Boardroom Energy
Bulletin

This week

– Year in review

2022: more change predicted

– Chart of the year: Renewables spot prices

In Brief

It’s Christmas and the energy presents are flying around. AEMO handed out its draft Integrated System Plan for 2022 last week. It’s a head snapping, 100 page read. We will delve into its detail at the start of 2022. The draft ISP gives the clearest idea yet of how the electricity system will need to transform to deliver near to net zero emissions by 2050. By sketching out the future, it becomes apparent just how many variables will be in play, and how much could change over the next 30 years. Central to the ISP is a massive overbuild of renewables to power existing electricity load as well as transport and hydrogen production. It has a big reliance on distributed energy technologies and massive transmission upgrades. This all occurs as coal generators make an accelerated exit. If this plan is delivered, the big unanswered question is how much efficiency is lost in the highly orchestrated entry and exit of assets over the next three decades.

Not to be outdone, the Reliability Panel of the AEMC gifted its annual market performance update, with the biggest reliability risk coming from minimum demand events caused by growing big rooftop solar PV output in SA and Queensland. Who knew?

Because everything comes in threes, the ACCC reported on its inquiry into the National Electricity Market and found that electricity prices were at their lowest in 8 years. Expect this fact and a comparison to Europe and its carbon rices to be wrongly waved around next year during the election campaign. The real driver here is chronic oversupply. Don’t worry, it can’t last.

The energy supply sector wants Australia to target a 55 per cent cut in emissions by 2035. And no, it can’t all be electricity. Small retailers are claiming to have torn away thousands of retail customers from Shell after it bought Powershop. Shell says it’s not true. Sounds like activists vs police estimates of protest crowd size. It’s the brand damage that Shell’s retail rivals are after.

While Australian motorists can’t seem to get their hands on an EV, the car industry is warning there won’t be enough EV mechanics when we do. That’s curious, because EVs have always been marketed as a much lower maintenance option than ICEs.

The indomitable Kerry Schott isn’t going away after completing her term as Chair of the Energy Security Board. She’s going to head up NSW’s clean energy investment board, after Malcolm Turnbull pulled out.

Domestic gas supplies in WA could start getting tight (meaning expensive) from 2025 as flow rates slow. WA is the biggest domestic consumer of gas in Australia, hosting big gas consumers like alumina refiners and ammonia producers, who are all there because of the cheap gas. Will hydrogen be market ready to step in by 2025? Probably not. For subscribers we have a Background Paper on the future gas market here.

Headline regulatory changes: The AEMC has published a draft rule change to improve the technical standards for distributed energy resources (DER) technologies like solar and batteries, and is seeking feedback on proposed changes to consultation requirements for guidelines and procedures and has been asked to consider a rule change from AEMO to tighten the reporting of generator availability. It will be the 16th rule change proposed in 2021.

Year in review

In 2021 global energy markets reminded us of the brutal reality of how inelastic they are in the face of short term change. Just as the pandemic cratered demand and collapsed prices in early 2020, so covid-recovery revived energy prices in 2021. Australian motorists noticed this, as did American motorists, prompting the Biden administration to release some of its strategic stockpile, briefly crashing the oil price.

Europe in the midst of winter energy shortage

But the biggest demand shock was, and still is, in Europe, where below average wind output over several months increased demand for gas. With limited storage and a short-term market, this led to a massive price spike. Old coal plants also had to ramp up to help fill the gap. The increased CO2 emissions meant that carbon prices in the EU and the UK also hit record highs. Gas prices are currently tracking around 81 EUR/GJ ($AUD127/GJ). Spot gas prices on the east-coast of Australia around $13/GJ.

Source: IEA

UK retailers go bust

There were multiple repercussions. In the UK 26 retailers have gone bust, almost wiping out the gains made by small retailers in the last decade. Europe’s dependence on Russian gas has increased, and meanwhile Russian troops are massing on Ukraine’s borders. This is a salient reminder that global energy markets are just as much about geopolitics as they are economics.

Australia was insulated from the European gas crunch, as its prices are (loosely) linked to Asian gas benchmarks. The Japanese and Koreans buy gas differently from the Europeans, with long-term deals and ample storage, allowing them to weather these storms. Nonetheless, there are signs that the supply/demand balance could tighten over the medium term, especially in south-eastern Australia. The big Asian users have not retreated from coal with the same enthusiasm as Europe, and so China and India experienced some coal price crunches.

