Mojo and the market squeeze

Australia it seems is not immune to the Retailer of Last Resort (ROLR) process which has been plaguing the European energy market for the last few years. Germany is discussing bailouts for Uniper SE, the French Government is talking about fully nationalising Électricité de France SA. The UK has seen over 30 electricity providers go into Retailer of Last Resort in the past few years, a gas shipper backed by Glencore go under, and have put Bulb Energy under the government’s control.

The Australian market isn’t immune either with Mojo just the latest retailer to enact the Retailer of Last Resort mechanism for its 500 customers.

So, why are so many companies buckling under the current energy crisis and what can you do to avoid being wrapped up in the process?

The squeeze of the energy markets is due to many factors, including the war in Ukraine and sanctions on Russian Oil and Gas reducing availability, catastrophic flooding affecting the mines and rail tracks from our own domestic coal supply and in our opinion some generators ensuring they are well placed to benefit from any perceived shortness of supply. All these factors have pushed the price of our domestic electricity and gas to unprecedented levels, and we are not the only ones. With Europe at 6 to 8 times higher than the last 5 years average there is no easing of international fundamentals pressure.

This should lead to higher prices on our bills, however, if a retailer has not adequately protected their position and are exposed to these prices, they cannot simply pass them through to the end user. Some consumers are protected by the Default Market Offer, this is the maximum that you can be charged on your bill, and it applies to mums and dads and small businesses with solar installed.

That isn’t a problem, is it? Well, if these retailers have not ‘hedged’ or bought the electricity contracts for their customers, before prices went up 6 to 8-fold, and they cannot pass through these higher charges, then they are no longer in a viable position to continue as a business and must call in a Retailer of Last Resort to take their customers and close. The customers who are passed to a new retailer then risk being passed through on a more expensive tariffs or variable tariffs.

With increasing interest rates globally eating into all aspects of businesses profitability and further possible energy price spikes, as retailers look to pass through as much of their costs as they can, we do not believe Mojo will be the last to shut its doors.

So how can you protect yourself from being exposed to variable pricing or smaller retailers in this market? Well, there are several ways:

  • Ensure you have a reputable retailer, the EUPP only works with the top tier retailers who have sound strategies to hedge their longer-term positions, either through generation or trades.
  • We ensure that all costs are either agreed at the start of the contract or passed through with no uplifts, and the allocation of these pass-through costs is fair.
  • Finally, the EUPP puts you into a larger group of buyers of electricity, allowing your company to benefit from access to retailers and contracts usually only available to the larger market.

All this coupled with the expertise of the energy managers, who manage your energy portfolio to ensure it keeps up with the market and defend your portfolio in this volatility.

If you feel you need more control of your company’s energy spend, please reach out to discuss joining our Edge Utilities Power Portfolio (EUPP) where we use the power of bulk purchasing to help Australian businesses of all sizes save on their energy bills. Read more: https://edgeutilities.com.au/edge-utilities-power-portfolio/ or call us on: 1800 334 336 to discuss.  

Is unaccounted for energy (UFE) allocation affecting my company’s bottom line?

Energy meter costs

I find myself asking, is UFE the UIG of Australia? Anyone who knew me in my past life in the UK knows that I harped on about Unidentified Gas (UIG) A LOT!

The idea behind the UK’s UIG is simple, it is to allocate the gas which couldn’t be attributed to a meter in an area, across all end users in that area in which it was used (known as “off-taken”). Seems simple right. But when was the last time you actually gave a meter reading? Possibly six months to a year ago, right? Well that means your off-take (unless you are on a smart meter) is estimated and you will be either over or under on allocated unidentified gas.

Now although this seems sensible with everyone eventually giving a meter read and therefore it will all work out in the wash,  the issue is currently exacerbated by the extreme increase in the gas price. These high prices are now passed through to retailers and then in turn our bills.

Now what does understating this UK gas usage or allocation have to do with Australia? Well, quite a lot. The system is similar, but not the same.

Following Global Settlements being introduced by AEMO we have started seeing Australia’s version of these charges coming into our bills. We allocate the unidentified – called Unaccounted for Energy (UFE) within each region by the off-takers in that area.

