Australia’s National Electricity Market is dynamic, fully merchant and fast changing – 2017 has seen extremes in volatility due to a number of factors coinciding within similar timeframes.
Some recent influences on NEM spot and forward prices include:
The increased risk to energy security following the closure of the Hazelwood (VIC) and Northern (SA) brown coal power stations was recently underscored by an update to AEMO’s 2017 ESOO (Electricity Statement of Opportunities). AEMO indicated a heightened risk of supply shortfalls over the next 10 years, potentially resulting in the current NEM reliability standard not being met. In response, the Turnbull Government urged AGL to consider keeping the ageing Liddell (NSW) black coal power station open beyond 2022 despite detracting environmental and financial drivers.
There has been a downward shift in spot outcomes observed in Queensland over recent months. In mid-2017, the government released the ‘Powering Queensland Plan’ which saw an announcement to bring back the Swanbank E gas-fired power station to operation in early-2018, complemented by an edict to Stanwell to place downward pressure on wholesale prices by altering its bidding practices.
Gas prices over the 2017 winter period did not experience the spike observed in 2016. From a demand perspective, this was the result of a mild winter. However, the Federal Government’s threat to impose export restrictions on LNG operations continues to be present and represents a real threat of intervention.
Late-September saw the commencement of talks between Australian exporters and Japanese utilities regarding the benchmark sale price of thermal coal for the Oct 17 – Sept 2018 period. According to reports, an offer price of between $100-$110/mt FOB Newcastle was initially provided, higher than the $94.75/mt agreed from last year. NSW generators have pointed to a tighter coal market pushing their marginal cost of production higher. This has flowed through to their recent bidding practices, which has seen marginal volume priced slightly below gas-fired generation bid bands, thereby supporting spot price outcomes. The higher starting negotiated coal benchmark price may indicate the tightness is set to continue for the foreseeable future, potentially meaning power outcomes will remain elevated.
In mid-October, the Turnbull Government announced that it had scrapped the Clean Energy Target in favour of a ‘National Energy Guarantee’, which will be imposed upon retailers and incrementally introduced over 2019/2020. The National Energy Guarantee (NEG) comprises of two parts: a reliability guarantee requires retailers to meet their load with a mix of contracts or physical assets that include a minimum amount of dispatchable capacity, and an emissions guarantee set at a level which will enable Australia to meet its 2030 Paris Accord commitments. In order to meet these requirements, retailers would be expected to either: (1) invest directly in dispatchable and/or renewable generation capacity, or (2) enter contracts with appropriate generators to either increase the ‘dispatchability’ of their portfolio, or decrease their average emissions on a weighted portfolio basis. At current, it is unclear if the Labor Opposition party will support the policy, with a number of MPs citing a lack of modelling and policy detail, compounded by no forthcoming guarantees of price reductions for end users.
Wholesale price movements:
Following the unprecedented rise in Victorian and South Australian forwards contracts from mid-2016 to the end of Q1-2017, contracts have traded slightly lower with domestic gas prices easing somewhat, in addition to a strong increase in committed renewable energy build.
Queensland saw a sharp drop across all forwards contracts in June, following the Queensland government’s edict to Stanwell to depress spot outcomes. NSW contracts, being a net importer of energy, also fell as a result.
Backwardation remains in the curve for all regions (i.e. Cal20 < Cal19 < Cal18) largely driven by the expectation of future renewable build over the 2018-2021 period, to meet the RET.
Note that in the charts below, the series ‘Spot’ refers to historical spot observations (average daily prices). The forward contracts series (i.e. Cal-18, Cal-19 and Cal-20) provide a view of where energy to be delivered/consumed over a future period have traded historically – these are based on liquid contracts traded on the ASX.