Will the Federal Government Climate Change Review affect the price of Large-Scale Generation Certificates?

A commitment by the Federal Government to reduce emissions by 2030 will see a Climate Change Review conducted this year. The government is focused on meeting our international emissions reduction commitments while also maintaining energy security and affordability. The focus of this review is to look at a range of options to reduce emissions by 26 to 28 percent below 2005 levels.

The review will consider the integration of climate change and energy policy, the impact of state-based policies on the national approach, the role of the Emissions Reduction Fund and its safeguard mechanism, complementary polices, and potential goals beyond 2030.

While the review does not explicitly mention the Renewable Energy Target (RET), there could be consequences for the RET. There is currently a concern that there will not be enough new renewable generation built in time to meet the 2020 target. This has led government backbenchers and some business people to call for the RET to be abolished. In the past, reviews into the RET scheme have caused the prices of Large-Scale Generation Certificates (LGCs) to reduce. Despite assurances that the current RET scheme will not be affected, discussion surrounding climate change policy may still affect the price of LGCs as the market factors in uncertainties.

The Climate Change Review is expected to be concluded by the end of 2017.

If you’d like to discuss what this means for your energy portfolio, please contact us here or on 07 3232 1115

High Demand contributes to record prices in Northern States

Increased electricity demand in both Queensland and New South Wales during January 2017 has had a significant impact on electricity prices for this period.

Queensland maximum and average demand was 8 percent higher than January 2016, while New South Wales was 9 percent higher compared to the previous year.

Higher demand helped in setting record prices for both states. The Queensland spot price averaged $197.65/MWh for January 2017. The previous record for January was set in 2013 when the price was $155.90/MWh. New South Wales reached $82.69/MWh eclipsing the previous January record of $66.95/MWh set in 2001.

Higher spot prices are currently expected to continue for the foreseeable future with forward contracts for both regions currently trading above $80.00/MWh on the Australian Stock Exchange.

If you want to discuss your energy arrangements, get in touch with expert energy consultants by contacting us here or on 07 3232 1115.

Confusion following the release of ERMS LGC Fulfilment Plan

Today the Australian Financial Review (AFR) has released a misleading news article which states that ERM Power has chosen to pay the penalty price of $65/LGC instead of paying the current market price of $90/LGC. This article has been released following an ERM Power announcement to the ASX yesterday.

Even at $90/LGC it is more efficient for ERM Power to purchase LGCs then pay ‘penalty price’. ERM are utilising the flexibility of the scheme to surrender LGCs in future years where they can off-set earnings.

ERM Power has a number of tax losses which they want to bring forward by paying ‘penalty price’ (which is not tax deductible) now and using the tax losses for other earnings. Over the course of the next three years, ERM Power is then able to purchase and surrender LGCs and gain future tax credits when they have earnings to offset. This frees up $37 million now which would otherwise have sat as tax credits against future earnings.

The AFR news article can be found here: http://www.afr.com/business/energy/electricity/erm-power-to-pay-123m-penalty-on-renewables-liability-20170123-gtxf6e

The announcement from ERM Power can be found here: http://www.asx.com.au/asx/statistics/announcements.do?by=asxCode&asxCode=EPW&timeframe=D&period=M6

Why the recent price spikes in Queensland Electricity?

Background

The average spot price for the QLD region on Saturday 14 January 2017 was $1,472.95/MWh. 2017 had already seen warm weather and an increasing volatility before Saturday however this was the first day where the 24 hour period averaged more than $1,000/MWh. This report will explore some of the reasons for the high prices on this day.

Temperature and demand

Temperatures for January have been above average in general. The lowest maximum temperature recorded so far this month has been 26.8 degrees on Tuesday 3 January 2017.This was followed by the highest maximum so far of 35.6 degrees on Thursday 12 January. Saturday 14 January had a maximum temperature of 35.0 degrees in Brisbane.

Figure 1: Minimum and Maximum Temperatures for Brisbane

The increase in demand started as soon as the maximum temperatures were above 30 degrees. This also coincided with more people returning to work and putting more pressure on air conditioned load in office buildings. Normally we would expect to see a reduction in demand on weekends but demand on Saturday 14 January was as high as many of the previous working week days.