What we are not doing yet, which in the UK’s defense they do there (through XOServe), is take into account those meters which are half hourly ready (smart(er) meters) and therefore their usage should be known. Currently in Australia, the offtake in a region will be directly linked to your proportion of energy being allocated to you and you literally have no say in these charges, despite having updated metering capability.

The sore point of it all is, that this is occurring at a time where our electricity market is extremely high and therefore there is a possibility of the combination of large UFEs at high prices being passed through to end users, whilst having no control over the volume or price it is passed through at. This is leading to significant shocks to companies’ outgoings, as there is little to no visibility on the charge on any given month, and no way to forecast them for a company’s budget.

I fear that UFE will become my new soap box issue, but I can guarantee this isn’t the last anyone will hear on this. I am pretty sure I won’t be the only one who will be making noise.

Is this happening to you? If you feel you need more control of your company’s energy spend, please reach out to discuss joining our Edge Utilities Power Portfolio (EUPP) where we use the power of bulk purchasing to help Australian businesses of all sizes save on their energy bills. Read more: https://edgeutilities.com.au/edge-utilities-power-portfolio/ or call us on: 1800 334 336 to discuss.  
 

Conference of the Parties: The Youth Strikes Back

We all know Greta Thunberg, the girl who rose to fame at 15 for sitting outside the Swedish Parliament with a sign saying, “School strike for climate”. This movement grew to the worldwide strikes by school children known as ‘Fridays For Future’, whilst she rose to fame for her address to the UN Climate action summit and three consecutive nominations for the Nobel Peace Prize (2019, 2020 and 2021).

However, there is a quieter youth revolution occurring, one which is now in its 16th year and although not receiving the media attention of strikes such as those organised by Greta et al, this one is dubbed the most significant youth gathering for its capacity to directly forward the official youth position in the UN Climate Negotiations.

Conference Of Youth 16 or COY16 is the lesser-known child of the Conference of the Parties. It was established in 2005 at the Montreal COP11. By 2009 the United Nations Framework Convention on Climate Change (UNFCCC) and all member states at the convention officially recognised youth as its own constituency observer.

By 2011 the constituency was given its own status and title, YOUNGO. There it was also given a significant role and voice allowing YOUNGO to be formally heard by the UNFCCC in all discussions.

Now it brings together thousands of young changemakers from over 140 countries in the week before the COP.

Not only does it give them leadership advice and policy training so they can successfully prepare for their participation at COP. They are immersed in event management including how to mobilise people by engaging around different impacts in different sectors through to gaining scholarships and internships in areas of Climate Change and influence.

However impressive for the individuals, this isn’t the main purpose of the gathering. It is there to produce a policy document which is presented at the COP the following week to ensure the youth are represented at the UN Climate Negotiations. The Statement to be presented this year at COP26 can be found here https://ukcoy16.org/wp-content/uploads/2021/10/Global-Youth-Statement.pdf . But to sum up the document they are asking for a seat at the table. This is as they say theirs to inherit and as well informed voices they don’t want to be ignored or given empty promises, they want leaders to commit to change and stand by their word. They are asking for specific recommendations to be taken on board and these are well articulated and well presented arguments to do so.

How much they succeed and what impact they have is unknown, but they are gaining momentum and as the leaders of the future it will create a step change in politics whether the old guard want it or not.

 

Hydrogen Guarantee of Origin Scheme

Everyone wants a piece of the Hydrogen pie, and the Australian government is no exception. With the predicted demand forecasted to be 50 million tons by 2025 for industry and transport alone, and a conservative growth of 3.5% per year expected following this it isn’t surprising everyone wants to be first out to the Hydrogen blocks.

No sooner had the Department of Industry, Science, Energy and Resources (DISER) released its discussion paper and questionnaire to set up a Renewable Guarantee of Origin (GO) scheme for the Hydrogen industry (and post RET electricity sector) than the Queensland Minister for Energy, Renewables and Hydrogen, Mick de Brenni, went to the Smart Energy Summit and announced the Queensland Government was partnering with the Smart Energy Council to create a zero-carbon certification scheme to create certificates for renewable hydrogen, ammonia and metals produced in the state.

