Interest in renewable generation projects has escalated on the back of elevated black and LGC prices and declining renewable offtake costs. The fulfilment of these projects presents an opportunity to change the energy supply landscape in  Australia. However, will government intervention and continued downward pressure on wholesale electricity prices derail the renewable movement?

Edge has worked with several renewable generation projects on development and funding applications, offtake arrangements, and firming products. Whilst ensuring that security of supply and integrity of the network is paramount, we view the progress of renewable projects as a positive step for the market and consumers.

As an advisor to large Commercial & Industrial (C&I) consumers, we give careful consideration to the integration of renewable generation projects when developing procurement strategies. The advantages for both seller (generator) and buyer (C&I offtaker) make transactions of this  nature mutually sought after and beneficial.

In recent years, we’ve seen the cost of black energy and Large Scale Environmental Certificates (LGCs) reach all-time highs and the cost of renewable generation become increasingly competitive.

Renewable generation projects and large C&I off-takers have never been more compatible.

Our client base is dominated by large and sophisticated energy users who value proactive risk management and understand the need for diversification strategies within their portfolio. A diverse strategy may include blending spot exposure with shorter term proactive and responsive dynamic hedging  strategies, and longer term aggressively priced off-take deals. These users don’t shy away from longer term propositions.
They understand the importance of diversifying to protect  against volatility and uncertainty.

A market where forward prices trade in a $5/MWh annual  range with $0.20/MWh intra-day spreads are a thing of the past. Over $40/ MWh annual ranges with $5 to $10/MWh intraday spreads are the new reality. These are alarming figures.

Spot prices are fundamentally higher, and we are seeing sporadic volatility that decimates quarterly averages. Market risk has escalated to levels that demand users take a more diversified and committed approach to setting prices that  significantly decrease their exposure to market volatility.

There is a frightening portion of aging baseload generation in the NEM.

The current intervention by various government and jurisdictional bodies has stalled the increase in energy prices, but provides no certain longterm solution. Short-term relief will only act to delay planned projects and push prices even higher. The cycle of high prices followed by temporary relief due to intervention continues.

We are helping clients beat the cycle by taking control of energy costs. We play a pivotal role in matching credible projects with suitable consumers, and give careful and considered support
to generation projects through longer term off-take agreements. We integrate these with complementary risk management products and an overall energy procurement strategy that mitigates risks and reduces costs. The benefits are two-fold.  Continued investment in renewable generation and  competitively priced electricity portfolios that save you money.

The Federal Government delivered their Energy For The Future package as part of their budget which would look at new gas development and greater gas interconnection across Australia.

It also had additional funding for the Australian Competition and Consumer Commission (ACCC) and Australian Energy Regulator (AER) to conduct reviews into the market. An independent review into the future security of the national electricity market was released late in the quarter. The Finkel Review made a number of recommendations for energy security and the Federal Government has proposed to adopt 49 out of 50 of these. This includes setting up a new Energy Security Board which will be responsible for whole-ofsystem oversight for energy security and reliability. The most controversial aspect of the review was the suggestion that a Clean Energy Target be adopted if an Emissions Intensity Scheme could not be agreed.

The Federal Government also announced they would restrict gas export if there was insufficient gas for domestic consumers. If a gas producer is sending more gas overseas than it is developing it must explain how it will fill any domestic shortfalls or they can be ordered to limit their export under
existing legislation. This quarter saw the SA Government progress their plan to avoid future black outs. Their first step was releasing a tender for 100 MW of battery storage.

A reverse auction for 400 MW of renewable energy was also included. In the near term, the plan will increase system security by returning Swanbank E (385 MW gasfired generation) to service and direct Stanwell Corporation to undertake strategies to place downward pressure on wholesale prices.

Full plan can be found here: https://www.dews.qld.gov.au/electricity/powering-queensland-plan

The market operator (AEMO) will also look to stabilise the grid for summer 2017-18. Both South Australia and Victoria are showing lack of reserves and there is no market solution apparent at this time. In response, AEMO has triggered its Reliability and Emergency Reserve Trader (RERT) functions. AEMO will seek to build a panel of service providers who can reduce their demand at times of peak demand (or provide equivalent generation).

This panel will be in place in case there are unforeseen shortfalls in the near term. For the current reserve shortfalls, AEMO is also seeking expression of interest from providers who can reduce load, benefiting the South Australian or Victorian region for summer 2017-18.

SPOT MARKET

Q2 2017 was the first quarter after the Hazelwood Power Station (1,600 MW brown coal in Victoria) shut down. This had a large impact on Victoria which had an average price of $104.92/MWh compared to $64.19/MWh for Q2 2016.