Figure 2: QLD regional demand

The sustained period of heat meant that residential customers were turning their air conditioners on as soon as it got warm, or even leaving them on overnight. With minimum temperatures remaining around 25 degrees, it was warm from the start of the day creating a large air conditioned load during the day. The humidity levels accompanying these high temperatures also mean air conditioners require more electricity for cooling. There was a fair amount of solar PV contribution but by 6:30 PM this had largely all fallen away.

Demand for the day looked more like a working week day. In fact, it looked almost identical to the demand profile of the previous Wednesday (11 January 2017).

Figure 3: QLD demand

The price had been high on the Wednesday at $166.49/MWh but this was still a lot less than the $1,472.95/MWh experienced on the Saturday.

Interconnector

It was only Queensland which experienced unusually high prices. Prices In all other regions in the NEM were within the expected range for January.

Figure 4: Average NEM prices 14 January 2017

A study of the main interconnector between QLD and NSW shows that it was at times affected by lightning activity and de-rated due to heat. As part of normal operation it is also reduced by an amount which means that QLD can lose its largest generating unit (usually Kogan Creek Power Station). With Kogan Creek Power Station generating near capacity for most of the day, the interconnector was reduced.

Figure 5: Flow limit from NSW into QLD on main interconnector

The interconnector limits are somewhat optimised with load and prices which is why we see it moving around a lot on high priced days. Overall, the interconnector performed similar (or even slightly better) on Saturday than Wednesday.

The interconnector played a role but it was not the main difference on the day.

Available generation

QLD is one of the few states which still enjoys sufficient generation. The two year outlook produced by the market operator consistently shows there are no expected situations where generation is unable to meet demand even during high temperatures.

Figure 6: Available generation

Available generation on Saturday was very similar to Wednesday and there were no material changes to the mix of generators available (coal / gas / hydro etc).

Price setters

The market clears by every generator receiving the price of the lowest priced bid which can satisfy demand. There was a change in the price setter on Saturday compared with previous days. Using Wednesday 11 January to contrast we can see a number of differences.

Figure 7: Price setters by region

On 14 January more than half of all spot prices were set locally in QLD compared to less than 25% on 11 January. The prices set locally were much higher than the prices set interstate.

If we look at the technology type we can also see that coal dominated the market on 14 January displacing other sources, in particularly Hydro. With the higher prices it was easier for peaking plant (distillate and diesel) to dispatch setting prices more often.

Most of the prices (56%) were still set by coal which has a modest running cost. The fuel mix on its own doesn’t explain the higher prices unless we look at the actual behaviour on the day.

Bidding behaviour

For most participants there is a trade-off between price and dispatch. The more volume is bid in low price band, the higher the dispatch volume but also the lower the price and vice versa. Generally what we see is participants covering their contract position by bidding in at the cost of generation and then competing for dispatch, market share and prices above this.

Most of the participants in QLD seemed to have the same bidding strategy on Saturday as they had adopted the entire month. Only Stanwell and InterGen seemed to have changed their approach on the day [1]

[1] A number of other participants changed their bids, these were mainly intermediate or high priced (peaking) plant. It is typical behaviour for them to rebid if the prices unexpectedly are high

Figure 8: Stanwell bidding and dispatch

On Wednesday 11 January Stanwell provided ~2,500 MW at prices less than $60/MWh. On Saturday 14 January they had changed their bids so they were only offering ~2,200 MW at this bid band. During the day, Stanwell rebid their four Tarong Power Station units saying that demand was higher than originally expected, the prices were different than expected or that a peaking plant (Mt Stuart) had come on line. On all occasions, Stanwell moved volume from cheaper price bands to higher price bands making higher prices more likely.

The only other QLD generator which made less volume available was InterGen who reduced their available generation to 670 MW on Saturday compared with 760 MW on Wednesday.

Figure 9: InterGen bidding and dispatch

InterGen owns the coal fired Millmerran Power Station which has two units. There were a few problems with the station on the day with baghouse issues (differential pressure was too high) and steam purification for reuse. There were also a number of rebids which related to the headroom on the main interconnector being lower than expected and the prices being higher. InterGen used this as an opportunity to put more volume in higher bid bands. It must be said that when the first spike occurred in the morning, InterGen added cheap volume to have maximum possible dispatch. They did not do so for subsequent price spikes.

