked by the major retailers. It was examined by the ACCC if the major retailers were making spare capacity available to other users on major pipelines through secondary trading. It was found that on the major pipelines this was not the case however, there was some evidence to suggest this may have been occurring on the less critical pipelines. Since the ACCC investigation it has been observed that the retailers have increased the availability of spare capacity to other pipelines participants improving competition.

FIRM CAPACITY – The amount of transmission guaranteed to be available to the shipper – up to MDQ & MHQ every day

AS AVAILABLE CAPACITY – This capacity is typically spare contracted capacity that is offered on the secondary market. As can be disrupted or delayed, it is not necessarily guaranteed.

The ACCC expects that transportation costs will start to come down as regulatory reforms begin to take effect.

Domestic prices to large C&I customers were around $16/GJ in early 2017 and even higher for smaller business customers. Since July 2017, it was reported that prices between $8/GJ and $12/GJ were achieved by large C&I customers.

GAS PRICES

Across each of the east coast trading hubs January average prices were higher than the Q417 average.

Table 2. Hub Prices

	Adelaide price ($/GJ)	Brisbane price ($/GJ)	Sydney price ($/GJ)	Melbourne price ($/GJ)
Q417	$7.14	$7.68	$7.12	$6.20
JAN18	$ 8.10	$8.16	$9.71	$8.64
FEB18	$9.29	$7.33	$9.71	$8.67

Source: AEMO

Recent news

Four projects have received funding from the South Australian Plan for Accelerating Exploration (PACE) gas program’s second round. The program was designed as part of a suite of measures to increase investment in local gas production and to ease price pressure in South Australia. The four projects to receive funding were:

$6.89 million for the Santos-Beach Cooper Basin project to deploy a heat-energy recovery system to offset natural gas used to run the Moomba petroleum processing plant
$5.26 million for the Senex Cooper Basin Gemba exploration/appraisal project
$6.89 million for Beach /Cooper Energy’s Dombey project in the Otway Basin
$4.95 million to the Rawson/Vintage Nangwarry project in the Otway Basin

Under the program, gas extracted through the PACE program must first be offered to local electricity generators, enhancing the affordability of supply. Whether the cheaper gas is passed onto end customers by the gas generators is more difficult to say.

Moving north to QLD, Senex’s 100% owned Western Surat Gas Project recently recorded a significant milestone, which was an all-in well cost of $1.2 million. The strong results have promoted Senex’s reputation in the market and has encouraged Project Atlas, which is another Surat Basin project expected to bring first gas in 2019, to be sold to the domestic market.

On 12 December Independent Scientific Inquiry into Hydraulic of Onshore Unconventional Reservoirs in the Northern Territory releases its draft final report. The overall conclusion of the report was:

“The overall conclusion of the Report is that risk is inherent in all development and that an onshore shale gas industry is no exception. However, if the recommendations made in this draft Report are adopted and implemented in full, those risks may be mitigated or reduced – and in many cases eliminated altogether – to acceptable levels having regard to the totality of the evidence.”

Since the release of the draft final report the panel has engaged with the Northern Territory community, Government, Industry, environmental groups, and other relevant stakeholders about the content of the report. This is the last opportunity for the Territorians to express their views on the inquiry.

The final round of regional consultations concluded mid-February and the final day for submissions due to the panel is 25 February 2018. At this stage the panel has committed to providing the Final Report to the government in March 2018.

If you would like to know more about what is happening in the gas market and how your business may be affected, please call Edge on 07 3905 9220 or contact your Edge Portfolio Manager.

Energy Security board consultation paper

The first public consultation paper for the National Energy Guarantee (NEG) has been released today by the Independent Energy Security Board (ESB).

Dr Schott, the ESB Chair person said “The consultation paper seeks feedback from stakeholders on the high level design of the of the mechanism’s reliability and emissions component”.

The release of this paper is the first step in a consultation process that will occur over coming months. The ESB has advised that a high level design of the NEG will be provided to the COAG Energy Council in early April, ahead of a COAG meeting later that month when the report will be considered.

Edge will provide more details in the coming days. If you are interested in how the NEG will specifically impact your business or would like assistance with a submissions please get in contact with us.

