May 4, 2020

Cheap electricity is back in Australia

Cheap electricity is back in Australia


In Victoria, the futures market for wholesale electricity prices now points to the low $40s a megawatt hour. And it’s not the only state market where this is happening.

Figure 1: Baseload futures. Source: ASX

As recently as 2019, prices were up over $110/MWh (technically the year to June 2019 futures) but now the initial quotes (untraded, illiquid etc) for FY24 are around $43/MWh. And as the chart above shows, it’s not just Victoria – the situation is little different in Queensland and even South Australia has quotes around the $50/MWh mark.

If we also adjust to a 1 AUD = USD 0.65 exchange rate, it’s clear that at the generator level electricity prices in Australia are once again towards the low end of the world scale.

One of the factors that may be behind the particularly large fall in Victoria is worries about the outlook for the Portland aluminium smelter. The market has been wrong about that before, though, and it’s far from the only thing going on in Victoria.

Why prices have fallen and why in Victoria?

It’s always easier to explain why something happened afterwards than to predict it, and equally there are often competing explanations depending on the agenda of the person doing the explaining.

In our view the same forces that drove electricity prices up are those that are driving them down now. In addition, there is constant downwards pressure on prices stemming from the growth in behind the meter. But in this note I say no more on that. The forces are:

Thermal fuel prices have collapsed

This  chart would look way more dramatic in US dollars but what’s relevant is the export parity price which is in Australian $.

Cheap electricity is back in Australia
Figure 2: Coal price. Source: Factset

The price of  lower specification coal (higher ash, lower quality generally) that Australian generators, particularly in NSW, believe is good enough for Australians has fallen even further. In our view it’s at level now where many coal producers will lose money. The global coal cost curve is relatively flat and also very difficult to get costs down.

For renewables there is good and bad news in the chart. Short term new renewables face a tougher electricity price to get under the short term costs of coal, longer term coal mines will be closed forcing prices up again, and some operations won’t reopen. New coal mine development will go on hold and while it’s on hold, potential buyers will think about the future.

It’s the same for gas, prices are less than half what they were last year. The reason is the collapse of the international market where LNG prices are down sharply. Domestic gas is therefore relatively more attractive to QLD LNG producers.

Via LNG, natural gas prices in Australia are linked to those in the USA where the price is around $US2/GJ. Natural gas in the USA is cheap partly because some of it is produced as an oil byproduct. To the extent that oil production in the USA falls it may lead to a rise in USA  natural gas prices.

However, ITK believes that oil prices will have to go back towards $US40/a barrel reasonably quickly since that is the marginal cost of oil. It’s a long story and enough on that for here.

Cheap electricity is back in Australia
Figure 3: Average, QLD,SA,NSW spot gas prices. Source: AS

Supply is increasing

Even leaving aside the 2,000 MW a year pace of behind the meter installations there is a wave of big wind and solar farms still due to hit the market, and particularly the Victorian market over the next couple of years. ITK’s capacity forecasts show about 4.2GW of utility wind and solar under construction and we think about half of that is mechanically complete just waiting for  electrical connection.

Cheap electricity is back in Australia
Figure 4: New wind and solar MW under construction. Source: ITK

Is the market factoring Portland closure in?

The market has been wrong about big ticket items in the past. It was the simultaneous shock of Hazelwood’s unexpected closure and the unexpected subsidy driven reprieve of Portland that made electricity prices go up as sharply as they did back in 2017. Not to pat ourselves on the back but even then ITK was on record as saying that the increased renewable supply in Victoria, once it came on line, would drive prices back down.

It’s just that the increase in supply is running at least 12 months behind our original schedules. Who knew that the 530MW Stockyard Hill windfarm  for which Origin Energy announced its PPA back in mid 2017 would still not be operating in mid 2020, despite having said it would be going in 2019.

It’s not just futures prices, spot prices are under $40/MWH

Cheap electricity is back in Australia
Figure 5. Source: NEM Review

And yet consumption is little different to last year across the NEM as whole.

Cheap electricity is back in Australia
Figure 6. Source: NEM Review

 

Cheap electricity is back in Australia
Figure 7. Source: NEM Review

Coal generation in Victoria has recovered from outages also contributing to lower prices:

Cheap electricity is back in Australia
Figure 8. Source: NEM Review

Are lower prices good?

Good for some things and not for others. The obvious point is that low prices encourage consumption (bad), reduce new renewables investment (bad), reduce the incentive for rooftop solar and batteries (bad) but are good for consumers and business profits. Politically success has many parents and every politician will claim it is their policy that has driven electricity prices down.





Click Here To Read Original Story

Leave a Reply

Your email address will not be published. Required fields are marked *