Toward Understand the developing electricity market drivers 2020

Transcription

1 Toward Understand the developing electricity market drivers 2020 Jim Snow, Director An Energy Market Revolution DLA Phillips Fox October 2009: Not to be reproduced without permission

2 Major Drivers of Change in the Energy Industry Electricity System Load Factor Decline Price Impacts Air Conditioning driver Demand Response Load Forecasting Asset Utilisation Carbon Pollution Reduction Scheme (CPRS) Greenhouse Intensity & Permit Trading and Importation Transport More Demand Response Funding Issues and Opportunities National Renewable Energy Target (NRET) 5 fold increase major impacts not really understood 2

3 System Load Factor Decline 3

4 Air Conditioning Western Sydney 3.50 Consumption Profile - Extreme Hot Summer Day Vs Mild Summer Day (Control Group - Western Sydney Price Trial) Load (kwh) :30 1:30 2:30 3:30 4:30 5:30 6:30 7:30 8:30 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30 19:30 20:30 21:30 22:30 23:30 Time 41 C - 21/01/ C - 01/02/2007 4

5 Extreme Temperature Impacts Growing 4,000 3,500 System Load - HOT Summer Day Medium & large business 152 MW System Load (MW) 3,000 2,500 2,000 1,500 Domestic & GS Non-Tou 1,169 MW System Load - MILD Summer Day 1, Capacity Utilisation is Extremely Low for Peak Assets - 0:30 1:30 2:30 3:30 4:30 5:30 6:30 7:30 8:30 9:30 10:30 11:30 12:30 13:30 14:30 15:30 16:30 17:30 18:30 19:30 20:30 21:30 22:30 23:30 Time of Day Total System Load - Mild day Domestic & GS Non-TOU contribution to Hot day Total System Load - Hot day 5

6 Load Factor Dropping in All States NSW Load Factor Trends 80% 70% 60% Load Factor 50% 40% 30% Actual EA IE CE 20% 10% 0% 1995/ / / / / / / / / / / / / / / / / / /2014 This is driving up the underlying electricity price : Increases in LRMC s Dramatic Increases in Network Charges Increases in NEM Averages as more peaking plant is used Load forecasting EVT, CBD Issues Load Factor (Average Demand / Peak Demand) 72% 70% 68% 66% 64% 62% 60% 58% 56% Victorian ElectricityMarket Load Factor Trend Analysis y = x x R 2 = % YEAR 5 months Jan - May

7 Rush to Peaking Plant Gas Fired Many firms are building large gas fired peaking plant OCGT s Retailers are vertically integrating for peak insurance >$300/MWh Origin are using their own gas and contracting plant output lot to protect as volatility rises TRU and AGL doing the same major rush on with something like 2 to 3,000 MW+ under way BUT this is not a greenhouse response not yet anyway A renewable energy peaker would be ideal and if it can be scheduled even better solar has a chance but needs right support? AND drive for renewables expected to make the situation worse because it free rides on the system (or maybe it won t?) they are not firm or able to be scheduled in most cases and competes with other base load generation while still requiring power stations that can be scheduled to cover when not available The wind issue which will be covered later 7

8 Peaking Generation State Gas Generation - Peaking Plants Peak 14,100 Peak 10,400 Peak 8,700 Peak 3, MW Peak Possible Peak Proposed Peak Probable Peak Construction Peak Operating NSW/ACT VIC QLD SA 8

9 Base Load Gas State Gas Generation - Base Load Peak 14,100 Peak 10,400 Peak 8,700 Peak 3, MW Base Possible Base Proposed Base Probable Base Construction Base Operating NSW/ACT VIC QLD SA 9

10 Wholesale Power - A Rising Market? 10

11 Wholesale Power A Rising Market? Victorian Electricity Market Spot Average <$300/MWh 2009 though is a downward trend wind impacts? Average Annual $/MWh Ave <$300 SRMC Gas 3 per. Mov. Avg. (Ave <$300)

12 Demand Elasticity? Economics says market demand will reduce if the supply price increases The basis of much of the ETS Garnaut Elasticities estimates do exist for Australia (NEMMCO) for Residential, for Business 25% increase in price 6% to 10% decrease in volume EnergyAustralia forecast 65% increase and GFC fallout BUT peak demand growth trend unlikely to change for a while Hence why we have a decreasing load factor This inevitably drives up retail prices and will become is becoming a major political and commercial issue ( death spiral ), and Peak forecasting becomes highly uncertain latent air conditioning load? EVT Issue - Melbourne summer outages, Sydney, Brisbane? High prices, falling volumes and uncertain outcomes on hot days? 12

