Energy Market Update for February 2011

14 Feb 2011Archived News Climate Change Matters

While the first two months of summer were notable for the absence of extreme market events, February has hit NSW with force, with temperatures in the first six days of the month in the vicinity of 40 degrees in some parts of the state.

Overall electricity price movements 

The previous record NSW electricity demand of 14,274 MW was exceeded on 3 days in the first week of February, with the record now standing at 14,580 MW. On 1 February spot prices reached a high of $12,136/MWh. The spot prices seen so far this month can be expected to add several percent to contract rates for the remainder of 2011.

The chart below shows the movement in financial year 2011/12 futures pricing from the start of last year. While the jump experienced last week was steep, even at the peak prices were still reasonable in the context of what has been previously available, and were broadly in line with pricing in October 2010. Prices have dropped following lower than expected spot prices on Thursday and Friday last week and the return to spot normal market conditions following the cool change on Sunday.

The table below shows the variability in the financial year 2011/12 futures pricing since the beginning of 2011.

1. NSW Electricity Sector Privatisation 

The NSW Government proceeded with its sale of the electricity retailers and the trading rights of the generators. The sale is the subject of a parliamentary inquiry which may delay the expected acquisition completion date of 1 March 2011. The following table shows the successful purchasers.

The sale reduces competition in the NSW energy market and, as expected, no new players participated in the sale. Competition is further reduced by the fact that vertical integration has been returned to the market, although the impact may be lessened by the failure of the second GenTrader tranche to sell.

2. Extreme Weather Events in Qld 

The flooding in southeast Queensland and the cyclone in northeast Queensland are expected to have the following short and long term impacts on the market.

  • Short Term - loss of power due to network outages.
  • Short Term - reduction in demand as business returns to normal.
  • Short Term - reduction in coal supplies until transportation infrastructure can be rebuilt.
  • Long Term - water storages secured for foreseeable future.

The disruption to electricity retailers was minimal with most trading again within days of the floods. Thus we anticipate no long term negative impacts on the market as a direct result of the recent events in Queensland.

3. Victorian Network Tariff Changes 

New network charges were introduced in Victoria on 1 January 2011. The average expected increase for each network area is shown in the table below.

Note that the figures above are average changes for each network area. Individual sites may experience different cost changes depending on their network tariff and consumption profile.

In addition to increasing its charges, SP AusNet has changed the way maximum demand is registered for billing purposes for a number of tariffs. The changes affect those customers who were previously on the following tariffs:

  • NEE54, NEE56, NEN56, NEE71, NEE72, NEE75, NEE76, NEE77, NEE78, NEE81, NEE82, NEE83, NEE91, NEE94, NEE95

Previously, customers on these tariffs were charged a demand charge based on a 'Contract Demand' reflective of the maximum demand recorded by the customer at any time in the past. This 'Contract Demand' was only reset if the customer:

  • recorded a higher maximum demand, thus leading to the higher value being used from that point forward; or
  • sought a demand adjustment (typically downward) to reflect revised energy consumption characteristics

From 1 January 2011, SP Ausnet will be replacing the single demand-related charge on all relevant tariffs with a 'Capacity Charge' and a 'Critical Peak Demand Charge', and will be introducing the notion of a 'Defined Critical Peak Demand Period'. The 'Defined Critical Peak Demand Period' comprises the periods between 14h00 and 18h00 on each of five weekdays in the December to March period. The five days will be nominated and communicated to customers by SP Ausnet with a minimum of one business day’s notice.

The different charge components of the new tariffs are outlined below:

One of the key reasons for the change is that the new demand charge structure better targets the demand that is driving system capacity constraints. It does this by focussing on demand during peak times on peak days. It also provides customers with greater scope to reduce or control their demand-related costs by being able to curtail demand on a few very specific periods, albeit at fairly short notice.

If you have sites on one of these tariffs, Energetics can assist by providing specific calculations of the benefit if you can reduce your site demand at 24 hours notice.

4. Small-scale Renewable Energy Scheme 

This scheme commenced on 1 January 2011, and as we highlighted last year, the scale of the charges was well beyond what was initially expected. The SRES is a federal scheme and so applies to all grid-connected energy users across the country. The legislated cost of the scheme for 2011 is $5.92/MWh, and several retailers are passing this cost through directly with no mark-up. However, we have seen some retailers adding excessive margins of as much as 25% to this base cost, which is hard to justify even for a new scheme where administrative processes have to be developed.

The new SRES costs will appear on your January electricity bills, so be sure to check that what is being charged is reasonable.

5. Inter-relationship between gas and electricity markets 

The following graph shows proposed new generation projects in the National Electricity Market that have been lodged with the Australian Energy Market Operator. The highest proportion of new generation fuel sources is natural gas, which has twice as much proposed new generation capacity as coal.

With the growing prevalence of gas fired electricity generation, the gas and electricity markets are increasingly intertwined. Peaks in electricity demand will increase gas demand to fuel electricity supply, and the correlation is magnified by the fact that a significant proportion of gas fired generators only operate during times of high spot prices.

The changing fuel mix puts upward pressure on electricity prices as the dominance of cheap coal fired electricity is eroded. Further increases in natural gas prices are expected as we move towards the establishment of LNG exports in Queensland.

Development is expected to begin shortly on the proposed LNG export terminal in Gladstone, with exports currently due to commence in 2015. The move towards LNG production in the eastern states will see gas prices increasingly set by international markets. As gas prices rise in response, the underlying cost of electricity production will also rise. 

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