Strategic Energy Procurement Update

01 Mar 2008Archived News Climate Change Matters

Since the extreme prices seen in the NEM last year, the market has fallen significantly over summer in NSW, Qld and Vic. The mild summer is largely to thank for this, with the lack of extreme temperatures giving little justification for any spot price spikes. At the same time rainfall in NSW and Qld has brought some much need water to the black coal power stations. The exception is in SA where the summer has been hot and prices have risen significantly with long periods of VoLL pricing.

 

Over recent weeks prices begun rising again as trading activity increases and we enter the traditional period (March to June) for customers to renegotiate their electricity contracts. Wholesale electricity prices for FY08/09 are shown in Figure 1 below.

 

Wholesale electricity prices for NSW, Vic and Qld are in the $45-50/MWh range, which is lower than many market commentators ever expected to see again following the volatility in 2007.

The table below shows the highest and lowest market prices recorded over the last 12 months for electricity contracts commencing 01/07/08 compared to current market prices. This shows that, with the exception of SA, pricing is currently at very good levels compared to what we have seen since March 2007.

 

NSW Electricity Privatisation

The Iemma Government continues to push ahead with plans to sell the state owned electricity retailers and lease the generators for the rest of their productive life. NSW is the last of the mainland NEM states to go down the privatisation path, making the current public ownership of these assets something of an anachronism. This does not however mean that the move is all good news for energy users.

There are currently 23 licensed electricity retailers in NSW, with only 7 of these who service large energy users. If during the sale process, new entrants are not able to compete with current retailers, after the sale of EnergyAustralia, Integral Energy and Country Energy there will be only four major retailers. Currently, electricity tenders attract 5-6 offers. If this is reduced to 2 or 3 responses per tender the ability of end users to negotiate a satisfactory contract, especially around service levels or contract changes, will be severely reduced.

On the generation side, the likelihood of the private sector investing in significant baseload power is only likely to be increased when the emission targets are finalised. The NSW Governement plans to lease out their generation on long leases which may see some vertical integration in the market. Macquarie Generation currently controls around 40% of baseload power in NSW, and their decision to increase or decrease production can have a major impact on spot market prices. Unless Macquarie’s assets, Bayswater and Liddell Power Stations, are sold separately this situation is set to continue. The situation is similar with Delta Electricity, which owns the Mount Piper, Wallerawang, Vales Point and Munmorah power stations and controls around 30% of the state’s electricity. Obviously the split of generators to various leaseholders may alter this mix – for better or worse.

It is this market power, not public ownership, which has deterred investors from developing new baseload power. In the Queensland market many of the older generators are owned by state owned corporations. The good news is that new baseload is being constructed by the private sector or in public/private sector partnerships. With some certainty on the future in NSW, we may also see similar projects easing supply constraints in the state.

NSW Gas Shortages Over Winter Impact Energy Users

Severe constraints in the NSW gas market mean that customers seeking offers for the supply of gas may not be able to find a retailer willing to supply them over the coming winter. Where prices are being offered they have been as high as $200/GJ.

There are a number of issues contributing to the gas shortage, but the main problem is the limited capacity in the transmission pipelines. The Eastern Gas Pipeline (EGP) is reportedly full until an upgrade is completed in October 2008, and the Eastern Australia Pipeline (EAPL) has been downgraded which means that less gas can be transported through the line.

Other factors influencing the high prices (or lack of capacity) include:

  • High electricity prices have meant that gas-fired electricity generation is cost-effective for longer periods, increasing the demand for gas
  • The supply constraints that came into effect in winter 2007 have made retailers concerned about the potential cost impact of similar restraints this winter
  • The gas retailing businesses of NSW government owned suppliers EnergyAustralia and Country Energy are expected to be sold. This leaves these retailers in a very risk adverse position
  • The international price for Liquefied Natural Gas (LNG) is considerably higher than Australian natural gas pricing. As the international demand for gas increases, there will be development of further LNG terminals such as that in WA. This will also increase pressure on natural gas pricing as gas suppliers will divert supply to export rather than local supply where the return is less.

In the medium term (i.e. after winter) it is hoped that the situation will ease with the upgrade of the EGP combined with an expected reduction in demand for natural gas for generation of electricity with the reduction of electricity prices. In the longer term, the proposed Hunter Gas pipeline will bring a new supply of gas into Newcastle and the Hunter Valley from Queensland. If it goes ahead,it will reduce the demand for supply that is currently being routed to Newcastle via Sydney. The earliest possible completion date for this pipeline would be late 2011.

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