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Quarterly Wholesale Energy Market Update: April – June 2020

In this quarter’s update, watch David Guiver, Executive General Manager Energy Trading, along with Andrew Hines, Senior Energy Trader, talk about Small-scale technology certificates, electricity price outcomes for the various types of generation technology and material reductions in emissions intensity in the National Electricity Market.

This video has been prepared for information and explanatory purposes only and is not intended to be relied upon by any person. Customers should seek independent advice before making any decisions about electricity contracting arrangements.

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Video Transcript

David Guiver

Welcome to ERM Power’s Quarterly Wholesale Market Update. This edition quarter two 2020. Three great topics to go through today. We’re going to look at the small-scale technology certificate scheme. We’re going to look at recent supply trend and also some of the price outcomes. Next, we’re going to look at the electricity generation market, all the different technologies and observed the price outcomes that have occurred over the last month, the last quarter, and the last year. See what we can learn from those observations.

And then finally, we’re going to take a good look at national electricity market emissions intensity. We’ve observed some real drops in emissions intensity over the recent period. So we’ll share that information with you also. To take you through the technical information in this edition, we’ll be introducing Andrew Hines. Andrew is one of the senior energy traders here at ERM Power.

Andrew Hines

Thanks Dave. Hi, I’m Andrew Hines, one of the Senior Energy Traders here at ERM Power. Today in this section, we’re going to be looking at the small-scale technology certificates or STCs. In previous episodes, Dave talked about the LGCs or large-scale technology certificates. These are certificates that are generated by large-scale, renewable generators like big solar farms or large wind farms. For the STCs, these are created by small-scale generating systems. So think about the solar panels on your next door neighbour’s rooftop.

Now this chart shows the weekly creation volumes of STCs through the year. The different colors on the charts represent what we call different vintages of certificates. For example, the dark blue section here represents certificates that were generated in 2017, but were actually created during calendar year 2018. Looking across the year, weekly creation rates are generally consistent. And what we see is a few variations related to holiday periods. For example, Easter and Christmas.

In the lead up to Christmas, we generally see an increasing creation rates as creators look to fill in the gap that we’ll see over that holiday period. Also on this chart, we have a line which represents the weekly average traded price or spot certificates corresponding to that week. STCs different from LGCs in that they have a clearing house. What this does is it puts a ceiling on the price of STCs. So STCs cannot go higher than the clearing house price of $40 a certificate.

What we want to look at now is the dynamics of both creation and price that we’ve seen in the recent months. Focusing on 2020, what we can see at the start of the year is the creation rates were fairly consistent as we would expect. We started to see variations once the restrictions for COVID-19 started to come into place. COVID-19 restrictions meant that creators, so think solar panel installers, feared that they would not have access to properties. So in the near term would struggle to meet their contractual requirements to create and deliver STCs.

This saw a rapid increase in the price of STCs as they headed towards that clearing house price of $40. What we can see on that black line there. In responses increase in price, we actually saw an increase in the weekly creation rate of STCs as creatives look to take advantage of this price increase in STCs. The small dip there relates to Easter and then we saw this higher than expected creation rate continue. After this period, we did see the creation rate returned firstly to normal levels, and then start to fall off.

Because of this, we also saw that the price remains at these higher levels. So the main point we can take away from this is that we’ve seen an increase in the STC price due to the market’s view of a lack of supply due to COVID-19 restrictions. In this section, we’re looking at the power side of the market. What we’re going to be looking at here is a comparison of the average revenue received by different generators classified by fuel type.

The charts we’re looking at here, show a comparison across the different fuel types of the dollars per megawatt hour received by these different classes of generator for the generation within the spot market. So what this is, is the pool price that they receive for their generation. And what we’re comparing this to is the flat or average rate across these different periods. We’re looking at the last 365 days, the last 90 days, and then the last month.

So the orange bars represent coal-fired generators or what you would commonly hear referred to as base load generators. Base load meaning that they run at a flat profile, so the same output across all periods of the day. This is represented in the dollars per megawatt hour they receive generally being in line with the flat average across those different periods. Things bars represent what are commonly referred to as peaking generators, hydrate units, gas-fired or liquid fuel type generators.

These generators are there to run at times of high demand and therefore high price. This is reflected in the dollars per megawatt hour they receive being a lot higher than the flat average. They’re only running for a small amount of time, but at higher prices. The yellow and purple bars here represent renewable generators, yellow being solar farms and purple being wind farms. What we see is that they generally receive less than the flat average, rate. This is because at times when there’s high output of solar and/or high output of wind, this has a depressing impact on spot prices.

