The state of the market – rising energy costs in today’s budget explained.

Up and up

The budget handed down last night by the Albanese government really did show that there will be “hard days to come”. The treasurer, although acknowledging the international pressures and increases of electricity prices, did nothing to assist with this increasing cost on households and businesses bottom lines.

So why are international pressures a driver for the electricity we use when we turn on our lights?

Well let’s start with a breakdown of what goes into our bill, a large customer will see this split into each section, but smaller businesses and households don’t, they are just rolled into a flat tariff.

There are 4 main components of the energy we buy:

  1. The physical electrons / energy we purchase
  2. The environmental subsidies we all contribute into for a certain number of renewables to be underpinned
  3. The cost of running our electricity grid
  4. The cost of maintaining and running the infrastructure from the huge transmission lines coming across the state to the smaller distribution lines which bring the power to our business or home

The cost of the physical power we use has been on a rollercoaster the last few years. From unprecedented lows during the pandemic, when there was little global demand for our exports and lower demand from our domestic industry to the highs we are now experiencing. But to breakdown this huge shift we have to look abroad.

Let’s first address why we are looking outside of Australia. As a country our coal and gas is largely exported into Southern Asia. Their thirst for energy has increased dramatically over the last few decades and our abundance of natural resources and location made us a great partner to feed their demand. But we are not the only ones satisfying their thirst for energy, and therefore our price of export at is linked to the price other global countries will export at. Setting the ’Global price’. It is just like us going into Coles (China) and seeing Tim Tams for $20 and knowing they are $4 in Woollies (Australia), we would always shop at Woollies. Therefore, to ensure no company misses out the price is always about the same no matter where you shop.

So, if you are an exporter of coal and you know you can sell your Tim Tams to Coles for $20, why would you supply our domestic market (Woollies) at $4/pack. You wouldn’t, you would pile all the coal (Tim Tams) you could on a ship and send it away as quick as you can, and that is why we are linked to the international market. As we need the Tim Tams (or Coal) to ensure our domestic electricity demand is met. But, to do this, we also have to pay the $20/packet to make sure we can have enough here in Australia.

This international price has skyrocketed recently. Not only has demand come back from all the lockdowns caused by COVID19, but the Ukraine crisis has thrown global energy into a tailspin. Europe, who used to be nicely fed their Oil and Gas from Russia now cannot get their supply, as such they are telling everyone they will buy the Tim Tams for $25 even $30 per packet. So again, the circle of, if I can sell to them for $30 why would I sell to Woollies for the now $20 price re starts until Woollies (Australia) is now paying $30 per packet.

But as the cost of the Tim Tams go up we start thinking maybe I will have a Kingston (Gas) instead, it is easier to buy and no one has bought them all for the next 18 months at $30/pack. So, as we all start leaving behind the expensive Coal (Tim Tams) because they have all being bought and pre-ordered for 18 months and move to Gas (Kingston’s). In doing this, that price also increases, and so the spiral re-starts.

Now let’s add some spice. The delivery truck bringing those Tim Tams and Kingston’s to the shops (Power Stations) are flooded in, or the truck unloads but they all get soggy in the rain. Now they can’t be eaten (burned to make electricity). So, what happens? What was already a high price, gets higher. So, with a third La Nina forecast for Australia and flooding already affecting many regions, these deliveries are either delayed or just don’t make it. Meaning an already tight market becomes more sparce and therefore more expensive.

Now the cynical among us would say that the generators are taking advantage of this, and the market is pushing the price higher and higher because they have bought their Kingston’s and Tim Tams at $20/packet and could sell them to us at that price, but instead they know they could now charge $30 per packet so why not, they bank the $10 per packet and no one is wiser. But that is for the ACCC, and you would hope they are watching such behaviour with eagle eyes!

These are a handful of the drivers affecting our price at the moment, there are currently 7 to 10 of them all similar in their affect, that any fluctuation anywhere in the world is having huge repercussions to us at home.

