Key Energy Review - December 2016


Welcome to our December newsletter and unfortunately, the continued news of higher electricity prices. Firstly, Season's Greetings, it is hard to believe that the year has gone so quickly. In line with what has become a bit of a corporate tradition we have given a donation to The Salvation Army in lieu of Christmas cards.

This year has seen some quantum changes in the energy market. While the closure of Northern Power Station (AKA Playford) was expected for some time, the planned closure of Hazelwood early next year was not as expected. Moreover, Hazelwood dwarfs Northern; its closure could turn Victoria into an energy importer. This would not augur well for South Australia or Tasmania, both of whom often rely on imported electricity from Victoria. As usual, further information about energy prices or anything else discussed in this newsletter can be obtained from info@thekeygroup.com.au or phone: (03) 9885 2633.

Electricity prices have continued to rise across the NEM. This is no more evident than in South Australia where a lack of market liquidity is hampering the ability of some large users to even negotiate suitable long term contracts.

EFI

To make matters worse, there is a worrying trend of uninformed users moving to pool based contracts, i.e. contracts that directly expose electricity prices to the wholesale pool. This is not something for the feint hearted. The following graph shows the extreme volatility of the pool.

RRP

Unfortunately, the current high prices may not be a short-term event as experienced in 2007. While the drought clearly played some part in high prices experienced in 2007, the full reasons were never clear, and the high prices didn't last.

Conversely, there are now several significant and fundamental reasons for the high prices. Firstly, we have the closure of the Northern Power Station and the planned closure of Hazelwood. This represents about 2,000 MW of relatively cheap coal fired generation. To put this into context, coincident Maximum Demand (MD) across the NEM is probably about 30,000 MW.

Secondly, there are no new conventional power stations due to be commissioned in the near or medium term; all new power stations are either wind or solar.

Thirdly, there is a fundamental mismatch between coal and renewables. Coal fired power stations take a long time to respond to changes in demand; they can't be turned on and off if the wind changes or cloud cover hampers renewable generation. Only gas can meet the fast response times required to dovetail into a system that is becoming increasingly reliant on wind and solar.

Has Deregulation delivered any benefit? So far, we have looked at the effect of deregulation on a medium size LV customer located in Victoria and SA. Prior to the recent price hikes, the Victorian customer saved about 35%, while the SA customer has paid about 15% more.

Now let's look at SE Queensland. If the same customer, i.e. a customer with a MD of 500 kW, annual Peak usage of 1,500 MWh and 525 MWh Off-Peak was in the Energex franchise area, the delivered cost at the regulated rates would be $268.05/MWh. Alternatively, if the customer opted to go to market and sign a deregulated market contract with a retailer, the delivered cost would be $175.27/MWh; they would save 35%. BUT, this only applies in SE Queensland and on the back of very high franchise prices.

Wishing you a happy, healthy and prosperous New Year.

KE&R hold AFSL No 281356. Any advice contained herein is general in nature and not specific to any client's requirements. Further personal advice should be sought from a qualified consultant before making any decisions relating to material contained herein.

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