But the big question which needs to be looked at is “are all GO certificate’s equal?” This is going to be key to the salability and international credentials which will be imperative to the confidence given to our hydrogen on the international stage.

The most defined scheme by far is the European CertifHy scheme which has set some stringent definitions that Australia seems to be trying to find some wiggle room within! The CertifHy scheme was founded in 2014 and sets strong guidelines (backed by the European Union Renewable Energy Directives (RED I and RED II) policies, setting out minimum thresholds of the emissions intensity of hydrogen that can be certified under the scheme.

Australia will need to match these emission intensity thresholds or down the track when our “green” hydrogen isn’t accepted worldwide we will suffer the consequence. Within both proposals (DISER and the Smart Energy Council) they are supportive of using the scheme using the governments Climate Active certification. This seems sensible until you investigate their requirements for “net-zero emissions.” The issue arises in that the status can be reached by emissions can be offset by purchasing carbon credits, these don’t have to be Australian (Australian Carbon Credit Unit’s ACCU’s), but the status can be achieved with international private certification schemes which may not hold up to the stringent regulation of state-run schemes.

CertifHy has only 2 definitions of Green Hydrogen. Green Hydrogen is Hydrogen generated by renewable energy with carbon emissions 60% below the benchmark emissions intensity threshold set by Natural Gas. The second is Low Carbon Hydrogen which is created by energy, not from a renewable energy source but still means the same emissions benchmark of 60% below GHG emissions of natural gas. All other forms are known as Grey Hydrogen.

If this is seen to be the international standard Australia cannot deviate from this. With major stakeholders in the design of the CertifHy scheme from Japan, the USA, Canada, and South Korea the creation of a harmonized GO across Europe and beyond the market for certified GO Hydrogen will have its base standard set. Being accepted on a national scheme will not be an issue if it corresponds with the international standard, but this is one corner the Australian Government must be careful not to cut in its green ambition.

BASELOAD COAL GENERATION LOSING THE BATTLE

Since the release of the latest Electricity Statement of Opportunities (ESOO), Edge has updated its energy price forecast and the energy landscape is looking difficult for the remaining baseload coal generators. Most of the coal-fired generators remain in vertically integrated portfolios which used to use the cheap coal generation to subsidise the more expensive gas and renewable generation. With the increased penetration of renewables, the cost for these assets has reduced and become a burden on the portfolio. With the cost to maintain the thermal units to meet reliability standards and generating less, the cost per MWh is increasing.

The change in the market is reducing the value of what non-renewable generation has on portfolios. Companies with large coal exposures have written down their coal assets and needed to change their business model to survive.

Renewables are pushing out coal-fired power stations and putting increased pressure on the gas-fired generators. Over the last decade, renewable energy has been gaining market share and with reducing installation costs, the share of the market has increased over the last 5 years. In the last 2 years, renewables have generated more electricity than brown coal following the closure of Northern Power Station in South Australia and Hazelwood in Victoria.

Black Coal Power Stations are next to be impacted by renewables. Although until recently the biggest threat has been for Solar during daylight hours, which still allows the thermal generators to make their required returns outside solar hours. This equation is changing with the increased penetration of batteries that will increasingly allow solar generation to be time-shifted into non-daylight hours and hence reducing the number of hours thermal generation can control spot prices.

With Solar, we are seeing a marginal cost of generation of $0/MWh so these power stations bid into the market at $0/MWh which pushes more expensive generation further up the bid stack. When negative spot prices occur, increasingly we are seeing large scale solar generation curtailing their generation to reduce their exposure to negative prices. Due to the nature of Solar generation which can increase or decrease their generation very quickly, this practice is causing issues for the market operator.

The energy market is cyclic, we have seen high prices which lead to investment in generation followed by low prices as demand grows to meet the extra generation. Between 2017 and 2020 we had record-high prices across the NEM following the closure of Hazelwood. We are now experiencing record low prices because of the influx of cheap renewable generation. These low prices are putting pressure on the financial modelling of future renewables, which has the potential to impact the supply and demand balance in the future once the aging coal-fired fleet retires.