Source: http://www.coagenergycouncil.gov.au/publications/energy-security-board-national-energy-guarantee-consultation-paper

Tesla and SA Government plan to build a 250 MW “virtual power plant”

The South Australian Premier, Jay Wetherill has announced that a deal has been made with Tesla to install 50,000 rooftop solar PV systems and Tesla batteries on homes in South Australia. The total capacity of the solar PV is expected to be around 250 MW or the size of a small power station.

The first 1,000 systems are already under way, being built by Housing Trust which is the South Australian Government’s low-cost housing arm. If successful, a further 24,000 government households will have the system installed, before being opened to private participation.

The details of the deal between the South Australian Government and Tesla is not known. Specifically, any success criteria to the first 1,000 installations and any cancellation clauses have not been disclosed. Cancellation clauses are particularly relevant given South Australia is facing an election on 17 March 2018. Prime Minister, Malcolm Turnbull, has warned against further experiments in the state’s electricity grid indicating that the Liberal party was unlikely to be supportive of a battery trial.

It is conceivable that a combination of batteries and solar PV may help to stabilise the local grid. The announcement by Mr Wetherill indicated that they would be looking for a retailer to manage the batteries. With a high correlation between low system security and low energy prices, retailers may have interest to dispatch the batteries when the energy prices are high, thereby mitigating their costs. Given the solar and battery system installations will be relatively small, they will not form part of central dispatch. This means that they cannot be relied upon by the Australian Energy Market Operator (AEMO) for system security. Control could be given to the distribution provider, who would be responsible for the low-voltage network instead of the retailer.. The distribution provider may want to dispatch the batteries at times of low prices to suit the network. This would reduce the revenue gained which would effectively make the pay back period on the batteries longer.

There is no doubt that the large battery installed by Tesla in South Australia has been a great publicity stunt for both the government and Tesla, however it would be interesting to understand which companies were invited to bid for the work and the selection criteria. There are a large number of Australian companies waiting to launch battery products at a large scale. Edge has previously reported on Planet Ark Power looking to reduce prices at Llewellyn Motors. Closer to Jay Wetherill’s home is Zen Energy and there are many other Australian companies wanting a chance to bid for a contract of this nature.

If you would like to know more about renewable energy projects and how they could assist with reducing your energy costs, please contact Edge on (07) 3232 1115 or 1800 334 336.

ASX stops cap trading from July 2021

The Australian Energy Market Commission (AEMC) recently changed the rules governing electricity prices in the National Electricity Market (NEM). Instead of being paid on a 30 minute basis, the market will be paid on a 5 minute basis.

The main benefits of moving to 5 minute prices are greater participation of demand side management including batteries and less opportunities for gaming the market. For a full discussion see the AEMC website: http://www.aemc.gov.au/Rule-Changes/Five-Minute-Settlement

One of the main concerns over the change to 5 minute markets is that it will be difficult for traditional peaking plant to ramp up fast enough during high prices. Many of these peaking plants sell what is known as $300 caps which protects the buyer from prices above $300/MWh by paying the positive difference between the spot price and $300/MWh. As a price spike will only last for 5 minutes they are unable to capture the price in time and are no longer able to cover their position.

We saw a reaction from the Australian Stock Exchange (ASX) yesterday (22 January 2018) announcing that they would delist their caps starting 1 July 2021 when the new rule will take effect. It is uncertain what this will do to the business model of open cycle gas turbines and other peaking plants seen as necessary for our transition towards higher renewable penetration. For now, they are unable to sell caps through the exchange and will need to take a higher merchant risk or restructure a new product which works better with renewable energy.

This may act as a disincentive for investment in gas fired power stations though AGL is still looking to replace their Torrens A power station with a new gas fired power plant which will be more flexible to respond to change in demand according to AGL. It is hoped that sufficient demand response and batteries can come online in time to firm up the renewable generation. If that is not the case, energy prices will remain elevated for longer.

If you would like to know more about the AEMC and the impacts of this rule change, please contact Edge on (07) 3232 1115 or 1800 334 336.

Solar Reserve receives approval for SA concentrated solar thermal plant

The Port Augusta located, concentrated solar thermal plant has reached a significant, yet not surprising, milestone in achieving development approval for the plant. The Aurora plant will have 150 MW of capacity and 8 hours of storage.

The development approval suggests that the $110 million concessional loan from the Federal Government is all but secured. It is understood that the funding was allocated in the May 2017 Federal budget and to be administered through ARENA.

