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Energy crisis update: Wholesale electricity prices more than doubled during Q1 2017

Extreme summer heat combined with energy crisis factors such as high gas prices, outdated market rules and a lack of competition, have produced extraordinary wholesale electricity pricing throughout the first quarter (Jan to Mar) of 2017 across the National Electricity Market (NEM). At $173.19/MWh, Queensland had the highest average pool price over the quarter (see Figure 1). This was more than $46/MWh (or 36%) higher than the next most expensive state, South Australia.

New South Wales had the highest percentage increase compared with Q1 2016 at 170%, followed by South Australia at 160%. Tasmania experienced very high pricing back in Q1 2016 due to a fault at the Basslink HVDC cable link, which connects Victoria to Tasmania, and record low storage levels in the hydroelectric system. The interconnector has since been restored to service and hence Tasmania was the only state to see a price decrease in Q1 2017 compared to Q1 2016.

In a previous article, I flagged that QLD’s average price of $197.65/MWh during January 2017 set a new record for the state. However, this was swiftly exceeded in February 2017, which had an average price of $239.60/MWh.

Victorian wholesale prices were the cheapest during the quarter but this is unlikely to last. The closure of Hazelwood Power Station in late March is highly likely to increase volatility in the Victorian market during the transition period.

Some people might be wondering how the emissions intensity of the grid has changed over the period shown in Figure 1. The Carbon Dioxide Equivalent Intensity Index calculates the tonnes of carbon dioxide equivalents that are emitted into the atmosphere for each megawatt hour of electricity that is produced. The Index for the first quarter of the last three years is shown in Figure 2. All states have remained relatively consistent with the exception of South Australia, which reduced its emissions intensity by 37% compared to Q1 2016.

During Q1 2017, the average emissions intensity across the entire NEM was 0.92 t CO2-e/MWh. Victoria had the highest state wide emissions intensity of 1.21 t CO2-e/MWh. We can expect this number to go down following the closure of Australia’s dirtiest power station, Hazelwood. Tasmania, which is predominately hydro powered, had the lowest emissions intensity of 0.13 t CO2-e/MWh.

The next question one might ask is what can energy users do to control their electricity costs in such extreme conditions. Much of the focus from the media and our politicians has been limited to supply side solutions. However, there are many demand side strategies, such as demand response, self generation, energy efficiency and more effective procurement and contract negotiation, that energy users can implement relatively quickly to drastically reduce their power costs and help mitigate future risks. Feel free to reach out to Energy Synapse if you want to have a more in depth discussion about what solutions might be appropriate for your business.

*All wholesale pricing data obtained from AEMO.

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
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Victorian energy users without a bold plan will be in big trouble following Hazelwood closure

Hazelwood, a brown coal-fired power station located in the Latrobe Valley in Victoria, is scheduled to progressively close down from the 24th to the 29th of March 2017. It was built between 1964 and 1971 and with an emissions intensity of 1.52 tCO2/MWh, it is the most carbon polluting power station in Australia and one of the worst in the world. In 2016 alone, Hazelwood emitted 15.5 million tonnes of CO2 into the atmosphere. Its imminent closure is a big win for the environment and certainly a necessary step in decarbonising Australia’s electricity grid.

However, the transition period following Hazelwood’s closure is likely to have big price impacts on Victorian energy users, most of all those who are unprepared for the changes. Hazelwood represents about 12% of Victoria’s available generation and the sudden departure of this cheap power source is likely to create big upward movements in the wholesale electricity market. Electricity futures have already been pricing in this risk for some time but just what kind of impact might we see in the spot market?

Generators place bids into the market that specify how many megawatts of power they are willing to supply at certain price points. The market then selects the lowest cost generation (given constraints) to serve demand during each dispatch interval. Figure 1 shows the average of the 5 minute generator bids during 2016 for Victoria as a total and then just for the Hazelwood Power Station. Hazelwood has been bidding nearly all of its output at a price less than or equal to $0/MWh. The closure of Hazelwood will act to remove an average of 1160 MW from the cheapest rung in the bid stack.

During 2016, the 30 minute Victorian spot price did not reach the $10,000/ MWh mark. However, if we eliminate Hazelwood from the equation, pricing had the potential to be in the $10,000-14,000/MWh range up to 10% of the time. In reality, peaking generators would most likely upwardly adjust their expectations regarding how many hours they will run and hence could lower their bid prices while maintaining current profitability levels. As we can see from Figure 1, bidding in the $1,000-10,000/MWh range was almost non-existent so we might see some of the red zone bids coming down into this bracket. Either way, significantly higher volatility is almost certain.

Fortunately, with great volatility comes great opportunity. Forward thinking energy users will be able leap ahead of competitors while others risk falling further behind in an already difficult environment. If you would rather be in the former camp, contact Energy Synapse and we will help you navigate the changes.

*Raw carbon, generation and bidding data from NemSight.

Author: Marija Petkovic, Founder & Managing Director of Energy Synapse
Follow Marija on LinkedIn | Twitter