But they aren’t the only changes. With huge pushes towards renewable energy and the certificates produced by them, this market is also increasing as the number of renewables is not increasing as quickly as the amount required. Therefore, again the costs go up and this is passed onto the end users in their bills. Now factor in this renewable energy is going to cost more not just now but in the future, as the cost of making the solar panels increases as the electricity price increases. Therefore, the cost of any of this de-carbonisation has just increased in price too.

But that isn’t the end of the story, finally, let’s consider the cost of bringing the power from the power station to our meter. This is a huge amount of infrastructure which is either older requiring it to be maintained or new requiring funding. Both costs are underpinned by debt. The higher the lending rate is, the higher this debt becomes and therefore the more we are charged to use their system. Further with the huge roll out in renewables this will require significant upgrades to the system as the power will be coming from less conventional areas to the load centres (think towns / cities). With the interest rates rising the cost of this debt or borrowing goes up, just like a mortgage on a house. Again, this only means one thing. An increase in pass through costs to our bills. With huge renewable ambitions and nowhere near enough funding passed down in this budget, that can only result in increases to our bills from our retailers.

Unfortunately, this means that without significant easing of many of these fundamentals, there is no relief in sight. Maybe for once the sensational headline of 35% increases in bills may turn out to hold some truth.

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If you feel you need to take more control of your company’s business 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.  

 

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.  
 

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Power Portfolio

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SOLAR LEADING THE WAY

Each week new records are broken across the energy market. Be it historic record low demands, reducing levels of thermal plant availability or the increased availability from renewables.

Last week saw solar reach more than 50% of Australia’s demand. This came as record generation levels came from both rooftop PV and large-scale solar sectors.

Ironically this record occurred on Sunday while the National Party room was meeting to discuss their stance on net zero emissions. As the Nationals push to lift the profile of the coal industry and power the country from coal fired power stations, solar generation reached 51.8% of the NEMs demand.

While regions like South Australia have passed the 50% solar milestone during the weekend it was the first time the NEM reached more than 50%. As expected, solar provided most of the electricity between 11:00 and 13:00, peaking at 11:55.

The 50% hurdle could have been higher as negative prices in South Australia economically constrained some large-scale solar plants. On the previous day, the record would have been broken if not for Queensland economically constraining off 1,800MW of large scale solar due to negative prices.

As mentioned above the NEM is also experiencing low operational demands and in line with the high rooftop PV generation, the demand dropped to a record low across the NEM of 12,936MW on Sunday as solar reached over 50% generation. As rooftop PV is not economically constrained, it accounted for 38% of the underlying demand.

As solar generation increased, it displaced coal fired generation with black coal generation throughout Queensland and NSW reaching historic lows of 6,105MW.

These statistics were surely discussed in the Nationals party room over the weekend and along with AEMOs forecasts showing the NEM can reach 100% renewables by 2025 as their base case scenario in modelling such as the ISP and the ESOO, the question about the role of renewable and coal in the market must have been discussed.

During the Spring months, skies are clearer and air temperatures are conducive to low air conditioning and heating loads, we could realistically see a situation where rooftop PV could cover demand. Of course, this will cause issues for AEMO who are required to keep various synchronous units online for system security however recent changes have allowed AEMO to employ systems to switch off solar in the event of a grid event to maintain grid security.

Written by Alex Driscoll Senior Manager Markets, Trading & Advisory

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.

SNOWY 2.0

With the release of the latest Electricity Statement of Opportunities (ESOO) some of the assumptions used in it have raised concerns of the viability of Snowy 2.0 and the impact it will have on security of supply for the market. Snowy 2.0 had been given the green light under AEMO assumptions even though the project would not have hit the hurdle rate AEMO uses for all other projects.  The second concerning point is when you build one of the largest generation assets in the country it is crucial that it is linked to the market via appropriate transmission lines. Information from transmission line providers suggests the full capacity of the powerlines will not be in place when Snowy 2.0 comes online. Our third concern is the cost of the new transmission line projects are rapidly rising. These costs will go directly to the end user.

Transmission provider TransGrid outlines information on HumeLink, the transmission line earmarked to connect Snowy 2.0 to the NEM. TransGrid estimates HumeLink costs have increased from $1.3B in the draft assessment to $3.3B. The more worrying statement is TransGrid saying the final cost could be up 50% or more.