The plant is scheduled to deliver 100% of its output to the SA Government under a long term agreement beginning in 2020.

Further information can be found on our previous article https://edge2020.com.au/edge-news/150-mw-solar-thermal-plant-constructed-south-australia/

If you would like to know more about renewable energy projects and how they could assist with reducing your energy costs, please contact Edge on (07) 3232 1115 or 1800 334 336.

Snowy Hydro 2.0 found to be feasible despite costing twice as much

Today, Snowy Hydro released their feasibility study into the expansion of the pumped hydro-electric storage. The study outlined that the potential upgrade will increase capacity by up to 2,000 MW at full capacity and will provide approximately 350,000 MWh hours of energy storage.

It has been agreed by Snowy’s board of directors to progress the project from feasibility stage towards final investment decision. According to Snowy Hydro, the project will be internally funded and meets financial hurdle rates under different scenario’s. The cost of the project is estimated to be $3.8-$4.8 billion. This does not include the required transmission network upgrades required to deliver the power from the upgraded facility. This could be a key assumption of the report and could potentially undermine the potential value of the project.

Details of the modelling are obviously tightly kept, however something that would be of significant interest is how the upgrades will stand up during prolonged periods of drought.

Final investment decision is due in 2018.

If you would like to know more about the potential impacts this may have on the future price of electricity, or details regarding the project please speak with your Edge Portfolio Manager directly or contact Edge on (07) 3232 1115 or 1800 334 336.

AGL’s NSW Generation Plan

On Saturday AGL released their NSW Generation Plan. The Plan sets out AGL’s preferred option to extending the life of the Liddell Power Station.

The Liddell replacement plan is a combination of new renewable energy resources, demand response technologies and an upgrade to the Bayswater power station. According to AGL the weighted levelised cost of energy (LCOE) of the replacement plan is $23/MWh cheaper than the cost of extending the ageing and increasingly unreliable Liddell power station.

Within AGL’s Liddell replacement the following projects are categorised as approved:

453 MW Coopers Gap wind farm at $62/MWh LCOE
200 MW Silverton wind farm at $62.00/MWh
100 MW upgrade to Bayswater power station
Purchase of 300 MW’s of offtake from NSW solar projects
Synchronous condenser at Liddell
Up to 20 MW of demand response

The other components of the Liddell replacement plan will be in feasibility stages between 2019 and 2022. This includes the proposed 500 MW gas peaker power station.

AGL also confirmed that Liddell would not be sold as it is required by AGL and once retired the site will be repurposed to form part of its alternative generation post 2022.

If you would like to know more about AGL’s NSW Generation Plan, please speak with your Edge Portfolio Manager directly or contact Edge on (07) 3232 1115 or 1800 334 336.

Planet Ark Power launches Llewellyn rooftop power station

Llewellyn Motors in Ipswich QLD have partnered up with Planet Ark Power to design and install Australia’s largest privately owned Solar and Smart Battery rooftop power station.

Yesterday Edge Energy Services attended the opening of the rooftop power station at Llewelyn Motors. The power station is unique in using the new technology dSTATCOM developed by Planet Ark Power to heal and support the grid, which allows commercial solar sites to export to the grid intelligently and significantly increase return on investment.

Consisting of 1,232 REC solar panels (332kW), it is expected to reduce the dealership’s carbon footprint by 8400 tonnes and save over $2 million on energy over the next twenty years.

Edge Energy Services is proud to work together with Planet Ark on the commercialisation of these projects which aims to mitigate the rising cost of electricity for consumers.

If you would like to discuss how your business can save on electricity costs through the use of solar and other renewable energy projects, please contact us on (07) 3232 1115 or 1800 334 336.

AEMC release their final determination on five minute settlement

The Australian Energy Market Commission (AEMC) has released its final determination into the five minute settlement rule proposal. The AEMC decided to change the draft rule however most of the changes it made were fairly minimal. The substantial change, that generators would be paid on a five minute basis instead of 30 was adopted.

The most material change was that all demand would be settled on the five minutes instead of 30 minutes which was originally proposed. This means that all type 4 meters will have to be able to record five minute data. AEMC has allowed a transitional period for this change to take place.

The final rule will commence 1 July 2021 with transitional provisions starting 19 December 2017.