Key Energy Review - July 2017


Welcome to our July newsletter and more bad news about energy prices.

How quickly things change. Not long ago we were talking of an abundance of electricity with sufficient generation capacity to meet projected load for the next five or ten years. Now we are talking of generation shortfalls and the risk of rolling blackouts this summer if there is a sustained period of hot weather across the NEM coupled with the failure of a major generator. To make matters worse, many of us are seeing a tripling in gas prices. Australian gas prices are well ahead of international parity and in some cases, LPG is becoming more viable than natural gas.

In a scene straight out of Alice in Wonderland, there is talk of bring a floating gas terminal into Adelaide so that we can import gas from overseas. Northern Australia will export, Southern Australia will import. Truth is stranger than fiction. As usual, further information about energy prices or anything else dealt with in this newsletter can be obtained from info@thekeygroup.com.au or phone: (03) 9885 2633.

Ten coal fired power stations have been closed since 2012 and another two are scheduled for closure. These are the cheap coal fired power stations that provide base load; hence, power prices have continued to rise as shown by the following graph of the Wholesale Electricity Price Index (WEPI).

RRP

Conversely, one gas fired unit (Swanbank E) is due to be brought back into service and there is talk of bringing TVPS back into regular service. Gas is replacing coal as expected.

Interestingly enough, the price curve is backwardated, i.e. there is some minor price softening in the outer years. Cal 2020 prices are slightly lower than Cal 2019 which in turn are slightly lower than Cal 2018. Does that mean that a three-year contract will bring more value over a one-year contract? That depends on the reason for the expected price softening.

Herein lies the problem. It is hard to see a solid reason for price softening beyond the belief that the current situation cannot continue for the medium term. It is also hard, if not impossible to see prices returning to the historic lows experienced in 2014/15.

Gas, the fuel for intermediate generation, is not only expensive but scarce. Several of the gas fired power stations have reported problems obtaining a reliable source of gas at an 'acceptable' price. In today's market, it is hard to see gas fired power stations achieving a short run marginal cost of $100/MWh or even $150/MWh.

Industry is also having problems sourcing gas. Today’s gas market is at best a duopoly; of the three main gas retailers one is currently unable to supply, while another can only supply occasionally, meaning that much of the time there is only one viable supplier. Depending on load factor, prices vary between $15 and $20/GJ. For many users, this is a tripling of retail cost. To make matters worse, the retail contracts are often coupled with onerous commercial terms including 80% Take or Pay (ToP).

The Finkel Review will hopefully bring some long-term certainty to the energy market and with this certainty some long-term planning on behalf of the generators and some long-term price stability. Unfortunately, there is no talk of major market reform such as transition to a Capacity Market. A requirement for new renewables (i.e. wind and solar) to also provide some dispatchable load will go a long way to solving some of our supply reliability problems. Grid scale batteries could supply part of the “dispatchable” component of this load as could contracts with recently announced Snowy Mark 2. My money is on the use of this dispatchable requirement to help fund Snowy Mark 2.

The Clean Energy Target (CET) proposed by Finkel is not radical and would probably operate much like the current MRET. In that respect, the end user would find it hard to differentiate between the MRET, CET and an Emission Intensity Scheme (EIS). All three would operate by imposing a levy on our electricity costs. The question is, which scheme would give the best outcome for the least cost levy.

There is some light at the end of the tunnel. State governments are starting to introduce and/or expand subsidy schemes to help improve energy efficiency. In particular, the Victorian Energy Efficiency Target (VEET) has recently been expanded to allow industry to apply for a range of subsidies.

For those with contracts ending in December it may be prudent to look at forward contracting sooner rather than later ahead of possibly another uncertain summer.

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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