So the dollars per megawatt hour they are receiving in the spot market will be much less than the flat rate. Looking at the Queensland chart in particular, due to the high penetration of rooftop solar throughout the market. This means that at times of high solar output, there was a strong depression on price, which means that there’s a negative correlation between pool prices and solar generation. We see a similar impact for wind in the southern states, New South Wales, and in particular in Victoria, which have a higher penetration of wind farms there.

Looking at the averages going across in the 365, 90 to last month, we can see that the proposal of revenue and in dollars per megawatt hour sense being received by renewable generators is trending down. Switching to the other states. If we look at South Australia, which is dominated by wind generation, we can see those renewable sources generally save a lot less than the flat average rate for their generation within the spot market.

This is because with the high contribution of wind farms to the generation mix in South Australia, they have a much stronger impact on price. So that means when there’s a lot of wind blowing in South Australia, this has a strong, depressing impact on the price. So we see a lot lower pool prices. Conversely, when the wind is not blowing, this gap in generation needs to be made up by higher price gas-fired generators. So what we see there is that the gas-fired generators in South Australia receive a much higher dollars per megawatt hour number compared to the flat rate.

Looking at Tasmania, which is dominated by hydroelectricity. We see that on average, the hydroelectric generators there receive the flat average rate. This is because Tasmania is generally dominated by hydropower. So the main point we can take away from these charts is that we are seeing renewable generators receive a smaller proportion of the flat average rate in the spot market as we see a growing capacity of renewable generation coming into the market.

What we’re going to look at now is trends in carbon dioxide emissions in the national electricity market, specifically changes in the emissions intensity in the market. What this chart shows here is what we call the Carbon Dioxide Equivalent Intensity Index across all generators in the NEM. What this actually means is this is looking at the tons of carbon dioxide emitted per megawatt hour generated.

Looking back over the past 18 months, we can see that there is a definite trend down in the intensity of emissions across the NEM. This is of course, due to an increase in capacity in renewable generation. As more renewable generators come into the market, this lowers the average intensity of emissions across the generation mix. So what this chart shows is the intensity of emissions, firstly, on a daily basis and then we’re looking at two averages, a rolling 90-day average and a rolling 365-day average. What we can see on the daily and the 90-day average is that we do have some seasonal variations in the intensity of emissions.

But what we can see looking back over a 365-day period, is that there is a definite declining trend of the intensity emissions across this period. Focusing on the more recent months, we are starting to see that declining trend reappear. Now let’s have a look at the individual states. Looking at Queensland, we could see there was a real step change in the intensity of emissions around October 2018. This was due to a large influx of new renewable generation, predominantly solar farms, as well as a large-scale wind farm in Northern Queensland. This saw the intensity of emissions drop from around 0.9 to around 0.8.

And since then, we’ve seen that intensity of emissions flatline through most of the period. More recently, however, we started to see a further decline in the intensity of emissions. This is due to renewables forming a larger proportion of the generation, as we’ve seen demand for thanks to COVID- 19 restrictions. Looking at New South Wales, we can see that while the intensity of emissions has decreased over this last 18-month period, it’s been a more gradual decline as we’ve seen a more consistent rate of new renewable generation entering the market.

Just focusing down on the last three months, we can see how the emissions intensity is still decreasing in Queensland, but in New South Wales over the last month, we have seen a slight increase. This is due to network constraints, which were limiting the output from solar farms within New South Wales. This has meant that with the lower proportion of renewable generation coal-fired generation had to fill the gap and so we see a higher emissions intensity.

If we switch to Victoria in South Australia, we can see that there’s a lot larger variability day-to- day in the emissions intensity. This is because Victoria, and to a larger extent, South Australia are really dominated by wind generation. This means that we see a high variability in the emissions intensity. When the wind is blowing, there’s more renewable generation, so we see a lower intensity. When the wind’s not blowing, the coal generators have to fill the gap so we see a higher intensity of the emissions.

Due to its coal generators, Victoria generally has the highest emissions intensity across the NEM. We can see that with the growing capacity of renewables coming into the state that their emissions intensity is also decreasing. Looking at South Australia alone, we can see that their intensity of emissions has been relatively constant across this last 18-month period.

Focusing on the last three months, we can see that the emissions intensity has been pretty consistent in both Victoria and South Australia. So the main point we can take away from these shots is that the drop in absolute emissions from generation across the NEM is due not only to a lessening of demand, but also to a growing proportion of renewable capacity within the market. Thanks for watching today and I hope you found this information useful.

David Guiver

Thanks Andrew. Fantastic analysis and insights on the market there. We trust this information is helpful for your organisation. Of course, if you do have more questions or queries, your ERM Power account manager is the person to get in contact with. And you can comment below if you’d like to give us some ideas for future video series. Thanks again.

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