Know your NEM: Rooftop solar catches wind in slow, but low priced start to 2020


“When Richard Branson, the wealthy owner of Virgin Atlantic Airways, was asked how to become a millionaire, he had a quick answer: ‘There’s really nothing to it. Start as a billionaire and then buy an airline.’” Warren Buffett 2006. In ITK’s view the same could be said of investment in electricity generation.

2020 starts slowly

Gas prices are very soft.

Coal prices have risen off their lows but are way down on last year.

Rooftop solar almost caught wind as a share of generation, but that won’t last.

2020 electricity demand has been very soft 20 days in and this has pushed both spot and futures prices way down. Let’s look at the pictures:

Figure 1 Victoria March 2020 baseload futures. Source: ASX

From $160 a megawatt hour at its peak, to about $95/MWh 4 months later.  It only takes a few hot days to push up average prices for the quarter, but traders who were on the right side of this trade could have made very good money in a hurry. At last quote the price is now a touch below ITK’s forecast, made back in October.

The broader picture shows a moderate reduction in futures quotes from a month and even a year  ago. As you might expect, Victoria and South Australia are more volatile.

Figure 2 Baseload futures quarterly. Source: ASX

As well as demand influences, prices are of course driven by supply. Just about everything on the supply side points to lower prices near term.

Figure 3 Source: Factset

Coal prices are up US$5/tonne off their lows but there are lots of issues which I’ll deal with in a separate note. Spot gas prices in Australia are now down around $6 a gigajoule – a far cry from their peak of about $11/Gj. 

This will be tempting to developers of gas generation ,although personally I wouldn’t go there. Gas is going to become as much of an issue as coal over the next 15 years from a global warming perspective.

In my view Origin Energy is making a big mistake focusing on Northern Territory gas and oil, and its APLNG interests and not doing more to become the “NextEra” of Australia. But again that’s for a separate note.

Figure 4 30 day average STTM expost gas prices SA, NSW, QLD. Source: AEMO

Renewable supply is about 19% of total demand, down from its peak of about 21%. This is a seasonal reduction.

There is still lots of supply being built, notwithstanding a lack of new project commitments in recent months. As ITK forecast years ago, transmission is the big stumbling block.

An even bigger stumbling block and something else we will be writing lots about (although with much less confidence due to lack of technical background) is the failure of AEMO to prepare for a low inertia grid.

Australia is probably a decade behind Europe and years behind the USA in this regard despite the fact that we have such a high share of distributed energy. More later.

Figure 5 Source: NEM Review

NSW talks a big game but as ever does less than anyone as we can see from the coal generation share:

Figure 6 Last 7 days share of State generation. Source: NEM ReviewFigure 7 Last 7 days annualised wind & solar. Source: NEM ReviewFigure 8 Source: NEM Review

It’s important to understand that because of energy efficiency, which despite the current Federal Government doing its best to unwind all the stuff setup in the Rudd/Gillard years, continues apace.

And because of the growth in behind the meter solar it’s a fact that new in front of the meter  generation (that is utility-scale projects) whether VRE or renewable or thermal firming power are competing in a declining total market.

Policy makers still don’t get that and I’m not sure the private sector always does either. In any event it’s why more policy is required.

The only way new supply can make money is by pushing out existing supply. Think about it. Demand for utility generation is declining at about 1% per year despite population growth

The only thing that will stop that is either saturation of the behind the meter market or cutting generator level prices. Because of transmission and distribution costs cutting generator level prices won’t really achieve much. At least not the cuts ITK can foresee.

Figure 9 Utility scale demand. Source: NEM Review

Equally as much as there are new sources of demand eg electric vehicles, or there would be if either State or Federal Govt had some policy its also true that there are still massive aluminium loads likely to leave the system.

David Leitch is founder-director of ITK and a regular contributor to RenewEconomy and a co-host of its weekly Energy Insiders podcast.

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