Apart from HumeLink, to be full unconstrained, Snowy 2.0 will need the Victoria to NSW interconnector West (VNI West) transmission to be built. HumeLink is labelled the largest transmission project in history, VNI will be a similar size and most likely a similar price however costing have not been released.

The cost of these two transmission lines will eventually be passed down to end users via increases in transmission tariffs. Modelling has indicated that the $3.3B for HumeLink will add 40% to NSW costs. While these costs are met by all end users, large users will be impacted the most as these fees are paid for on a proportional basis.

Latest costing suggests HumeLink, VNI West and Snowy 2.0 has the potential to cost $12 billion. This will make Snowy 2.0 the most expensive generation and transmission project in history.

The question is, with far cheaper renewable projects that do not require 2 huge transmission lines to make them effective for system security, are there better options the federal government and the consumers of NSW could be spending their money on.

SOLAR SLOWING DOWN

Recent data shows there is a slowdown in the rooftop solar industry, and this is likely to continue as prices rise. Installations in August dropped, most likely due to the current lockdowns in NSW and Queensland. NSW installations have been the heaviest impacted followed by Victoria then the largely COVID free Queensland.

The early growth in the roof top PV market has gradually reduced with 2021 largely being flat across Queensland and Victoria. Early adopter states like South Australia are gradually declining due to early adopters reaching capacity. The growth in the early adopter segment is now replacement of existing systems with larger systems.

It is likely that the continued growth in states like Queensland are a result of COVID related home improvement plans funded by government financial stimulus.

Recent talk of a ‘sun tax’ has prompted people to install roof top PV before the changes occur while residents in SA would be concerned about installing a system that can be switched off when system conditions occur potentially leaving them exposed to high electricity cost. The other driver slowing the uptake of roof top PV is the lower feed in tariffs offered by retailers. The lower feed in tariffs do not make the installation of roof top PV as attractive and large-scale renewable energy should also bring down the retail cost of electricity.

With recent changes to the exchange rate the cost of imported panels will increase and as a result roof top installation will become more expensive. Higher installation costs and lower feed in tariff reduces the incentive for households to install solar.

As the number of installations drops, operational demand is less impacted during solar hours as consumption increases over time. Under the small-scale renewable energy scheme, liable entities are required to surrender the number of small-scale technology certificates (STCs) equal to that produced each year so as the number of certificates created each year increases the number of certificates they need to procure also increase. Any slowdown in the installation market may even reduce the percentage of certificates the liable entities need to surrender. STCs are likely to stay in their narrow trading range even if the number of certificates created each year fluctuates.

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.

HYDROGEN PLANT CRITICAL

Andrew Forrest is one step closer to building a hydrogen fuelled power plant in NSW with the project being declared as a critical state significant infrastructure (CSSI) project. The CSSI status granted by the NSW Department of Planning, Industry and Environment show the $1.3B project has government support.

The duel fuelled 635MW power station is also hoping for support through the federal government’s Underwriting New Generation Investments scheme but at this stage no funding has been released to any project. The power plant forms just one part of Andrew Forrest’s plans for Port Kembla with his company Squadron Energy also developing the LNG import terminal.

The duel fuelled power station is designed to run on 50% green hydrogen but is likely to utilise the LNG available close by.

The Port Kembla power station is aiming for financial close by August 2022 and operational by Q125.

NSW Deputy Premier John Barilaro said the move to grant the project “critical state significant infrastructure” was driven by its “game changer” status in terms of supporting new renewable energy in NSW as coal power plants close.

The timing of this announcement is also good news for renewable energy project developers who have recently been invited to an expression of interest for the New England Renewable Energy Zone (REZ). The synchronous power station will not only provide an opportunity to burn clean green hydrogen but also provide much needed system strength services such as inertia.

The government has received 34GW of renewable energy interest which is 4 times the proposed capacity of the REZ. This has raised concerns from communities that fear over development of the area.

Matt Macarthur Onslow, from the Responsible Energy Development for New England, said the major expansion envisaged lacked “social licence”, and major divisions within local communities regarding renewables and concerns that they feel are being overlooked.