Electricity investment: is it on strike?

Electricity markets in Australia appear headed for slowing investment in new renewables and firming generation as softer wholesale prices crimp the yields needed to get new projects across the commercial line.

Origin Energy CEO Frank Calabria was quite forthright at last week’s end of year results when he said that “at current market prices investing would be difficult“. Wholesale electricity prices this week are 49 per cent lower than that same time last year, the result of canyoning global oil and gas in March this year.

AGL CEO Brett Redman had a similarly sombre view a few days earlier, warning of an investment strike while low wholesale electricity prices remained. AGL has grand plans to build 500MW of new battery storage at the site of its closing Liddell coal fired power station in NSW’s Hunter Valley, but Redman hinted that the pace and scale of that investment would depend on market conditions.

Even the Clean Energy Council joined in, reporting new investment in renewables for the second quarter of 2020 would be the lowest since 2017, at least signalling the end of the world record building pace to deliver the Renewable Energy Target.

Curiously, the CEC blamed the slowdown on the cost of grid connections and underinvestment in network capacity, sidestepping the more fundamental commercial issue that renewables investors sell electricity for a living and need a better wholesale price too.

The CEC’s pessimism was also curious given only a month earlier it had reported renewables investor confidence rising sharply.  Its members, who were surveyed to produce the result, were apparently undaunted by the economic impacts of COVID-19 on global energy demand and canyoning wholesale electricity prices.

The Clean Energy Regulator was similarly bullish about renewable investment prospects in May when it released its Q1 Quarterly Carbon Market Report. It contained  a special section on the risks of underestimating renewables investment while effectively lobbying for accelerated transmission investment. Which is curious for an independent regulator.

So to some extent the future of new renewable and firming capacity rests in the hands of global oil markets, which have stalled after a steady recovery following a collapse in demand and prices at the start of the COVID-19 global pandemic.

Brent crude is trading around US$40 per barrel, up from the sub-US$20 a barrel prices in April but down from US$60-$70 a barrel in 2019 and US$90-$80 a year earlier. Oil prices have stalled for a number of reasons: sustained lower demand as the economic impacts of the COVID-19 pandemic continue and a continued supply glut not aided by recent easing of OPEC supply restrictions.

How long does the protracted economic uncertainty of this pandemic last? Weeks, months, years? While it endures it will continue to slow new generation investment which becomes more critical as time passes.