Key Energy Review - December 2018


Season’s Greetings and welcome to our December newsletter

In what is becoming a tradition for Key Energy & Resources we have elected to make a donation to charity in lieu of sending out Christmas cards and gratuities. This year we donated to the Smith Family. Given the pressure that many families face over the holiday season I am sure that they will put the funds to good use.

Unfortunately, we are still struggling with high energy prices, a lack of clear energy policy and the threat of black outs this summer. We are a resource rich, first world country, so this is hard to explain. Given the results of the recent Victorian election, popular money is on the Labour party to win the next Federal election. That will mean increased renewables and a wind down of coal. If done properly this does not necessarily mean increased cost. 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.

Renewable take up under Labour will probably ramp up to 50% by 2030. In the first instance we can expect this to be done via the existing Mandatory Renewable Energy Target (MRET). This raises several problems: firstly, there are grid stability problems; secondly, the high ingress of intermittent renewable makes it hard to schedule coal plants; and thirdly, there is the cost. These problems, however, are not insurmountable.

Batteries or pumped hydro are being touted as the solutions to stability and intermittency problems. Unfortunately, it is not a one size fits all. Batteries are great for managing grid stability, hence the success of the Tesla battery in SA, but not necessarily so good for managing large scale energy storage. Current technology sets a price point that is probably north of $250/MWh for battery storage. Couple this with the ten-year life of a battery and we have an expensive solution that will, in ten years, lead to the environmental problem of recycling all the batteries that have reached the end of their useful life. On the other hand, pumped hydro should have a life span of over 100 years, can be centrally dispatched, and, according to government figures, has a cost of $25/MWh. The NSW government has released a report showing that 50% of the states’ demand could be met by pumped hydro implemented at existing reservoirs.

The cost of renewables should continue to decline and the current pricing mechanism in the MRET needs to be questioned, especially the penalty prices. It is hard to see why well-placed large-scale renewables would need more than $55/MWh; well below the current high energy prices.

Capacity Market, a neat solution? The current ‘Energy Only’ market across the NEM is working as intended, but not producing the results the designers had proposed. The ‘Energy Only’ market rewards supply shortages with very high prices; the theory is that this would encourage new entrant generators. The problem is that once the new generators come online prices will soften and profits made by the generators will plummet. No responsible Board would advocate investing in a new power station if they knew it would actually cut profits. When coupled with the lack of revenue certainty offered by the ‘Energy Only’ market and the current controversy about coal, new fossil fueled power stations must be very difficult to finance (renewable generators can get through by the revenue certainty offered by MRET). On the other hand, a Capacity Market will pay a set fee for generators to provide capacity if and when required. This would be a neat source of funding for pumped hydro. Generators availing themselves to the capacity payment can only sell energy into the market at their Short Run Marginal Cost. The concept could be extended to require renewable generators that are paid for contributing to the MRET to only bid their SRMC.

Now, what is happening to gas prices? It is still hard to get more than two or three retailers to bid for gas, especially in NSW. We have been involved with several gas contract negotiation projects where there were only two bidders. Fortunately, commodity prices were down a bit, somewhere between $10 and $11/GJ. This is still double what we would expect, and above international parity, less than the $15/GJ we had been seeing.

Electricity futures as measured by the Electricity Futures Index (EFI), are still in the stratosphere, but at least they are down a little from what we saw earlier this year. This price softening is predominantly driven by a price softening in the outer years.

EFI


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