13 CPRS Issues (Power) Will inevitably ALSO increase the price of electricity may double it? Will change the merit order of generation plants Lot of gas peaking plant being constructed but CCGT is risky Free permits are not enough to stop major change occurring unless offered for long periods (what is the point otherwise?) Will really need to ask the Banks (and Equity) they hold the key Hazelwood wants to be paid to shut down - recent AGL announcement walking away from Loy Yang stake no certainty yet? Major modelling Issues be really careful here Assumptions on gas availability and price are generally wrong MAJOR ISSUE? Debt Providers and Impairment Impacts? Demand Side Assumptions? Retailer Assumptions Greenhouse Intensity Issues? 13

14 CPRS Issues (Power) Innovations are coming - keep an eye on coal gasification (brown and black) Lowers Greenhouse Intensity (GI) and lower GI is critical Various technology risks but Australia well placed to lead Carbon capture is also pre-combustion and off the shelf technologies Infrastructure issues are very challenging Mainly relates to gas and electricity transmission This will get much worse with the NRET CPRS may also have a major interaction with NRET Arbitrage opportunities between schemes NRET may well dwarf CPRS as a key change driver and already enacted? Arbitrage opportunities are particularly important for large energy user 14

15 What Value Carbon Power Generation The real impact relates to 3 key parameters: The market Greenhouse Intensity (GI) CO 2 t/mwh, The anticipated price of tradeable permits, and The cost of embedded carbon in the generation fuel What Value Carbon carbon netback mark-to-market? Embedded Carbon Cost Black Power Market GI Market RRP Underlying Market Prices Permit Prices Influenced by changes in merit order 15

16 CPRS GI Vic Example (Worst Case) G.I. SRMC vs. CO 2 permit price MW (tco 2 /MWh) $0/tonne $10/tonne $20/tonne $30/tonne Loy Yang A 2, Loy Yang B 1, Hazelwood 1, Yallourn W 1, , NG-fired CC 450/ This diagram is actually fundamental to the issue Long term average of 0.8 targeted benchmark This is the key to assessing fuel value Carbon mark to market for fuel suppliers by technology and region? 16

17 Origin View high carbon price needed for CCGT 17

18 Carbon Impacts on Merit Order Source : International Power,

19 More Demand Response? The demand side will exhibit the price based response outlined, but Firms that are directly covered will also have to for the first time manage their own greenhouse emissions legally and commercially They will have compulsory reporting with associated governance requirements, Have to lodge plans to reduce emissions, and Buy and acquit permits This is a massive behavioural change Potentially restructure of industry as well close, out-compete? Big driver for self generation using gas or renewables or any other low GI fuel 19

20 Funding Issues Also Abound Impairment of existing assets Banks the real deciders on who plays and who pays Debt is scarce may not last but very hard to get right now It is the time to have equity and any good banking lines Who has the money for this market key issue now? Cash generators like Origin, AGL, etc. Chinese some money flowing Some large energy consumers? 20

21 NRET The targets are ambitious by any measure 20% by 2020/30 45,000 GWh vs. 9,500 GWh - 60,000 in total Phase out by CPRS? Now a $65/MWh Penalty level What will make up this mix - wind, solar, biomass, geothermal? How will it be funded? Can it all even been built 30% LF = 15,000 MW + by 2020/30? Lets get this into perspective on a windy day we will see thousands of MW of generation hit the market as price takers unscheduled? If this was new coal generation we would see decades of price crashes, people going broke and shutting down and huge value destruction So why do people think wind will not have a similar effect? 21

22 NRET We are told there are major opportunities here for new players, but Can they find the money to participate can they bank their projects without off take arrangements? It really is a buyers/funders market and highly bankable contracts needed As outlined ask who has the money and who has the liability? Surprise - AGL say they are going big here, Origin also building up but also talking up solar and geothermal (which they have made major investments in) After NSW Retail sale how many counter parties will there be and will TRUenergy get taken out? 22

23 NRET Major issue will be ability to arbitrage CPRS market REC s plus market price for the black this is a major market distortion Large element of double dipping if this is allowed but seems to be what will happen Lot will also free ride as price takers Wind for example is not dispatched and will eat into base load and cause major changes to the market if it becomes as big as anticipated Evidence is this build up crashing/will crash NEM prices for a while, then Progressively will need fast response plants if wind takes the lions share of the NRET (as expected) OCGT guess who owns these?, and May also see wind being constrained off by AEMO for supply stability? May give rise to new price pressures from ancillary support Whole scenario may even spook independent wind investment 23

24 January 2009 Heat Wave in SA Note Lack of Overlap? David Swift, AEMO presentation ACCC Conference July , , ,000 2, Demand 2, Wins Output 1, , Native Demand Total Wind 24