It should be noted for absolute clarity that as far as Edge is aware, all bids (including initial offers and rebids) were made within the market rules. If there had been more competition in the state, others could have bid in their volume to be dispatched ahead of Stanwell and InterGen. This competition would mean that the prices may not have increased and both Stanwell and InterGen would have lost out on dispatch.

Will Q1 2017 continue to see high prices in QLD?

Prices were already high, but increased on Saturday 14 January 2017. With warm weather bringing high demand there is an opportunity for participants in QLD to reduce their output and increase prices when the interconnector is at capacity.

The only real difference between Wednesday and Saturday is that Saturday is an off-peak period and Stanwell could have a different contract position during off-peak. This means that it may be more profitable for Stanwell to reduce generation and increase prices during off-peak. This could continue throughout the quarter. It is worth noting that the main competitor (CS Energy) didn’t decrease their generation. Stanwell would not want to lose market share to its main competitor and may therefore not be as inclined to remove generation in future periods as this could mean surrendering market share.

AGL considering Loy Yang A shutdown in response to industrial action

Update 16/12/2016: According to the Australian Financial Review (AFR) The Construction, Forestry, Mining and Energy Union (CFMEU) has backed down on its threats of industrial action at AGL Energy’s Loy Yang power station, putting an end to a whirlwind eight hours that saw AGL responding with an indefinite shut down and the Victorian government intervening to avert significant damage to the state’s energy supplies.

An ongoing dispute regarding pay and conditions at the Loy Yang A power station in Victoria could result in industrial action and subsequent employer action at the facility.

AGL’s negotiation with the CFMEU over an 18 month period has failed to yield an agreement to suit all parties. This led to the Fair Work Commission granting approval to CFMEU’s application for a ballot of its members on taking industrial action. The resulting ballot showed support for this course of action.

Due to this outcome, AGL has now advised the market operator (AEMO) that it intends to take employer response action to the proposed industrial action at Loy Yang A power station. The response will be a full site lock-out at both the Loy Yang A power station as well as the adjacent mine. The lock-out at the mine would curtail fuel supply to Engie-owned Loy Yang B power station. AGL has advised that the lock-out would commence on 28 December 2016 and last for an indefinite duration.

The news comes as the market operator is already predicting a tight supply / demand balance for the quarter. The most recent forecast doesn’t take this news into account but shows that Victoria was already relying on its interconnectors to keep up with demand in the state. A reserve shortfall was originally expected to occur on 22 and 23 December and will therefore not be affected by this announcement.


Figure 1: Reserve capacity for Victoria Source: AEMO

The loss of Loy Yang A (2,305 MW brown coal) and a reduction at Loy Yang B (1,120 MW brown coal) is likely to increase the number of reserve shortfalls and could lead to involuntary load shedding. The Victorian brown coal generators are also responsible for keeping prices down and stabilising the system.  During Q116, Loy Yang A provided 35% of the state’s average load and Loy Yang B provided 19%. Without the base loaders, the more expensive peaking generators will have to provide more generation which will be at a much higher price.

It is not just Victoria affected by the planned industrial action. South Australia is heavily dependent on Victoria for both prices and energy support. With potential shortages in Victoria, South Australia will struggle during times of low wind. Other regions will be affected as well. We saw earlier that the planned March 2017 shut-down of Hazelwood (1,820 MW brown coal) increased the forward prices across the entire NEM.

The announcement today is likely to affect Q117 contracts and maybe even beyond. Victoria will not be able to sustain the loss of both Hazelwood and Loy Yang A and it is likely that either the lock-out will be called off or Hazelwood will have to keep operating for longer if the unions and AGL cannot find agreement before March 2017 when Hazelwood is scheduled to come off.

The market operator will update its outlook for the period once the market has had a chance to respond to the news.

If you’d like to discuss this news with one of our energy experts, please contact us here.

Federal Government opposes industry opinion on Emissions Trading Scheme

powerstation

The Federal Government has denied it will impose an emissions intensity trading scheme despite public comments made this week by Environment Minister Josh Frydenberg.

Mr Frydenberg had announced that this may be an option explored during a review into Australia’s climate policies. This review was planned by then Prime Minister Tony Abbott in 2015.

