BILLION DOLLAR GREEN ENERGY HUB

Spark Infrastructure, the partial owner of SA Power Networks, Transgrid, Powercor, CitiPower and the Bomen Solar farms is looking at developing a 2.5GW renewable energy hub in the middle of the South West Renewable Energy Zone (REZ) in NSW.

The Dinawan Energy Hub is strategically situated along the route of the planned interconnector between South Australia and NSW. The EnergyConnect project will be a 330KV interconnector running between Wagga Wagga and Robertstown in South Australia and will open up more than $20B of new renewables projects.

The Dinawan Energy Hub will be located halfway between Coleambally and Jerilderie and due to its location will support the existing network and the Humelink and Karanglink interconnectors.

The hub is expected to be completed by 2025 and is expected to include 1GW of wind, solar and battery storage. The $1.5B project will be undertaken in stages with the first stage expected to

commence construction in 2024.

Spark Infrastructure have completed the project identification stage of the development and now will undertake engineering studies and community consultation. The final investment decision is expected in 2024.

In some ways the Dinawan Energy Hub will compete with the NSW government’s plans to develop the REZ however Spark infrastructure believe the REZ and the energy hub can be developed together.

Spark Infrastructure is also in the news with a potential takeover bid for the multi-billion-dollar business.

Leading global investors including Kohlberg Kravis Roberts (KKR) and Ontario Teachers’ Pension fund have showed interest in investing in renewable energy and infrastructure projects in Australia.

It is understood these investors are looking at investing $5B to take over Spark Infrastructure.

If the takeover goes to plan, KKR and Ontario Teachers’ Pension Plan may add the Australian market to their target markets having recently bought a stake in Finland’s largest electricity distributor. KKR is also in the process of buying John Laing, a developer with interest in renewables assets in Australia.

BIGGER BATTERIES AND LARGER STORAGE

Back in 2017 following the black out of South Australia, the Tesla big battery was announced as the largest lithium-ion battery in the world. Weighing in at 100MW/150MWh the unit was big and provided enough storage to get regions through short duration period of high price of low availability. At the time, most people in Australia thought of batteries as a small segment of the industry and did not predict batteries to make any meaningful impact on the market for the next 10 to 20 years.

The Tesla big battery has now grown to 150MW/194MWh with the addition of extra batteries but has lost its title as the world’s largest and is likely to lose the title as Australia’s largest battery with Neon installing a 300MW/450MWh big battery near Geelong.

Now even Australia’s newest largest battery is about to be pushed off the top step as large scale wind and solar projects are installing larger, high-capacity batteries.

Most large-scale batteries in Australia have not been operating as storage devices, instead offering a service to “time shift” generation out of intermittent generation such as solar or wind to the time where the energy is required and returns better prices. The big batteries have predominantly been operating in the frequency market where they deliver network services such as frequency control ancillary services and synthetic inertia. To provide the network service the batteries operate for short sharp periods and as a result do not require large amounts of storage duration. As the competition in the network services segment of the industry increases the price for these services has reduced. Battery developers are now focusing on “time shifting” to provide better return for their projects rather than being exposed to low solar hour prices.

As coal fired generators retire the “duck curve” will deepen opening more opportunities for batteries to time shift the wind and solar generation into the evening peaks.  Developers are now looking for large duration storage to optimise their returns over the evening peaks. It now appears a 4-hour storage duration is the norm.

In recent weeks we have seen the large market players with significant thermal generation installed entering the battery developer market. Energy Australia is planning a 350MW big battery with four-hour storage at Yallourn.  AGL is constructing a 250MW big battery with four-hour storage at its Torrens Island site in South Australia which has announced the mothballing of its gas units. AGL also plans to replicate the 250MW battery at its Loy Yang coal site in Victoria. At Eraring, Origin is planning to install a big battery to offset generation when the coal fired power station closes.

The question is, if “time shifting” occurs, the times when the battery charges will likely raise spot prices as demand increases and the evening peak prices should drop. To make money battery operators will need to arbitrage the charging cost with the price they receive when they discharge. With the increased penetration of wind and solar generation into the generation mix the spot prices during the solar hours are likely to fall further however with many large-scale battery developers still heavily reliant on coal fired generation the optimisation of their exist portfolio will be interesting to see.