Capacity factor, the ratio of actual electricity output to the maximum electricity production from that specific asset, is falling for all coal-fired generators. The next coal-fired power station to close has dropped in capacity to 42% and other aging power stations have also dropped well below 70%.

The first state to have no coal-fired generation is South Australia and this state has been working through the challenges of a market filled with intermittent generation. The market operator has worked to resolve the technical issues arising from high penetration of intermittent generation, these solutions are starting to be used across the NEM.

South Australia at this moment in time is where we will see the other states in future years. System stability is becoming the issue and finding solutions to provide inertia which is key to system stability.

Another issue for the market is when the intermittent generation does not generate the demand that needs to be met for more expensive dispatchable generation such as fast responding gas turbines.

The problem for the market is not the increased penetration of renewable energy or system security, it is who and what fill the supply gap once intermittent generation is taken out of the equation. At times this residual amount can be very high.

The reserve can be filled by coal or gas, but the baseload units are not designed to only operate on the part of the days when they are required. Currently, these units stay online 24hrs per day. The only option they have is to reduce their output to minimum load to reduce output and potential losses resulting from very low prices.

As the coal plants become older and less reliable the service, they provide becomes less dependable, so more reliable solutions such as gas-fired generation or batteries once they become commercially viable are the solution. This leaves coal-fired generators in a market that they can’t sustain their required returns and can’t provide the service with the market needs due to their lack of flexibility.

As the growth in renewable increases, coal will be pushed out as the financial pressure on the generators and retailers increases. Retailers will renew their fleet of assets to meet the future need of their business and reducing maintenance costs and reducing emission liabilities will be the key driver to retiring the coal fleet. Coal-fired power stations are struggling to make the required returns now with most stations unable to remain viable after 2030 if the current price trend continues.

The government may have thrown the coal-fired generators a lifeline with the Energy Security Board (ESB) capacity market post-2025, where generators will be paid to remain available to provide inertia and other system security services. The issue with the lifeline is in the future. There will be other technologies that will be able to provide these services at low prices, making coal-fired generators obsolete.

NEW TOOLS FOR AEMO

We all agree having a safe, reliable, and secure National Electricity Market (NEM) is the key deliverable for AEMO. AEMO have flagged that there is a shortfall in the participants able to provide key services to keep the grid stable as the generation mix changes and they are running out of tools to keep the grid stable.

The biggest issue for AEMO and market participants is as synchronous generators such as thermal power stations reduce availability and eventually retire the much-needed system security services such as inertia and voltage control that they provide, drops.

As a result of AEMOs concerns, the Australian Energy Market Commission (AEMC) has developed ways of valuing the much-needed services.

The AEMC has just released a directions paper outlining mechanisms that could provide the system security services to the NEM. The AEMC has also highlighted support for innovative technologies to provide these services.

At this moment in time, AEMO has limited tools to improve system security at times of scarcity apart from using its intervention powers to direct generators online to provide the services. The problem with using its direction powers is that additional costs associated with the directions are passed onto end users and as a result this does not meet the requirement of the National Electricity Objective (NEO) of providing the lowest cost solution and it also distorts the market.

AEMC’s directions paper covers two rule changes proposed by Delta Electricity and Hydro Tasmania. The Delta proposal is to introduce a capacity commitment mechanism to provide system security and reliability services. In Hydro Tasmania’s request they propose to create a market for inertia, voltage control and system strength products.

Both these rule changes will form part of the Energy Security Boards (ESB) ‘post 2025’ market design. AEMO is also working with participants to develop the engineering to meet these challenges. These challenges include a changing market due to an increased reliance on weather dependent generation such as solar and wind and new technologies such as batteries.

The options in the directions paper are about providing a transitional approach as we move to a different generation mix while keeping the cost of the solutions to a minimum over the long-term. Solutions may include a similar process to direction but increasing the transparency of what assets should be online to maintain system security while keeping the costs down. Some of the options available to AEMO could be scheduling assets to provide specific services like voltage control while other would be scheduled for inertia. These arrangements would likely transform into stand-alone services similar to the current FCAS services.

