Presentation to Powering Australia Tim Nelson, Chief Economist, AGL Energy
Future of generation NSW case study
Not many power stations operate beyond 50 th year Internationally, only 1% of power stations in operation are older than 50 years Source: EPRI (2017) excludes China and Russia 3
Exit and entry Australia and the US Australian exit has exceeded entry of firm dispatachable capacity since 2013 Year of Exit/Entry Coal Retirements Gas Plant Entry Renewables Entry No. of plant Capacity (MW) No. of plant Total (MW) CCGT (MW) No. of plant Capacity (MW) 2005-2012 2 740 31 8,674 2,546 112 2,640 2013+ 9 4,656 4 218 52 49 2,422 Total 11 5,396 35 8,892 2,598 161 5,062 Av. Age 42 years Coal-fired generation closure 18% of fleet Source: Simshauser (2017) [1] CCGT column is a subset of the total gas capacity column.
Exit and entry Australia and the US US entry has significantly exceeded exit largely a function of low cost gas Year of Exit/Entry Coal Retirements Gas Plant Entry Renewables Entry No. of plant Capacity (MW) No. of plant Capacity (MW) CCGT (MW) No. of plant Capacity (MW) 2005-2012 245 11,257 648 81,775 72,925 1,500 57,449 2013+ 384 50,367 241 36,183 14,490 2,042 44,998 Total 629 61,624 889 117,958 87,416 3,542 102,447 Av. Age 52 years Coal-fired generation closure 18% of fleet Source: Simshauser (2017) [1] CCGT column is a subset of the total gas capacity column.
Issues in Australia Policy uncertainty in relation to climate change objectives and issues related to gas supply Source: Compiled from various companies and AEMO
But new supply is on the way.. Around 4.5 GW of new renewables and some low capacity factor gas is being built Source: Compiled from various companies and AEMO
Quick overview of NSW market
Existing firm supply to meet demand Without Liddell, existing baseload and intermediate plant is adequate but more peaking plant is required Source: AEMO
Existing firm supply to meet demand With peak demand growth and underlying consumption declining, still mainly a requirement for peaking capacity Source: AEMO
And then there is renewable energy Renewable energy is not firm but still provides energy (in a market with declining energy consumption) Source: AEMO
Cost of building and operating power stations Renewables are increasingly cost-competitive with traditional thermal sources such as coal and gas Source: Simshauser (2017) 12
Optimal plant mix results Given energy consumption forecast to decline and new renewables providing more energy, peaking capacity required Category Optimal Actual (2022) Imbalance Weighting Baseload 7,295 8,160 865 overweight Intermediate 1,669 567-1,102 underweight Peaking 5,022 4,236-786 underweight 13,986 12,963-1,023 [1] This assumes no new investment apart from plant under construction. It also assumes Liddell power station is closed. 13
So what can we conclude?
Some observations. Not all dispatchable plant is also flexible 1. Renewable energy provides the lowest long-run marginal cost of energy 2. But as renewables begin production, they require complementary firm capacity 3. In the short-term, existing coal-fired units can provide some flex 4. But while dispatchable, coal is not as flexible as gas or hydro 5. In the medium-term, an optimal plant mix is likely to transition to gas-fired peaking units and demand response 6. Gas-fired peaking units provide capacity but not significant volumes of energy 7. In the long-term, renewable energy is likely to be complemented by pumped hydro and battery storage to allow energy to be consumed at times when it is needed
Price dispersion in Australian electricity markets
What is price discrimination? 2 or more goods are sold at different prices relative to their marginal cost of production 1. First-degree: monopoly pricing based upon willingness to pay 2. Second-degree: non-linear pricing utilised to provide discounts based upon quantity consumed 3. Third-degree: market segmentation is used to base individual pricing on customer willingness to pay (e.g. pensioner discounts at the movies) 17
Why is price discrimination used for energy pricing? Prices set at marginal cost would ignore the significant upfront capital costs of production 1. There is a big difference between long-run and short-run marginal cost 2. Long-run costs include power station construction whereas short-run costs are typically fuel and operations 3. The alternative, uniform pricing, would require ALL prices to reflect long-run and shortrun costs 4. If a uniform price didn t reflect both long and short-run costs, new investment would never occur 5. Price discrimination allows consumers to shop around to extract the best prices as prices are allowed to vary 18
Victorian tariffs the market is efficient Marginal offer is priced at approximately our estimate of marginal cost Annual Electricity Cost ($ pa) $1,600 $1,500 $1,400 Average Cost Marginal cost Retail Offers $1,300 $1,200 $1,100 $1,000 $900 $800 $700 $600 Descending scale of retailer offers
But what is driving uptake of different offers? Analysis of consumption data shows the presence of second-degree price discrimination
But what is driving uptake of different offers? Time value of money and the benefits of shopping around are likely to be key drivers
The outcome of second-degree price discrimination High-consumption households receiving discounts relative to low-consumption households
How are customers in hardship impacted? Hardship customers are, on average, large users of energy 1. Hardship customers (on average) use around 40% more energy than other customers 2. Simahsuer and Nelson (2014) demonstrated family formation demographic most vulnerable to hardship due to: lower household income per person; and greater consumption due to higher number of people within the household 3. Price dispersion allows these customer classes to extract lower prices due to higher consumption 23
Price dispersion in an evolving market New technology allows price dispersion at every moment in time
Price dispersion in an evolving market New technology allows price dispersion at every moment in time
Policy recommendations Competition is a key way in which consumers can benefit from participating in the electricity market 1. The market is efficient the marginal offer is priced at our estimate of marginal cost 2. There are significant savings for customers that shop around 3. Our analysis indicates the presence of second-degree price discrimination 4. Family formation demographic and hardship customers able to benefit significantly from price dispersion 5. Price dispersion is a key driver of better outcomes for consumers 6. Important that governments and industry communicate www.energymadeeasy.gov.au and other comparator tools to consumers
Contact Tim Nelson Chief Economist tanelson@agl.com.au @tanelsonaus agl.com.au 131 245 Download the app agl.com.au/ community facebook.com/ aglenergy twitter.com/@ aglenergy youtube.com/ aglenergy