WHAT IS CAUSING THE INCREASE IN THE SPOT AND FUTURES MARKET PRICES?

A constraint designed to maintain power flow in the Gladstone region, primarily to maintain the continuous current rating on the 132kV feeder bushing at Boyne Smelter, is constraining off hundreds of MWs in Queensland.

Constraints on the interconnectors out of Queensland are also limiting QLD generation. A constraint to avoid voltage instability on the Sapphire to Armidale 330kV transmission line is reducing NSW generation.

Constrained gas supply is also impacting spot prices. BHP’s Gippsland Basin joint venture with Exxon in Victoria, is not operating at full capacity due to a processing train at the Longford plant out of service since 28th June. This was due to an unplanned maintenance issue.

The unplanned issue at Longford has also reduced the output from the Bass strait gas fields that feeds the plant. The Iona gas storage facility operated by Lochard Energy is also running low.

The reduced level of generation from coal fired generation, resulting from the loss of Callide power station, the delayed return of Callide C3, and the reduced output of Yallourn in Victoria due to flooding have all added to the extra requirement for gas powered generation in QLD and VIC.

The requirement for extra gas-powered generation has led to higher prices in the gas market, which in turn leads to higher dispatch prices of the gas-powered generation. Higher dispatch prices lead to higher spot prices.

Domestic pressures on gas prices on the Australian wholesale market have been impacted by the overseas gas market demand and prices. As the Australian gas market is export dominated, any changes to overseas prices are reflected domestically. The benchmark Japan Korea Marker (JKM) is linked to the LNG netback price.

The JKM is also used as a floor for gas contracts in Australia and with the JKM lifting to $19/GJ this reflects in Australia. Today the Declared Wholesale Gas Market (DWGM) prices in Victoria is $58.44/GJ with a demand of 1,100TJ.

The futures market has responded to this week’s higher spot prices, along with the announcement that Callide C4’s return to service would be delayed until the end of 2022. The unit was planned to be in service by the end of 2021 and capable of supplying power over the 2021 summer however, the delay has pushed up the Q122 quarter prices as well as most of the quarters until 2023.

AGL DEMERGER

Last week AGL shared its plans to split the existing business into two. The announcement on Wednesday was not taken well by investors as shares dropped 10% when chairman Peter Botten made the announcement. The share price continued to fall through the week closing on Friday at $8.13 well below the $17.72 price a year ago. Investors are concerned that the two entities will lack the financial capacity to grow the businesses.

Accel, the coal fired part of the business will be led by current AGL CEO Graeme Hunt while Christine Corbett will run the retail business. Accel will earn its returns from carbon intense assets so institutional investors are steering clear of the business, Accel will also retain a 15-20% ownership of AGL Australia. Apart from a lower share price pushing investors away, it is also expected dividends will continue to fall for the 2022 financial year. AGLs retail business will retain the clean energy assets and the retail business.

The previous CEO of AGL Brett Redman proposed the demerger to evolve the business in a rapidly changing marketplace. Prior to the demerger AGL had consolidated to form a vertically integrated business, this worked well over recent years however the business structure is no longer optimal.

Customers are after a cleaner alternative to coal fired generation so the retail business that will retain the customers will be merged with the carbon neutral portfolio of assets resulting in customers sourcing their power from cleaner green generation sources.

While AGLs demerger does not seem to be seen by investors as a positive direction, Edge has previously highlighted that the splitting up of generation businesses is gaining momentum overseas with many fossils fuelled businesses creating businesses to develop a green focus and meet the customers’ demands. Time will tell if the demerge strategy will benefit to AGL.

Despite the negative outlook for Accel with its fleet of coal fired assets there is a positive light at the end of the tunnel. As the existing coal fired assets are retired Accel will retain their key location on the grid. Their favourable locations on the grid will allow Accel to transform the connection points from a high carbon emitting locations to low carbon hubs as new cleaner generation and storage is installed.

EDGE IS HELPING BUSINESSES TO STEP UP THEIR CLIMATE EFFORTS

The world is changing……………………. you only have to look out the window, to see the impacts of this. No matter how you think it is occurring or who you think is contributing to it, climate change is real.