Glasgow

From a climate perspective, the UNFCCC’s COP26 conference in Glasgow was intended to be the big show (subscribers can read an insider’s view of the COP process here). Media and activist rhetoric centred around the failure of what was always an unlikely outcome – a big new global deal on faster emissions cuts to meet a 1.5 degree target. Glasgow was actually like most COPs: some modest incremental progress was made, largely due to unilateral announcements from various major economies in the run up to the conference. A high-level agreement was struck on the future of international carbon trading. While the detail needs to be fleshed out, it signals the beginning of the end for cheap overseas credits, which have been a mainstay of carbon offset and other ESG promises by some Australian corporates. There were also pledges to phase down coal and cut methane, although Australia was not keen on either.

The most significant climate deal of the year may be one that happened completely outside the COP. The EU and US struck a trade deal based around low emissions “green” steel and aluminium. This may be the prototype for a carbon border adjustment mechanism, (CBAM) the threat of which was a major driver for the Morrison government to finally declare a net zero by 2050 target.

No carbon price election in 2022

The punchline to the federal net zero target turned out to be that there weren’t any new policies to get there. Technology and voluntary action are apparently all that’s required. The ALP responded with a climate policy that was a little more ambitious and accepted the logic that some government policy was required to get there but didn’t create the same hostages to fortune as their previous climate policy platforms.

The Coalition and ALP agree on something: nothing they do is going to cause coal mine and coal plant workers to lose their jobs. Does the public buy this? We shall see. No coal plant closed this year at least. But a few announced new closure dates earlier than expected, most notably Yallourn, in Victoria’s Latrobe Valley, courtesy of a secret deal with the Victorian government that includes Energy Australia promising to build a big battery at its nearby Jeeralang site. Yallourn’s continued operation to 2028 was however briefly threatened during the winter thanks to a mine flood.

Things go bang

The Yallourn incident caused the Victorian power price to spike. This wasn’t the only coal-plant incident to cause volatility. More spectacularly, the Queensland Government’s Callide C blew up, causing power outages in the southeast of the state. Callide C is still under repair, although some wonder why they are bothering…In any case, AEMO’s draft ISP, just out, has the most aggressive official forecasts yet of the rate of coal closure, with up to 2/3 of coal capacity forecast to close by 2030.

Are these price spikes the shape of things to come as coal exits permanently? Hopefully not – the ESB thinks that a capacity mechanism can help. Whether the mechanism is to prop up coal or to help incentivise modern flexible resources like gas peakers, pumped hydro and battery storage depends on your point of view. Although it hasn’t been designed yet. Batteries have also supposedly been helped along by the start of one of the biggest (and most expensive) market reforms since the NEM was created – five minute settlement. Early indications are that it has put an end to disorderly bidding sometimes arising from the previous mismatch between dispatch and settlement, but whether there are fewer price spikes to start with is less clear. The AEMC’s storage rule change is also supposed to help, although their refusal to exempt charging batteries (or pumped hydro) from network charges has many proponents up in arms.

States go their own way

The ESB’s capacity mechanism was only the most prominent element in its final post 2025 market design proposals. This 2 ½ year project briefly threatened to be a significant shake-up of the rules that govern the power system but devolved into a mixed bag of tabulating existing reforms, articulating safely long-term visions (such as a two-sided market) and recognising that the ESB had been bypassed by state governments, who are now the key actors driving future investment. Energy Ministers quietly signed off on the reform package but it remains to be seen if they will pay more than lip service to the notion of national harmonisation of policy approaches.

It’s clear that the wholesale market is being reduced to a signal for the order of dispatching resources rather than a driver of investment as the states take over. Nonetheless, there were some interesting signals, including the growing prevalence of negative prices, largely in the middle of the day in SA, QLD and Vic. SA remains a fascinating live experiment in a renewables dominated grid. It set a new mark of negative scheduled demand on 21 November, as rooftop PV flooded the system. It also saw the start-up of four synchronous condensers to help maintain a secure system when there are few other spinning machines (i.e., gas generators in SA’s case) running. These already look like they could be a white elephant before long. One of the factors that reduce their utility is that in 2-3 years there’s likely to be a new connection from SA to NSW that will give AEMO more options for managing the grid. Project EnergyConnect as it’s known, will be the largest new transmission project in the NEM since market start. It’s likely only the first of several similarly large licks of transmission that will transform the dynamics of the NEM.

Hydrogen hype

Hydrogen – especially green hydrogen – continued to be the most hyped energy source around. The reality is yet to catch up with the hype. Andrew Forrest says he’s going to build a gas plant that will run on hydrogen in Port Kembla – when the Coalition gave him some money towards it, they said it was a natural gas plant. Meanwhile with less fanfare, governments and agencies began the important if dull business of updating gas regulations to accommodate hydrogen blends and eventually pure hydrogen. The federal government also got the ball rolling on a national Guarantee of Origin scheme, a necessary precursor to a potential green hydrogen export industry. And NSW became the first government to begin implementing a “renewable gas” scheme to stimulate the development of a green hydrogen industry. Subscribers can read more about this emerging technology here.