25 5000MW Example (modelled) SA and Vic Wind farms - Note degree of overlap? David Swift, AEMO presentation ACCC Conference July MW /Sep 02/Sep 03/Sep 04/Sep 05/Sep 06/Sep 07/Sep 08/Sep 09/Sep 10/Sep 11/Sep 12/Sep 13/Sep 14/Sep 15/Sep 16/Sep 17/Sep 18/Sep 19/Sep 20/Sep 21/Sep 22/Sep 23/Sep 24/Sep 25/Sep 26/Sep 27/Sep 28/Sep 29/Sep 30/Sep 25 SA Wind Farms Vic Wind Farms

26 SA Price Trends? Based on: David Swift, AEMO presentation ACCC Conference July 2009 SA Generation Prices $/MWh Wind Ave Wind Peak Other Ave Other Peak

27 Negative Price Events 700 David Swift, AEMO presentation ACCC Conference July 2009 negative price dispatch intervals since September Axis Title 200 total WINd RRP /09/2008 0:05 04/09/ :05 08/09/2008 0:05 11/09/ :05 15/09/2008 0:05 18/09/ :05 22/09/2008 0:05 25/09/ :05 29/09/2008 0:05 02/10/ :05 06/10/2008 0:05 09/10/ :05 13/10/2008 0:05 16/10/ :05 20/10/2008 0:

28 Over-speed Event in SA on 30June 28

29 Relevance to Gas for Power Generation It is generally accepted that gas fired plant are the best at managing load fluctuations But will we see the OCGT plant used for more reasons than simply market price caps auxiliary supply, more medium running because of wind and eventual market mitigation (even domination) by the large Retailers And the question remains can CCGT s compete in the market anyway? Is the gas price stable enough or can it be linked to power markets, and Can gas be purchased long term to back a CCGT plant at all now? What about the LNG stampede gas bankers, oil price links? Advent of Retailers with equity gas - how will this play out? Do we have the pipelines to cope? 29

30 Origin Energy 19 October

31 Gas Availability on the East Coast? Eastern Australia currently has gas limitations for power generation that are becoming apparent Santos has gas but no power gen deals being announced is though permitting Shaw River Power Station (1,500 MW CCGT) using own gas (and now looking for a partner?) is 2P on books enough to support in south east need circa 1,300PJ for SRPS? Cooper Basin? Gunnedah? Queensland? Origin is very short in the south focused on peaking plant to cover retail positions with OCGT and to gain from wind issue move onto mid merits and CCGT later do they have the gas (economically) have announced capability to draw 60PJ/year from Queensland via SA (major strategic move) forgoing LNG value drilling more offshore SA and Vic? Bass Strait has 2,000 PJ of 2P left for sale but again no longer term deals announced everyone selling short? 31

32 Gas Availability on the East Coast? Price Arbitrage issues abound and as of today no old style CPI linked long term contracts being sold (to underpin a CCGT project for example) Now that was not in the modelling assumptions and has interesting implications Work being done on gas/power long term commodity linked hedge (with LNG link just for fun) but hard yards Power netback deals Arrow in Queensland, The truth is equity gas arrangements are the real push Origin and AGL and Santos the leaders Understandable no downside from this strategy and lots of upside New entrants will need liquidity of supply, well priced and long term deals but from whom not many choices highly illiquid market? 32

33 Gas Availability But we have all this CSG I hear you say? In Queensland most of it is currently earmarked for LNG developments Origin has some to export interstate but otherwise none to be had Everyone busy doing 2P reserve proving billions $ being spent Claim could be 250,000 PJ 10 x Bass Strait may be a timing issue? How much LNG? Each train of 3.5 mtpa requires about 6,000PJ of reserves Origin/Conoco Phillips 14m tonnes/year - needs a 1,000 PJ/year pipeline (48 inch) and 24,000 PJ of reserves Santos/Petronas GLNG 10 mtpa another say 17,000 PJ BG/QGC/AGL 12 to 15 mtpa another say 24,000 PJ LNG Ltd (Golar/Brand/Arrow) 1.5 mtpa 1,200 PJ Yep circa 50,000 PJ no wonder they are busy? 33

34 Gas Availability NSW CSG? Eastern Star Gas, Santos and AGL (Sydney gas) in NSW Santos also have ownership in ESG ESG 19.9% Santos, Santos have 1/3 of the field as well? The key issues here are proving reserves and the distance to markets without any pipelines reserves come with markets ESG Has announced MOU s up to 1,300 PJ and busy trying to prove this up by years end How much gas in NSW that is useable 6,000 PJ C3 ESG, 17 TCF, more? Pipelines? LNG development at Newcastle? LNG prices? 34