Over the last decade it has been more evident that Australia is being impacted by climate change. We have seen higher temperatures, worsening droughts and recently parts of Australia have been impacted by the worst floods in a decade. Australia has always been affected by extremes in the weather, but science shows the impact and regularity is increasing.

At Edge part of our role is to advise our clients on how to best manage risk. This is not always financial risk as most people would assume but, indirectly climate risk. This is the biggest risk many companies are facing, and this directly relates to financial risk.

Investors are starting to push companies to align their operations towards emission reduction targets and the use of sustainable practices. Many companies across Australia are pledging to reduce emissions to ‘‘net zero’’ by 2050 however, many do not have a clear strategy to reach this target.

Edge has and is currently assisting our clients with the development of low carbon business models.

When investors are weighing up the performance of a company, they are now allocating more weighting to how the company manages it sustainability.

Edge works with a range of clients including, some of the largest mining and utility companies worldwide and over the last couple of years we have developed strategies to decarbonise their businesses.

The procurement of renewable energy is just one way in which Edge is assisting our clients. We have developed sophisticated mechanisms to provide the client with access to renewable energy, environmental certificates and emission offsets while managing the price risk and uncertainty in the energy market.

PIPELINE RUNS DRY FOR WIND

On Friday BloombergNEF released its latest Global Wind Market Outlook. It showed wind farm development has slowed in Australia with no wind farm project reaching financial close to date in 2021.

Delays in the projects are resulting as investors are more cautious to put money into projects that could be exposed to lower spot prices and potentially constrained off due to the continuing network challenges. In the previous your Covid-19 impacted our lives and slowed developments. Last year only 449MW of wind projects reached financial close, significantly lower than the boom year of 2018 when 2,500MW reached financial close.

Based on AEMO data, there is substantial pipeline of wind projects under construction across the NEM with 3,600MW being built. Many of these projects are experiencing delays due to the approval of connection agreements in some cases requiring additional infrastructure to be added.

BloombergNEF analysis predicts up to 700MW of generation could be delayed and not see first generation until 2023. It is understood we may see some progress in wind farm development before the year is out, with the MacIntyre wind farm and the Kaban Wind farm both approved by AEMO, the next barrier is financial close.

As system strength increases across the NEM due to greater interconnection and more stringent connection requirements the flow in the pipeline will increase. With the announcement of Project EnergyConnect which will link between South Australia and NSW it is expected to lead to more than $5B in new projects.

NSW is adding new Renewable Energy Zones (REZ), and these REZs are expected to allow up to $30B of new projects, however development has stagnated as developers wait for the REZ roll out.

While lower electricity prices are good for end users, the low-price environment is making investors nervous resulting in banking a project hard to achieve. With the power purchase agreement (PPA) market seeing more interest from large companies looking to reduce their carbon footprint we will continue to see deals being done and projects starting to be built through the remainder of 2021, 2022 and beyond.

Edge News – June 2021 Newsletter

As we head into a new financial year consider the usual activities at this time of year. Consumers on financial year contracts would (should!) be recontracted by now, leading to a temporary decrease in demand for forward contracts from a consumer perspective. Wholesale contract traders will be squaring away positions for financial year end, so we should expect some profit taking from those in long positions and vice versa!

One thing we all know with contracting energy… timing is everything!  Edge2020 clients provide tips on how to contract better.

We’ve been working with some amazing clients these past couple of months, and we highlight one in particular who was an absolute pleasure to work with (and who we helped save nearly half a million dollars).

We also review Callide – what happened and what now?

COAL FIRED GENERATION SHUT DOWN

Just weeks after the evacuation of Callide Power Station we have seen another thermal power station evacuated and units shut down.

Yallourn is the latest coal fired power station to be taken offline as it has been impacted by the flooding in Gippsland’s Latrobe Valley. The flooding has stopped production at the Yallourn Coal mine. The power station, operated by Energy Australia, has been operating at minimum level to conserve coal and this will continue until coal production resumes.

Part of the coal conservation strategy has been to shut down units and operate the remaining unit at minimum levels. This is not the first time Yallourn has been impacted by flooding. In 2012 the nearby Latrobe River broke its banks and water flowed into the mine shutting down operations for weeks.