Offshore wind hype

Regulatory changes also sparked a flurry of PR activity in the offshore wind sector, as the federal government finally got around to updating offshore regulations to accommodate the sector. The most intriguing project is the prospect that the Portland aluminium smelter may underwrite an offshore wind project and plug the output directly into its own operations. But it’s early days yet – subscribers can read about the dilemma Australia’s offshore wind sector faces in a background paper here.

The other technology we didn’t see much of was electric vehicles. At present there are too few models at too high a price for Australia to emulate the increasing take-up in Europe and China.

Corporates go green

Even if tomorrow’s technologies aren’t quite here today, a clear indicator that the energy sector is going through a major transition is the upheaval in corporate ownership. The standout is the impending split of AGL. Corporate activism has forced a cleavage between “clean” AGL (retailing, renewables) and “dirty” AGL (fossil fuel generators). This did not rescue the share price, especially when the CEO who was the apparent architect of the split decided to jump ship shortly after the announcement. More attractive to investors were network businesses, with both Ausnet and Spark about to depart the ASX. Meanwhile, renewables portfolios, especially those with a small retailer attached, especially with a few renewables behind them continued to attract a lot of overseas interest. Shell won the auction for Powershop and immediately started bleeding customers who feel an oil supermajor isn’t green enough for their taste.

The interest in renewables portfolios indicates the long-term attractiveness of these assets as well as the wall of “green” cash desperately looking for a home. In the near-term though, renewables lobbyists bewailed the state of the market and its rules, in the face of a slow down in new developments following the record-breaking years of 2019 and 2020. But there’s one clean energy technology that can be relied on to be popular year in year out. Rooftop PV kept barrelling along, with around 4GW expected to be added to the nation’s roofs this year again. Its popularity continues in the face of regulatory changes designed to make a grid with so much of it easier to manage. In this ever-changing world in which we live in, it’s nice to know some things don’t change.

2022: more change predicted

Energy used to be a policy backwater. Low ranking government ministers would adopt bipartisan deals on new coal fired power stations and have lunch together. Prices were always low, reliability was mostly high. Energy was predictable. Looking forward to 2022 is a reminder that those halcyon days are fading into the distant mirror now. The only certainty is uncertainty.

The year will start with Europe still in the grip of a winter gas shortage, skyrocketing prices and too much of its industrial demand curtailed. Russia, which is the biggest energy exporter to Europe, will continue to use the crisis to try to broker some geopolitical advantage, which means trying to weaken and isolate Ukraine. The severity of the energy crisis will be shaped by the severity of the weather. The conclusion of this geopolitical crisis will depend on the brinkmanship of Russian President Putin, how hard the US wants to push back and how far the EU will let him.

This winter may determine the fate of the Nordstream 2 gas pipeline, the second direct gas pipeline between Russia and Germany. It is completed but its final sign off has been suspended by German regulators as a result of 175,000 Russian troops who began to amass on the border with Ukraine a few weeks after Europe found itself plunged into a gas shortage. The US state department has been lobbying Germany since 2017 to not build more gas pipelines to Russia, precisely because of the strategic consequences of events like this. Will it be approved by Germany regulators, or will it be shut down indefinitely? Boardroom Energy says it will be approved in the northern spring. Business is business. And energy is critical for business.

Oil futures for 2022 appear to be stable around USD$70 a barrel in the first quarter of CY 2022 as the Omicron variant of COVID-19 softens demand. This results in Henry Hub gas futures easing slightly too. This suggests the gas crisis in Europe will not spread next year, which is good for the Federal Government going into an election, as gas prices drive wholesale electricity prices. The election will be in May, or any time earlier if there’s a bounce in the polls.

Labor has laid its low-risk climate and energy platform on the table six months early, differentiated by ambition rather than policy. It will be the first federal election without a carbon price in play since 2004. As Kim Beazley said, there’s always room for one more. If Labor wins (they’re paying $1.62 on Sportsbet) expect a more vigorous climate and energy policy discussion in the second half of the year. A hung parliament is still possible (Sportsbet reckons this is about a 20 per cent likelihood). Zali Steggall wants a 60 per cent emissions reduction by 2030, but remains vague about the policies to do this. She should fit right in.

There will be a queue of rent-seekers around the block seeking government monies for their technologies. Expect hydrogen, offshore wind and more than 50 announced battery projects to be jostling for space at the front of the queue. What will be interesting is how a possible Federal Labor handles the ($10bn) expensive but possibly quite handy Tasmanian Battery of the Nation project. Will they find it easier to deal with the Victorian Government? What about the staunch opposition from the Victorian Energy Policy Centre?