35 LNG Prices Crash but from very high values LNG Outlook Henry Hub now not trending with WTI last 6 months? 35

36 Will CSG make power? Economic theory says we will eventually have a clearing price that is more rational for the LNG market Recent prices driven by lack of supply/excess demand But international gas bankers playing the long game Power netback prices may though be attractive in the end BUT long term GSA s are tight at the moment and the game is changing with groups who are happy to sit on reserves and lock them up for LNG long term and paid BIG money ($1.78/GJ 3P) AND major issue with grid infrastructure Pipelines will be required to get to southern markets and pipeline businesses risk adverse with GFC Retailer backed investments? Electricity transmission may get the gig as it is a common good market pays but this is also a raging argument especially for wind plants another nation building investment? 36

37 OCGT vs. CCGT OCGT plant developments are tolerant to higher gas prices if aimed at a cap market Fuel price capped by distillate and carbon prices have little real impact, and They are not as sensitive to price resets which makes gas contracting easier CCGT s are very sensitive to both gas and carbon permit prices affected more by well head sensitivities to markets and to new haulage pipeline costs, and Very difficult to garner a long term bankable gas supply agreement at this time this may well change but 15 year deals are hard to nail for large volumes Retailer equity gas is also a new advent, and There may end up issues about market concentration of upstream basin ownerships (retailer equity gas may well be a response to this) Ongoing tension between large LNG sales and gas for domestic markets will the east coast end up like WA in this regard? Coal may well be very competitive to CCGT wind may mean coal competes 37

38 OCGT vs. CCGT Means OCGT s good investment and CCGT very risky right now Can always convert OCGT to CCGT if and when required (and if you can access gas) May well end up running extensively as mid merit plant Much greater separation between prices in the peak and off peak periods (big case for pricing reforms in certain areas such as networks) Greater ancillary service payments maybe some constraints on wind at certain times? Major demand side responses to come? Gas supply for CCGT development will have to be extremely flexible in terms of prices and conditions and pipelines will need to provide flexible storage services everything the gas industry does not want? 38

39 National Retail Vision Work this time 2 years ago? A national energy industry with increasing national economic and policy impact and stringent national watchdogs for its financial, economic and competitive performance...providing fertile ground for innovation and change Jim Snow 39

40 National Retail Vision Work this time 2 years ago? The Australian Retail Energy market will have a fully national end-to-end coverage and be characterised by a few dominate nationally operating energy businesses that will compete on the strength of their integrated energy portfolios and closely associated range of customer offerings; The market will deliver on national greenhouse policy and, although competitively set, energy prices will be relatively higher in the next decade than the last and this will have a significant impact on economic outcomes in the Australian economy; National regulation and energy policy (and potentially social policy) will seek to drive significant change and accountability into the industry in terms of fostering competitive behaviour and market entry, reducing jurisdictional interference, and mitigating energy price rises and associated economy wide impacts through being diligent on the prudency of investments and the costs of inefficient industry processes and practices; These developments will drive innovative customer responses and cause new innovations in the industry itself and the National regulators and policy makers will come under enormous consumer pressures to mitigate market power while balancing the value to the economy the cost/benefit equation Jim Snow 40

41 Summary Peakiness will grow with weather effects and demand response air conditioning and LRMC key issues driving up prices anyway as we have seen RET will have major impact if wind is built in the quantities indicated but will anyway as huge uplift in generation and volatility no matter what CPRS delays are causing gross paralysis and early exit strategies and will magnify RET impacts when implemented fully especially on base load coal but this depends a lot on what it looks like in the end This all provides major opportunities for key retailers that have good balance sheets and equity gas positions taking dominant market positions Gas is unlikely to be major energy base for power in medium term unless things change or retailers (or producers) use their equity gas positions but will be very large for peaking and intermediate and maybe base load in the longer term? Likelihood of more major Government intervention must be extremely high starting to see input cost effects of energy industry as a national issue politics of energy at the Jurisdictional level should not be underestimated? 41

42 Oakley Greenwood Thank You Melbourne Alan Rattray Energy trading and risk management Strategy advice Analysis Lance Hoch Gas and electricity network and retail Demand side expertise including energy efficiency Climate change impact analysis Stephen Thompson Stuart James NEM Modelling Gas & Electricity Trading LNG Gas haulage agreements Power generation matters Brisbane Jim Snow Business Strategy Gas industry experience Energy project development Network regulation Energy Marketing Demand side Industry Restructuring Wellington, NZ Andrew Shelley Regulatory economics Model development Competition matters Jim Mcdonald & John Wallace Senior Consultants to OGW Adelaide Greg Thorpe Market policy, market design and regulation Market analysis and market modelling Climate change impact analysis Transmission / Generation interactions Gas/electricity interactions Jim Snow, Phone: , Mob: jsnow@oakleygreenwood.com.au, 42