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.
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.
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 – 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.