Back on the mainland the first unit at Liddell will close in April, with the remainder available for another year. Even though renewables have slowed to modest 5GW+ of new generation a year (more than half of this rooftop solar PV) this is still a belting pace on the global per capita scale. As observed in our Chart of the Year below, the continued build-up of renewables is suppressing wholesale electricity prices and driving deeper and longer periods of negative spot electricity prices, mostly when the sun is shining and the wind is blowing. A more organised approach to coal exiting may be required, and soon. At least one coal generator is likely to give the required three years notice next year. It won’t be in Victoria. Probably NSW and/or WA. A NSW state government deal as part of their next closure is a certainty.

The pace of new renewable investment may slow as a result of solar and wind supply chain bottlenecks driven by higher costs of key inputs, supply chain disruption and increased demand. Batteries will be impacted too. This will strengthen the hand of pumped hydro proponents, even though the bottlenecks will probably be cleared before they start pouring concrete for any of their projects. Renewable project developers will be itching to start colouring-in the maps of renewable energy zones, most of which are still not connected with transmission lines. There will be talk next year of how to expedite this process to get things rolling. Coordinating renewables projects around as yet non-existent transmission assets and keeping everything cash flow positive will require some hands on planning. Local communities who don’t like large new transmission lines will slow the process down.

All these “real world” problems won’t harm the buzz around the new toy in the toyshop, offshore wind, because it’s already more expensive anyway (check out our Background paper on offshore wind here). Australia hasn’t got offshore wind yet, so it’s a me too technology. Their sales pitch says offshore wind is like baseload power (no it isn’t), it creates thousands of new jobs in key regions (no it doesn’t), and its higher efficiencies more than overcomes its much higher installation costs (no they don’t). So why exactly are we trying to build this?

NSW will introduce a new hydrogen RET-styled scheme in 2022, Buying an EV will remain more like a hostage negotiation than a new car purchase (no test drives, full sticker price, one year waiting list, expensive models only). States like South Australia will start to kick the tyres on using the capacity mechanism proposed by the Energy Security Board, that is, if they want to retain any large-scale firming capacity in the state.

The Clean Energy Regulator will hopefully begin to tighten the screws on cheap, dubious offsets from overseas as it brings its Corporate Emissions Reduction Transparency Reporting into full gear (CERT). This will significantly increase the cost to companies of claiming to be carbon neutral or offsetting high emissions activities. If this coincides with the ALP implementing its plans to start ratcheting down the Safeguard mechanism baselines, then there will be a ramp-up in demand for ACCUs. This in turn will draw focus onto the supply side and how to expand supply. Quality control will be key.

Companies across the economy will continue to make big announcements on big clean energy, infrastructure and storage projects, but only a fraction will look vaguely like getting to financial close. More foreign owned businesses will join Enel, Shell and Iberdrola trying to invest in the transforming Australian energy market,  further undermining activist claims that Australia is uninvestable.

COP27 will be held in Cairo in November. The number of activists able to get there will be much lower than Glasgow, but Greta Thunberg will still make it. It will be portrayed as another minute-to midnight opportunity to save the world. It will fail to get any critical global deal, but it will make useful progress.

Chart of the year: Renewables spot prices

It’s hard to pick one chart that encapsulates the energy transition and its challenges, but we thought we’d give it ago. In our September 24 bulletin, we explored the volume-weighted average (VWA) spot prices that large wind and solar projects achieve across the NEM. This price is a signal of the value the market is putting on the output of these projects. One of the charts showed the difference between the VWA price achieved by wind and solar and the spot price. As can be seen below, wind and solar tends to earn less than the spot price – a function of its intermittent nature and the limited diversity of renewables output. The trend is towards a bigger negative gap.

Chart 1: difference between the spot price and the VWA price achieved by wind/solar, by region, $/MWh

Source: Boardroom Energy analysis from NEM Review

Why does this matter? The problem is that we keep installing wind and solar at high rates to meet emissions goals, but each new plant will be contributing less valuable energy. Even though wind and solar costs are on a downward trend, projects may struggle to cover their costs unless they can find an offtaker willing to pay a premium. Who would do that? Some corporates may do in order to meet their own emissions goals, but they risk finding that when they pay on top of that for reliability, that the overall price is too costly for them. More likely is state governments. But this begs the question, where does that excess price go? The indication from the ACT, who have already done this, is that it rebounds on consumers in the form of higher bills. Real solutions include closing coal, which will give at least a temporary boost to renewables prices and making demand more flexible, so that demand follows supply rather than the other way around. This includes storage. Developing Renewable Energy Zones may help by increasing the geographic spread, but it remains to be seen whether that improves diversity of output enough. In any case large scale solar is competing against rooftop PV, which has the advantage that it offsets retail bills, which are much higher than the underlying wholesale price. Whatever the solution, addressing this challenge is a key element of a successful energy transition.