The market is changing at a rapid pace and these extra tools in AEMO’s toolbox should allow the NEM to operate safely and securely for many years into the future.

NEW RENEWABLES ON THE HORIZON

The next phase in the development of the renewable industry may just be about to occur. The Australian Energy Market Operator (AEMO) have been studying locations for new renewable developments. The majority of the market has been focusing on Renewable Energy Zones (REZ) on land but the solution maybe further off ashore. AEMO have located four offshore wind zones off the coast of NSW, Victoria, and Tasmania. The potential opportunities could add up to 40GW into the grid. To keep transmission costs down, AEMO have found locations close to land where significant ports are established that will allow the renewable output for the wind farms to be used at renewable hydrogen export hubs.

This year, AEMO updated its inputs into the Integrated System Plan and one of the significant changes from previous years is the volume of offshore wind availability. The 40GW identified is likely to be constructed over the next 20 years. At this stage the only offshore wind farm is the Star of the South wind farm located off the coast of Victoria and is likely to be 2,200MW. The Start of the South project is likely to connect into the grid via the Latrobe Valley and will feed in electricity as the coal fired generation in that region retires.

As the Hydrogen market also grows, offshore wind developers will focus on sites adjacent to the proposed hydrogen export facilities around Newcastle.

Offshore wind developers are concerned the legislation hurdles may stall the industry, so they are looking for support from governments to allow the industry to grow.

Oceanex Energy is looking to develop and construct up to 4 offshore windfarms off the coast of NSW with output likely to be over 7,000MW.

Oceanex Energy CEO Andy Evans says the clarity over the legislation is important given that project developers would likely need to spend up to $200 million to get a project to financial close.

He said it was an industry that would be likely dominated by major energy players – such as RWE, Iberdrola, Macquarie, and Equinox, along with big oil companies such as Shell and BP that are also expanding into offshore wind.

ALL COAL FIRED GENERATORS SUPPORT KEEPING COAL ONLINE

On Thursday last week, Australia’s largest energy company released its annual report. The 192-page document contains a lot of information but not a lot of good news for investors. One of the sections is titled “a year of continued evolution”, first there was the planned demerger, then the exit of its CEO following the demerger announcement, now to cap it off the news of on-going challenging market and operating conditions due to declining wholesale electricity prices.

The FY21 financial results demonstrate the huge reliance AGL has on the wholesale electricity market with profits dropping 33.5% to $537M. These results have not been favourable for investors with dividends also down to $0.75 per share.

Revenue from consumer customers increased 1.1% thanks to an increase in customer numbers but large business customers revenue fell by 12.4% because of COVID related consumption drops and finally there was a drop of 4.6% for wholesale customer revenue driven by lower volumes and lower prices.

With the restructure of the business, AGL is looking to lead into a new future. Part of the new future is the decarbonising of the business and the move towards renewables.

AGL Energy CEO has called for a national plan to phase out coal fired generation to protect consumers and jobs if the energy transition falls into chaos.

The concern for the industry is that events like the Callide C4 turbine failure or the flooding of the Yallourn mine could trigger price shocks and blackouts. Other concerns include the increased penetration of cheap renewable energy and batteries that will make coal fired generation uneconomic, leading to early retirement.

AGLs idea has been endorsed by the majority of companies with coal fired generation assets. The Energy Security Board (ESB) has also flagged a scheme may be required to enable the orderly retirement of assets while keeping the grid stable.

AGLs CEO said “a plan is needed that goes beyond the reforms proposed for the National Electricity Market to give certainty to industry, investors, consumers and others about the pathway towards the eventual shutdown of plants”. This is something that would work in Queensland that has historically been reluctant to announce the early retirement of power station following the impact on regional jobs.

Alinta’s CEO has supported the AGL idea. Alinta operates Loy Yang power station which supplies a large quantity of baseload electricity in Victoria.

Origin’s CEO also supports the plan, saying they want to avoid a messy transition to low carbon energy.