Spot prices were higher across all regions except for Tasmania. Tasmania was higher in 2016 primarily due to an average price in April of $236.85/MWh due to limited hydro output as Hydro Tasmania was rebuilding their storage levels. With the rain fall in May, Hydro Tasmania could continue to generate more power into the system, softening spot prices.

FORWARD CURVE

The forward curve for 2018 contracts increased with the higher spot prices. There was an additional increase when Hazelwood Power Station closed. The forward curve started reducing towards the end of the quarter due to lower spot prices. There was an additional drop when the QLD Government announced its new energy plan. It’s expected that lower QLD wholesale prices will flow through to other states.

Temperatures have driven higher demand across the market, however there is still sufficient generation to meet this demand. When base load generation has been lower in Victoria, Snowy Hydro provided sufficient generation to avoid the state running out of power.

The start of a new financial year presents an opportunity to evaluate and plan your next 12 months. Energy costs represent a significant portion of operational expenditure and a forecast should be carefully considered in your plans. Energy costs can be challenging to understand for several reasons;

• Geographically dispersed operations
• Invoices may not be stored centrally
• Minimal visibility of usage and costs
• Poor understanding and insight into historic and projected operational performance

Things to consider when developing your forecast:

Identify the data you need for reporting

Consider the level of detail you require when developing your energy forecast. You may need it broken down in a number of ways;

Monthly forecasts

• Department/Division
• Energy cost components
• Fixed or variable costs

Accurate energy budgets and forecasts rely on you transforming your historical energy data into
usable future estimates.

Gather your information

Historical consumption data provides a platform for future estimates. Complex organisations will require greater insight and understanding of forecast consumption. Confirm any operational changes that may impact consumption and include this in your calculation.

Energy and environmental rates are especially important when forecasting in a period where your organisation is uncontracted. Incorporate marked to market pricing to avoid any surprises and prepare for any potential price shocks. This is imperative during times of volatility.

Network Charges can account for up to 50 per cent of an energy invoice. These costs are  regulated and need to be included in your overall forecast.

Monitor progress

Once your forecast is in place, it’s important to monitor progress of actuals against forecast. Identify any significant variations and investigate.

Edge provides the flexibility to develop bespoke reporting to suit your requirements. Our reporting pack includes detailed forecasts of all energy cost components.

The competitive round for large-scale solar photovoltaics held by ARENA saw enough successful projects to triple existing production of large-scale solar in Australia. Edge is proud to have assisted with several of these projects to bring them to financial close.

The large-scale solar technology is also a developing technology. To stay on top of the market and to discuss future challenges, we attended the recent Large Scale Solar Conference hosted by Informa in Sydney. The conference was well attended with representation from State Governments, ARENA, Clean Energy Finance Corporation, as well as new and existing developers and research institutions.

Large-scale solar has come a long way from being a collection of fixed plates at the fringe of the market (both literally and figuratively). It is now becoming a highly integrated and bankable technology. The cost of large-scale solar is now equivalent to wind in many regions and continued innovation is bringing the cost down even further.

There is further development in the integration of large-scale solar including mix use with wind and batteries, and installation with pump storage hydros to provide baseload technology. There is also an opportunity in further innovation for investment in renewable generation.

With financing costs being the most significant project consideration involved with large-scale solar, getting the right financing structure is critical. The most important lesson learned was early and genuine engagement will get a better result. This means engagement with community, Large Scale Solar Conference – Sydney land holders, transmission service providers, and consumers. Without genuine engagement, a project will rarely be successful.

Large-scale solar is now cost competitive with other technologies and with more innovation and improvements to come, it is one of the technologies of the future.

The conference was packed with useful presentations and perspectives. If you want to hear more about large-scale renewable energy, please contact us on 07 3232 1115.

Recent events show the National Electricity Market (NEM) is changing and becoming more volatile. Electricity prices have risen significantly and the market presents risks for consumers when it comes to managing their electricity supply and spend. At Edge, we develop tailored procurement strategies to achieve lower costs and mitigate risks for our customers. These strategies may include one or more of the following options.

Fixed Price, Fixed Term

The traditional way of purchasing electricity is to agree rates for peak/offpeak usage with a retailer for a defined term. The term would typically be for a year or two, but could be as short as a quarter or as long as five years.

This contract type is easy to manage and provides a known energy rate for the duration of the contract. All price uncertainty is worn by the retailer.

Pool price exposure

This pricing arrangement involves taking on exposure to the variable electricity spot price (pool price) which varies for each 30-minute period. Pool exposure may involve part or whole load exposure to spot prices. Generally, spot price exposure is recommended for loads that can respond to pricing changes. (Curtail usage during high prices and operate during low prices).

