Unprecedented changes in the NEM with a new generation mix

31 Jul 2015Archived News Mark Asbjerg Climate Change Matters

With changing demand patterns, growth of the natural gas industry and continued development of renewable energy industry, the National Electricity market is undergoing a period of unprecedented change. 

Recent historically low electricity costs have begun to show signs that they are levelling out as the market starts to adjust to a new generation mix and supply and demand levels begin to balance.

The supply of electricity on the east coast of Australia is governed by the National Electricity Market (NEM), which is made up of five interconnected, state-based jurisdictions. Whilst focused on servicing their own demand, these jurisdictions also import and export electricity to other states as necessary.

Generally speaking, with improved awareness of energy efficiency, the rise of residential PV and the decline of the manufacturing industry; electricity demand across the NEM has been on a declining trajectory since 2008. This has resulted in surplus generation capacity, which has generally reduced wholesale electricity prices through increased competition, as well as a reduction in the frequency of peak demand events.

The figure below illustrates how spot prices have followed the decreasing demand trend of the market.

Figure 1: Monthly Average Spot Prices across the National Electricity Market (NEM)1 

Monthly-Average-Spot-Prices-across-the-NEM.jpg

With jurisdictions characterised by its own mix of electricity generation assets and energy users, each region is subject to a unique set of price drivers.  The current key trends and drivers of pricing in each region are:

- In New South Wales and Victoria, the decline in manufacturing combined with oversupplied capacity has resulted in reduced pricing volatility.

- In Queensland, the combination of high-level gas generation and the emergence of the export LNG industry will put upward pressure on prices, as domestic wholesale gas prices compete with international prices. Short-term pricing volatility is expected as gas wells ramp up production to coincide with the commissioning of export gas trains. Furthermore, the recently elected Palaszczuk Government has announced its decision to defer electricity price deregulation for another 12 months as this would give the yet-to-be-established Queensland Productivity Commission an opportunity to hold a public inquiry into power prices.

- In South Australia, particularly, high levels of installed wind has created significant levels of price volatility when there is low wind output. In the week 10-17 June, for example, there were multiple periods where the spot price reached $13,500.00/MWh2.

- In Tasmania, decreased demand has resulted in an oversupply of capacity and a declining trend in electricity prices.
Recently, AEMO forecast electricity demand to increase (Figure 2), signalling that the decline in national electricity demand has plateaued. When combined with the shutdown of multiple generators, such as Alinta’s Port Augusta operations (due for closure in 2018), it would appear that demand and supply of electricity in the NEM will soon return to balance. Longer-term, this is going to remove the downward pressure on electricity prices that has existed over the past few years, with prices expected to maintain a relatively flat trajectory over the coming year.

Figure 2: Residential and Commercial Consumption by State to 2017-183

Residential-and-commercial-consumption-by-state-to-2017-18.jpg

The recent announcement by the Bureau of Meteorology, that Australia is due to experience its first El Niño event in over four years, will however cause concern amongst market participants. Such events are normally characterised by high temperatures and periods of drought on the east coast if Australia. With this announcement, a potential scenario exists for drought to reduce dam levels in the Snowy Mountains, Victoria and Tasmania; reducing the output of hydro generators, and increasing their costs. Furthermore, drought would reduce the supply of water to coal-fired generators on the east coal who rely on fresh water for both cooling and steam generation. The effects of El Niño shouldn’t have any significant impact on the spot market; however its effects are sure to be incorporated in risk premiums on the futures market. Memories of the last such event in 2007 are still strong amongst market participants; where the reduction in available water supply, put significant limits on the generation capacity of both hydro and more traditional coal generators, greatly impacting spot prices.

The forces that have been pushing electricity costs down over the past few years are showing signs of levelling out. With changing demand patterns, the growth of the export Natural Gas industry and the continued development of renewable energy industry, electricity prices are expected to maintain a relatively flat trajectory over the coming year.

 

 

 

 

 

 

1   Source: AEMO Average Monthly Price
2   Momentum Market Report (10-17 June)
3   2015 National Electricity Forecasting Report , AEMO (2015)

 

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