2023 Federal budget: slight update SA and VIC named for cap scheme

Melbourne, Victoria

Further to Edge’s update on the 2023 federal budget shared last week, more information has become evident from Hon Chris Bowen’s MP office around the actual schemes to be introduced and their allocation of the budget.

There is no doubt Australia, as in much of the world, they are pinning their hopes on a Hydrogen Economy. The governments ‘modernised’ energy economy is being underpinned by a technology which yet is not to scale and is unproven, can anyone say carbon capture and storage (CCS)! Now I do not believe Hydrogen is another CCS boondoggle, but the amount being invested, and the legislation changes to allow it to occur are akin to those of its previous silver bullet government neighbour.

The budget has allocated half of the $4bn green energy package, $2bn, to the Hydrogen Fund. The idea is the investment will assist in the commerciality of these projects and allow for 1GW of capacity to be on the system by 2030. The allocation of this will come in the form of “production credits” and as was later confirmed these will be allocated via a ‘competitive process’ however details of this are scarce. The funding is likely to have come in part to keep up with our European and US counterparts who have signaled similar investment in the industry through their own budgets (the US giving a $3/KG (USD) tax rebate if it relates to H2 production.

This will be supported by the new REGO or Renewable Energy Guarantee of Origin scheme which was first floated in the papers released at the end of last year.  $38million has been allocated to the project which will be used to certify the energy and emissions from these projects.

The details around the controversial capacity scheme continues to be scarce. With ‘commercial sensitivities’ being touted as a reason for non-disclosure. However, we do expect these to be run state by state and through auctions, so we hope for more detail to be shared on this in the future, especially given SA and VIC have already been named to lead the charge on this later this year. The choice of these states is unsurprising given the high renewable penetration on those grids.

We have also seen a little more information come out around the function of the “Net Zero Authority” who received $83m on Tuesday. It is anticipated that they will be working with local state and territory governments as well as lobbyists and stakeholders to create a roadmap to net zero in those regions, focus will naturally sit in heavy mining regions such as Queensland, the Hunter Valley and Latrobe Valley. From the 1st July the executive agency will be established and they will be tasked with supporting those in heavy industry to transition into a low carbon economy, assist with policies around this and assist with investment in the regions. No small feat to say the transition is already well underway.

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.

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.