Spot price exposure comes with a considerable increase in risk, and variability in cash flows. For consumers who cannot hedge spot prices physically, we would only recommend incorporating spot exposure if done so in conjunction with a component of fixed pricing.

Hedging

All customer connection points settle in the market against the pool price. This pool price exposure can be hedged using relatively standard electricity derivative contracts.

Any mismatch between hedged quantities and actual load shape will result in pool exposure either through over-hedging (contracts greater than load in which case exposure is too low to pool prices) or under hedging (contracts less than load in which case exposure is too high to pool prices).

Progressive purchasing

Progressively agreeing fixed prices (as opposed to one price) is a method of diversifying timing (market) risk. This type of purchasing involves locking in a price for part of the electricity load in advance in incremental stages. It provides the benefit of improved price risk management and the flexibility to lock in prices quickly. Generally, the minimum energy block that retailers will allow progressive purchasing is 1MW though some retailers have started to offer this product in lower increments. Progressive pricing is most commonly conducted on a quarterly or calendar year basis.

What approach works for you?

There are many combinations of the above options that are possible, all of which will have differing risk profiles and price premiums. We can implement a strategy that includes one or more of these options that has been tailored to your energy portfolio by conducting a thorough analysis of your demand, usage and business drivers.

Let us show you how we can bring your electricity costs down.

STAFF PROFILE

Kristy McGrath

What is the best piece of advice you have ever received?

Find success in your failures.

Name a place you have never been to and would like to visit. Why?

The Bungle Bungles in Western Australia. The mystery and myths behind this place would make it an exciting place to visit.

Who or What inspires you?

My parents. They both worked hard to give us everything we needed to be happy and healthy. Their physical and mental determination provided excellent childhood memories and solid foundations for me to build on.

What is one of the biggest challenges facing energy customers today?

The energy industry is changing and announcements in the market can have a significant impact on the cost of electricity. Keeping up with the industry can be time consuming and requires expertise and constant monitoring. Often, the people responsible for managing business energy costs are time-poor and manage multiple utilities. We help these customers by making sense of the market and providing tailored advice for their portfolio.

What does a typical day look like for you at Edge?

I review client deliverables and work with the team to ensure they’re delivered on time. This could mean reviewing client reports, agreements or papers. I also manage the operations of the business. This includes negotiating contractual agreements through to auditing internal risk controls under our Quality Management System.

STATE OF THE MARKET
Q117 MARKET OVERVIEW

With warm weather and increased demand, the first quarter of a calendar year is generally high-priced compared to the rest of the year. Higher demand means more expensive generation is dispatched, contributing to a higher spot price.

Traders were not prepared for a high-priced quarter. With the exception of South Australia, all other states underestimated spot prices. This means all forward contracts for these states (excluding SA) for the first quarter were higher than the eventual spot prices.

Demand played a key part in the spot prices for most of the National Electricity Market (NEM). Gas compression in LNG fields and a warm summer has contributed to increasing demand in Queensland. The other states in the NEM also experienced elevated demand. Victoria was somewhat protected; not recording a single temperature above 40 degrees for Melbourne. Demand was already lower in Victoria due to an outage at the Portland smelter. Power was cut to parts of its plant in December 2016 causing the aluminium in more than 200 smelting pots to cool and solidify cutting production to one-third of capacity. The smelter still hasn’t recovered and the future capacity is currently uncertain.

In South Australia and New South Wales, the heatwave caused involuntary load shedding as the system struggled to cope with peak demand. In Queensland, there was record demand during the quarter. What was unusual about the high demand was that it was set on a Sunday. Demand for electricity is usually lower on weekends as many businesses do not operate.

After the issues with Basslink last year which was returned to service in June, Tasmania had a quiet quarter with spot prices averaging $98.22/MWh compared to $177.17/MWh for the first quarter of 2016.

There were several announcements during the quarter. With both system security issues and higher prices, electricity was a major focus for politicians.

The Federal Government announced a feasibility study into adding 2,000 MW of pump storage hydro at Snowy Hydro. This would assist with capacity constraints and assist with integrating additional renewable generation. The feasibility study is due by the end of 2017 however it is likely that it will take at least four years to build.

The South Australian State Government announced a plan for South Australia to avoid future black outs. The plan includes a 100 MW battery farm, 250 MW of stand by gas plant and greater usage of South Australian generation through a new state based scheme. The Australian Energy Market Operator’s (AEMO) new CEO Audrey Zibelman presented the final report on the power system event which led to South Australia losing power. The report contains 19 recommendations to strengthen the system. Many of the recommendations were specifically targeted at the system event which happened in South Australia but most are applicable across the entire market.