We all agree a transition plan to reach renewable energy and emission targets is useful for owners and operators of coal fired generation to manage the life of their plant, but we must remember the owners of these assets are ultimately responsible for the utilisation of their assets. If they are under financial pressure and the units are becoming uneconomic, they can notify the market and retire the units or simply mothball the units.

Apart from sudden shocks to the market like what occurred following the Callide failure, other units in the generation mix pick up the difference very quickly. If the market is working correctly, the lowest cost solution is always found.

The Energy Security Board is working on plan to transition to a low carbon market to alleviate the concerns of generators with other enhancements including a two-way market to benefit consumers.

It is understood the ESB is developing a strategic reserve mechanism for generators to ensure adequate supply and certainty of available capacity. This mechanism will include capacity payments for dispatchable generation to supply the much need system security service they provide rather than just the electricity they generate.

With increased pressure on the federal government to reduce emissions to meet net zero by 2050, coal will need to make room for renewable energy. The question is, should coal generation be pushed out based on economics or should the industry and ultimately end users’ subsidies the coal generators to keep the lights.

LIQUID BATTERY

Is metal battery technology the next game changer? Bill Gates has put some of his money behind the concept supporting a Massachusetts company to commercialise and grow its long duration energy storage systems.

Ambri has obtained $196M in funding from its largest shareholder, Bill Gates with Reliance Industries Limited from India and various other institutions including a Japanese Energy Fund.

Currently Ambri’s batteries have capacities of between 400kWh and 1,000kWh. 250kW batteries can provide storage from 4 to 24 hours.

Liquid metal batteries are constructed of a liquid calcium alloy anode, a molten salt electrolyte, and a cathode comprised of solid particles of antimony. The material used in the construction are relatively low cost and easy to assemble keeping the overall price down.

Ambri claim calcium and antimony electrodes are less than one third the cost of lithium, nickel, manganese, and cobalt currently used in lithium-ion batteries.

The new battery technology is also likely to last 20 years with very little performance degradation over time.

Batteries are likely to cost up to 50% less than equivalent lithium-ion systems from 2022 to 2030.

The longer-term plan for Ambri is to construct high volume manufacturing facilities in the United States and globally while in the short-term Reliance New Energy Solar will develop and manufacture the batteries in India.

5 MINUTE SETTLEMENT DELAYS

AEMO have submitted a contingency plan to the Australian Energy Market Commission (AEMC) for consideration. Although AEMO is on track to meet the planned 1 October start date, it has submitted a rule change request as a precautionary measure.

The 5-minute settlement is a major market reform that brings 5-minute settlement in line with 5-minute dispatch. From 1 October 2021, the electricity spot market will settle every 5 minutes rather than in 30-minute intervals where it currently occurs. The changes to the market have impacted many parts of the electricity sector including generators, retailers, and network providers. This has resulted in new systems being implemented to accommodate the changes.

The AEMC has been asked to rule on a proposed contingency plan to account for an event where there is a delay to the implementation of 5-minute settlement resulting from late issues occurring with major IT change projects.

AEMC has prioritised this request because going live with 5-minute settlement before AEMO or industry can meet essential capability requirements would be a threat to the market.

AEMO will advise the market by the 1st of September if there is any cause for delays. If delays are not flagged, a new rule will not be made, and the 5-minute market will go live on 1 October. AEMO will consult with industry on the impact of AEMO’s three proposed alternate start dates. The final ruling will be live by 30 September if a change is required.

AEMO has identified two scenarios under the contingency plan. The first option is a short delay until 1st December 2021, and the second and third options are longer delays until either 1st February or 1st April 2022.

As the implementation of the 5-minute market required changes to the national electricity rules (NER), any changes to these rules, because of different start dates due to delays needs to be approved through the AEMCs rule change process.

The impact of these delays has a knock-on effect for different parts of the industry, the Commission noted that any new start date could change the timetable for other, linked reforms and affect existing market contracts for 5-minute settlement. The commission will make a decision on proposed alternative start dates with that in mind.

The AEMC have asked for submissions to the rule change request and will be open until 2 September.  A public forum on the issue will be held on 9 August.