Key Energy Review - September 2019


Welcome to our September newsletter

It would be nice to report some good news, especially if it related to price softening; unfortunately, the only thing that has gone down is the cost of the LGCs. These have come down from a high of about $80 per certificate to about $20 per certificate, translating to a cost savings of about $10 per MWh. A nice saving but not enough to outweigh the high cost of black energy. The only solution is to take advantage of the backwardated curve and forward purchase, but this contains a few risks of its own.

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.

Electricity prices remain high as shown by the following graph of the Wholesale Electricity Price Index (WEPI). Not only are they high, but there is nothing on the horizon to suggest that they will fall. If we assume gas, at a delivered price of $10 per GJ, becomes the marginal fuel (and that is an aggressive price) then we are looking at a Short Run Marginal cost of $100/MWh. Not a good outcome.

WEPI

Backwardated electricity prices mean that the cost of electricity for year N is greater than the cost for year N+1, which are in turn greater than year N+2. This opens the possibility of reducing long term costs by buying in advance. A good strategy if prices harden, but not so much if they soften. On balance, there is no reason for price reduction in the short term, so a three-year deal could make sense. Of course, buying long term opens some other risks including the risk of volume restrictions, especially ‘Take or Pay’, and the possibility of poor customer service.

BACK

Wind, PV and the Duck Curve all come together to show why cost savings with solar / PV may not be as good as expected. Wind and PV have zero fuel cost, so they have a very low Short Run Marginal Cost. This ignores two things. Firstly, they have low utilisation factors; PVs only work for a few hours per day. More importantly, however, they are not schedulable, so they are not necessarily available when needed. Traditional fast start generators, batteries or other energy storage solutions such as pumped hydro need to be held in reserve, another capital cost. Now the duck curve: when the sun is shining in the middle of the day the market is flooded with PV, the wholesale price drops dramatically and the value of exports decline as a result. In some cases prices have even fallen close to zero.

DUCK

Consider a retailer who has a contract for the supply of electricity to a property with PV. If the retailer is fully hedged, they will be over hedged when the sun shines, i.e. they will be ‘long’ when the market is soft and will sell into the market at a loss. This risk is covered by increasing the cost of electricity, but this increased cost can make a real dent in the savings the PV was meant to provide.

The figure below shows ideal cost savings with PV and adjusted savings after the retailers have added a premium to compensate for the increased risk.

NORM

As usual, further information about energy prices or anything else in this newsletter can be obtained from info@thekeygroup.com.au or phone (03) 9885 2633.


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