Key points in AEMO’s gas statement include;

• Declining gas production may result in insufficient gas to meet projected demand for supply of electricity from summer 2018–19.
• Maintaining system security is becoming more challenging and the risk of supply shortfalls in both gas and electricity markets is increasing.
• Market responses could alleviate the risk of forecast gas or electricity shortfalls. E.g. Increases in gas production from existing fields, additional supplies via the Northern Gas Pipeline, exploration and development, and alternatives to GPG.
• Continued upward pressure on gas and electricity prices may threaten the financial viability of some commercial and industrial customers.

RESPONSE TO GAS SUPPLY ISSUES

There was a concern that a shortfall in supply could cause issues with supplying industrial consumers or the supply of gas for electricity generation to meet peak demand. The Prime Minister recently sought assurances from gas producers that the shortfall would not transpire. Gas producers agreed to make more gas available to the domestic market “as soon as possible”.

Victoria and the Northern Territory currently have moratoriums on both on-shore conventional and unconventional gas exploration. In addition, New South Wales’ buy-back of a significant number of the State’s Petroleum Exploration Licences has put a stop to any possibility of new gas developments in the State. Bucking the trend, Queensland continues to support on-shore gas exploration for both supply to the liquefied natural gas (LNG) export industry and the east coast market.

News has also emerged that Origin Energy and Engie have struck a gas supply deal in South Australia. Origin will supply gas to Engie’s Pelican Point Power Station for three years providing 240MW of electricity in South Australia.

CUSTOMER’S FEELING THE PAIN

Customers coming off retail gas supply agreements are certainly feeling the pain of a market experiencing tight supply. AGL confirmed in early March that AGL is out of contracted gas and may be required to supply customers from the spot market. AGL has been quoting $20/GJ for gas for customers in NSW in 2017 and beyond, with some customer’s experiencing a trebling of their previous contract gas prices.

In the east-coast gas market, gas retailers are limited and in some instances, appear to be pricing uncompetitively. Customers who are yet to secure gas contracts in 2017/2018 should explore all options open to them

November’s announcement by Engie regarding the closure of Hazelwood power station has seen an increase in east coast energy prices.

While the largest increases have been evident for Vic where Hazelwood is located, there has also been an impact on prices in NSW and Qld. Most of the increases have been contained to 2017 prices with smaller increases in 2018.

The loss of  Hazelwood is likely to be replaced in the short term by increased generation in NSW. Vic has a target to reach 25% renewable generation by 2020 and 40% by 2025. This should be able to replace the output of Hazelwood.

There is no doubt that the loss of Hazelwood will cause increases to prices and fewer available hedges to be bought.  With NSW already facing a shortage of generation and SA relying on Vic at times of low wind, the prices in these regions are likely to increase.
Qld has been less affected as it does not border Vic but by constraining support to NSW, it has also increased. Vic has enjoyed the lowest wholesale electricity prices in the National  Electricity market but the forward prices beyond Q1 2017 are now on par with other states.

Engie is also exploring what to do with its other brown coal  plant in the state and has announced that it would be willing to sell if the price is acceptable.

SHORT TERM SOFTENING OF LGCS

There has been a softening in the price of Large-Scale Generation Certificates (LGCs) after increasing for much of 2016, as retailers become  concerned about the possibility of a sustained drop in prices. 

After sitting at $89 / certificate for many months, prices started to reduce over recent weeks. Retailers who have renewable generation coming  online over the next two years became concerned they could end up with large inventories of certificates in a falling market. This has led to some selling at high prices.

Concern in the market that uptake of new  renewable generation cannot keep pace with  surrender obligations had originally led the  price of certificates to approach penalty rates.

482 MW of renewable generation is due to be built with funding from The Australian Renewable Energy Agency (ARENA). This is a major step, but at least 10 times as much will need to be built in coming years to meet targets for 2030. This makes it unlikely that there will be a sustained drop in price. It is more likely that the price will start trending back towards penalty price.

STUDENT GAINS REAL-LIFE EXPERIENCE AT EDGE

Introducing our Work Experience student, Hayden!

Hayden comes to us from Nursery Road State Special School where he is currently completing Year 12. The school offers a number of different programs catering for children from birth to 18 years with a strong focus on teaching with individual needs in mind. The programs are implemented to give students a learning pathway to functioning independently.

Edge has been an avid supporter of Nursery Road State Special School for many years. So, when we were approached to consider taking on a work experience student – we jumped at the chance.

Work Experience is a valuable tool to provide students with real-life experiences that build skills and confidence.

Hayden joined our team in July and settled in quickly. He helps to keep our office in smooth running order and is always ready to learn new tasks. His Friday visits always end with morning tea which Hayden tells us is his favourite part.

Learn more about Nursery Road State Special School