Prime Minister Malcolm Turnbull, refuted Mr Frydenberg’s public address and announced the government wouldn’t consider an emissions trading scheme. Mr Turnbull describes it as another form of carbon tax.

The government has continued with this stance even though business groups and the Climate Change Authority have been advocating such a scheme.

There is also commentary that a joint report by AEMO and AEMC had modelled three options for reaching the Paris agreement of a 26-28% reduction in carbon dioxide emissions by 2030. These options included an expanded renewable energy target, paying coal-fired power stations to close, and an emissions trading scheme. The report is said to have found that an emissions intensity scheme best integrates with the electricity market’s pricing and risk management framework. It also had the lowest economic costs and the lowest impact on electricity prices. The report is also said to identify Tasmania’s reliance on the Basslink interconnector from Victoria, and South Australia’s high penetration of wind and solar as the biggest threats to the market.

The announcement that the Federal Government is not willing to consider an emissions intensity scheme has prompted the South Australian Premier to canvas support for a state based emissions intensity scheme. Both Victoria and New South Wales have rejected this proposal.

The Federal Government still considers their current Direct Action Plan to be the best way forward despite Danny Price who originally designed the plan now suggesting that an emissions intensity scheme could be up to $15 billion cheaper over a decade.

Edge Insights – Issue 2

Edge Insights provides you with the latest news in the energy industry and showcases some of our services that help to ensure businesses maintain their optimal energy arrangements at all times. In this edition:

  • Hazelwood Closure Impacts East Coast Prices
  • Softening of LGCs
  • Student Gains Work Experience
  • Energy Snapshots
  • Gas Market Update
  • National Electricity Update

 

NEWS OF HAZELWOOD CLOSURE

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

lgcdropping

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-at-work

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

SNAPSHOT REPORTS DATA AT A GLANCE

Effective management of an energy portfolio requires significant attention and expertise. The portfolio needs to be continually monitored and reviewed to ensure optimal outcomes in key areas.

We often find that the time and knowledge needed to efficiently manage a sophisticated energy portfolio can be difficult to find within large and small organisations alike. There is also an overwhelming consensus among energy customers that the ability to view cost and consumption data in one place is critical to making decisions.
Our extensive experience with managing electricity for clients has meant that we have been able to develop a reporting tool that provides you with accurate insight into how your portfolio is operating at a specific point in time. This experience coupled with our constant review and analysis of the market, and discussions with industry counterparties brings an unprecedented depth of knowledge that you can access by engaging Edge.

We also provide full transparency of the underlying data, for those in your organisation who prefer to analyse the numbers.

The report can be tailored to your specific requirements. Our clients use the report for a wide range of purposes.

– reviewing the outcome of our invoice reconciliation process to make a decision on invoice approval for payment
– financial history of individual sites and the overall asset (Annual, monthly or by financial year)
– forecasting costs and consumption based on historical outcomes and projected operational changes
– consumption and demand history for each site or at an overall asset level.

With this information at your fingertips, you can translate energy consumption into actual costs, provide accurate forecasting to your finance teams and have the peace of mind that the bills you are paying are true and correct.

The Snapshot Report is an easy to read graphical representation of your energy consumption and costs.

Our clients continue to save time and money with this report. Contact us to see how the Snapshot Report can work for your business.

snapshots-infographic-1

STATE OF THE MARKET – GAS

gaspipelinestation

What is happening to gas prices

After unprecedented high spot prices in the winter months, there has been a softening across the short term trading market (STTM) recently. High spot prices in winter is characteristic of usual seasonal adjustments, however gas supply issues coupled with higher than expected demand pushed spot prices well above historical figures. With regards to recent spot prices, there has been a notable increase in prices from the same time last year. Pricing is currently sitting on average above $7/Gigajoule (GJ) across the three hubs of Sydney, Brisbane and Adelaide. This time last year Adelaide was sitting at $4/GJ, Brisbane at an average of $2.89/GJ, and Sydney around $3.90/GJ.