Unlike the situation we had in Queensland a few weeks ago, there was no need for load shedding.  AEMO made a statement outlining there was no supply problem in Victoria. The six remaining coal fired units at Loy Yang remain online and not materially impacted by the flooding.

As occurred in Queensland, other generators filled the supply gap, Newport Gas fired station ramped up as Yallourn shut down units. Jeeralang power station operated at full capacity over the following evening peaks after the Yallourn units were taken offline and other units adjusted their bids to generate more if required.

Similarly, to the Queensland event, when the thermal units were taken offline there was insufficient renewable generation to fill the gap resulting in gas powered generation filling the shortfall.

RENEWABLE ENERGY ON WOOLWORTH’S SHOPPING LIST

Woolworths have signed a 10-year agreement to purchase electricity from the Bango Wind Farm. The new 82.8MW wind farm is located in New South Wales near the town of Yass.

The output from the wind farm will cover about 30% of Woolworths NSW electricity needs which will be used to provide renewable energy for 108 supermarkets and offset 158,000t of emissions each year.

The project being developed by CWP Renewables is expected to commence supplying electricity under the PPA in January 2022.

Woolworths has a target to move to 100% renewable electricity by 2025 as part of its larger ambitions to become carbon neutral and then take more carbon out of the atmosphere than they produce by 2050.

Woolworths operate in an energy intensive sector with supermarkets consuming large quantities of electricity. They implemented strategies to use their scale to benefit the community and the environment. Woolworths prioritise their support for new renewable energy project builds which invest in renewable energy while also supporting jobs in regional areas.

The Woolworths Group accounts for around one per cent of Australia’s total energy use. Woolworths continues options to invest in more renewable projects and is also looking to partner with energy retailers on new build renewable projects. Woolworth procurement strategy will assist in accelerating the availability and affordability of renewable energy for all Australian households and businesses as it continues its target to converts to 100% renewable sources by 2025.

The 100% renewable energy target by 2025 will support Woolworths’s transition to its carbon reduction target of 63 per cent by 2030.

Apart from the use of renewable energy in its supermarkets, Woolworths have also reduced its carbon footprint by around 25% by using energy efficiency initiatives such as converting its supermarket lighting to LEDs and optimising its air conditioning and refrigeration systems.

MULTIPLE UNIT TRIPS, CAUSE BLACKOUTS IN 375,000 QLD HOMES AND ENERGY PRICES TO RISE.

Apart from the power going out in 375,000 Queensland homes we would not have seen any real impact on the NEM as prices remained stable as supply and demand was managed by AEMO.

AEMO published a market notice at 2:21pm advising of the power event at H24 Calvale.

H24 Calvale substation is next to Callide Power stations, which connects to the 275KV transmission line that links Callide in central Queensland via Tarong into South East Queensland.

As a result of this transmission line outage, all the power from central Queensland was redirected down the transmission lines closer to the coast.

Following the simultaneous trip of the Callide units, Stanwell power station also tripped.

Initially there were various rumours regarding the cause of the failure including:

  • explosions at Callide
  • a fire in the turbine hall
  • a fire at the substation

It is now becoming evident that the cause could be a fire in the turbine hall at Callide. The station has been evacuated and emergency services are on site.

At the time of writing this update, 4:30pm, the Callide units have not returned to service however, Stanwell is gradually returning 3 of its 4 units to service.

As demand increases, solar generation diminishes, and thermal generation slowly increases the market has been put under stress. This has resulted in several price spikes and increasingly higher prices.

As we move into the evening, predispatch shows the price is likely to hit over $14,000/MWh for the next couple of hours, however this is unlikely to occur as the gas turbines and other coal fired generators increase their output.

Tomorrow when all the market data is published, we will provide a more accurate update on what is currently occurring.

Update:

  • At 16:13 AEMO flagged its intension to negotiate with RERT panel members for additional generation between 17:30 and 20:00.
  • At 16:16, AEMO notified the market that the transmission line out of H24 Calvale had been returned to service, this will allow generation to flow unconstrained.
  • It looks like 3 Gladstone units also tripped following the event at the same time as the Stanwell trips.