Queensland LNG industry

October signalled the start of operations for Australia Pacific LNG’s (APLNG) second gas train on Curtis Island offshore of Gladstone. This completes the construction of three major Liquefied Natural Gas (LNG) projects that were proposed under the Queensland Government’s “Blueprint
for Queensland’s LNG Industry”. The projects consist of six trains and three LNG processing facilities that have the capacity to export up to a combined total of 25.3 million tonnes per annum (Mtpa). The pipelines are contracted to deliver 4,520 terajoules (TJ) to the three  facilities, with an average of 3,300 TJ currently being delivered per day.

AGL outlines a move into WA market

AGL presented growth opportunities at its investor day held in November that gained some  interest in the market. The company announced it will enter the WA Gas Market from January 2018. AGL announced an aggressive acquisition target of 100,000 customers within the first two years. Alinta Energy currently holds an estimated 90% share of the WA market, with Kleenheat holding the remaining 10%.

This move will certainly be a key driver for increased competition in the WA market providing  customers with opportunities to make potential savings in future years. By making this move, AGL also puts itself in prime position to be able to swiftly enter the retail electricity market if and when it becomes contestable.

AGL considers LNG import facility

AGL has also announced a $17m feasibility study to build an LNG import facility, with a  terminal potentially available by 2021. Given that there is a declining gas supply (2P reserves) on the east coast of Australia, opinion suggests that more needs to be done to secure forward gas for the domestic market.

NATIONAL ELECTRICITY MARKET OVERVIEW

Q316 started where Q216 left off with high prices across the National Electricity Market (NEM).

Generation availability continued to be the main issue for other regions. There had been a number of generator outages during Q216 and some of these had failed to come back by Q316. The first two weeks of Q316 averaged between $83/MWh and $92/MWh for all regions excluding SA. After the generation came back online the prices normalised and prices were in the range of $42/MWh and $46/MWh for the remainder of the quarter.

Overall the dominant theme was availability of base loading plant. There were a number of trips on large base loading plant and a delayed return to service once they were off. The market is now unsure how stable the generation is, particularly in NSW. There is also concern that any exit will be disorderly as there is not much spare capacity left in the system. These concerns were made  worse when Engie announced it would close its Hazelwood plant in Vic. This would mean less support from Vic in the future.

SA had a turbulent quarter. It started with record high spot gas prices, high demand due to cold weather, and limitations on the interconnector with Vic. Pelican Point, one of the state’s largest power stations, chose not to operate for the first two weeks of the quarter. This was the first full quarter without any coal-fired power generation in SA.

During the first two weeks the average price was $379/MWh and large users were concerned they would be unable to continue if the prices didn’t reduce. The SA government stepped in and negotiated for Pelican Point to start up while the interconnector was being upgraded. Prices became subdued, however they were still higher than other regions. The price for the rest of the quarter  was $73/MWh.

Towards the end of the quarter SA experienced a major energy shutdown, now known as the ‘SA Black System’. The grid was slowly restarted overnight but the competitive market was suspended
for a further two weeks.

As a result, the Council of Australian Governments (COAG) Energy Council is currently looking into what needs to change to better integrate renewable generation into the NEM.

Full PDF edition: Edge Insights – Issue 2

Markets move again on Hazelwood closure

Workers at Engie’s Hazelwood Power Station were today called to a meeting to be advised of the closure of the plant in March 2017.

Hazelwood has been producing low cost baseload for more than 50 years in Victoria.

The brown coal power station has been producing approximately 20% of Victoria’s energy demand and has helped make Victoria the cheapest state in the national electricity market for wholesale electricity.  This is no longer the case with both Queensland and New South Wales now cheaper in Q217 and Q317.

While the largest increases have been evident for Victoria, there has also been an impact on prices in New South Wales and Queensland. Most of the increases have been contained to 2017 prices with smaller increases in 2018.

There is often immediate market movement following announcements like these followed by a return to usual levels. Uncertainty drives volatility in prices which adds a premium to the forward prices.

The 2017 prices are expected to hit resistance today or tomorrow and then settle down over the next week or two. 2018 and beyond may increase slowly across the next couple of weeks as the market digests the news. As there is more time to adjust positions further out, longer term pricing tends to move more orderly than near-term pricing where there are strict limits on trading.

Engie is expected to make a formal announcement at their 2pm press conference.

Edge Energy Services will continue to monitor the market closely and report on impacts relating to this closure.

If you have any questions please contact your Portfolio Manager by email or on (07) 3232 1115.