Quarterly Wholesale Energy Market Update: July – September 2020

In this quarter’s update, watch David Guiver, Executive General Manager Energy Trading, along with Andrew Hines, Senior Energy Trader, talk about the low points in electricity demand we’ve seen over the last quarter, revisit the Renewable Energy Target as we close in on the end of 2020, and examine the gas market and interstate gas flows.

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 Powers’ wholesale market update for Quarter 3 2020. Again, three great topics to focus on for this edition.

We’re going to first of all look at the low, low points in electricity demand, and we’re seeing some new records set in Queensland, Victoria, and South Australia, so we’re going to take a deep look at that.

We’re going to go back and revisit the Renewable Energy Target. Been a while since we’ve shared some information there. We’re close to the end of 2020 so we’ll see how we’re tracking for compliance.

And finally, we’re going to take a good look at the gas market. We’re going to look at the gas flow from south to north and have a look at the price impact in the spot market. Again, Andrew Hines will be joining us and he’ll take us through the in-depth analysis again this quarter. Over to you, Andrew.

Andrew Hines

Thanks, Dave. Hi, I’m Andrew Hines, one of the Senior Energy Traders here at ERM Power. Renewable energy continues to transform the energy market and change how incumbent generators behave. This September, we saw all-time lows in the scheduled demand in Queensland, Victoria, and South Australia. Today, we’re going to look in more detail at each of these days and see how the impact of renewable generators, most notably rooftop PV, has impacted on where the minimum demands occur in the day and how this is changing the dispatch behaviour of incumbent generators.

The dotted line represents the half hourly demand on that day, while the dash line represents the average half hourly demand we saw through the quarter. The coloured area charts represent the generation output from each of the different fuel sources. Also on this chart, the yellow line represents the rooftop solar PV output that we saw during that day. Now the rooftop solar PV sits behind the meter. So what that means is that value comes out of the scheduled demand.

So looking at the Queensland chart, we can see that while on the average shape, minimum demand is usually either occurring sometimes overnight and sometimes during the middle of the day. On this low demand day, that low point was right in the middle of the day at the peak of the rooftop solar PV output. With that minimum occurring in the middle part of the day, we’re also seeing large output from the grid scale solar PV as well.

What this means for the generation mix is we can see that the base load, or coal-fired generators, are having to switch down during this middle part of the day as they’re being displaced by the higher output from both grid scale solar and from rooftop solar PV. In the evening, as the solar output ramps down, we’re having to see both the coal-fired generators ramp up as well as additional gas fire generation come in to meet the growing demand. Thus, we see quite a much steeper evening ramp as we’re seeing the combined effects of demanding increasing, as well as the output from both solar rooftop PV and large scale solar generation decrease.

This has an impact on price. The average price for this low demand day was around $38 in Queensland, but during that middle part of the day where solar had the highest contribution, the average was around $5. This is changing the price distribution across the day as we’re now seeing the lower price periods occur in the middle part of the day as opposed to the evening.

We saw a similar mix of generation on the 6th of September in Victoria. What we can see on the average shape, though, in demand is that in general, the minimum demand periods in Victoria occur overnight. Victoria doesn’t have the extent of rooftop solar PV penetration in Queensland, so in general, their low demand periods are still occurring overnight. However, on this day in September, there was enough solar generation, as well as lower demand to see that minimum demand period occurring within the middle part of the day. You can see a slightly different shape on that solar PV output in Victoria due to the lessening solar hours in the Southern States. But again, we’re seeing that same impact on the incumbent base load generators, in this case brown coal in Victoria, where they are having to turn down in the middle part of the day as they are being displaced by rooftop solar PV output.

In Victoria, there’s also a large amount of wind. We can see that on this day there also happened to be a big contribution of wind output during the middle part of the day. On this day, we also saw quite a strong impact of the rooftop solar PV and that low demand point in the middle of the day on price. The average price for the day in Victoria was just under $30. However, during these solar hours, this averaged at minus $17, so we can see how much more of an impact that additional solar was having on both the price and demand shape in Victoria.

A few days later on the 13th, South Australia also recorded a new all-time low for scheduled demand. South Australia has a much lower overall demand. More recently, they’ve had a large increase in the amount of rooftop solar PV. As you can see from this chart, that has had a huge impact on the daytime demand shape. On this day in South Australia, the scheduled demand got down to just 300 megawatts, while we had almost 900 megawatts of rooftop solar PV.

South Australia is a much smaller market so the recent increase in rooftop solar PV generation has had a huge impact on the demand shape. In such a small market, this has a huge impact on the ramp required during the evening peak, where we saw demand move from that low 300s all the way up to 1400 megawatts. And this had to be serviced by an increase in both gas fired generation, as well as use of the Hornsdale battery.

We can see that at those low price periods during the middle part of the day when the solar PV was at its highest, that battery was also charging, so taking some of the load from the market. As in Victoria, this middle part of the day also saw negative prices with the average price during those solar hours getting down to around negative $18 for that period.

So the key point we can take away from these three all-time low scheduled demand days is that the increasing amount of rooftop solar PV in the East Coast market has created increased variability in the half-hour demand shape, which in turn has meant generators have to change their operating behaviour in order to accommodate for this increase in renewable generation.

In this section, we’re going to revisit the supply demand balance for the 2020 Renewable Energy Target. This waterfall chart looks at the supply demand balance for LGCs for the calendar year 2020. We’ve seen a decrease in the supply of LGCs this year as renewable energy generators have faced network constraints, which have put a limit on their output, so this has seen a lowering of the creation of LGCs we’ve seen so far across quarters, one, two, and three.

Probably the biggest change we’ve seen since we last looked at this chart is the volume of certificates that have been voluntarily surrendered. These are certificates surrendered voluntary, so not to meet the 2020 liability target. The number of certificates voluntarily surrendered so far this year now sits at over 3.9 million. This increase in voluntary surrenders is primarily due to the ACT government, which surrendered over 2 million certificates, which they had previously earmarked for surrender.

Also, an increase in operation of desalination plants in new South Wales and Victoria, which had been looking to run carbon neutral, has also seen an increase in the number of certificates that they have voluntarily surrendered against their additional operation. There has also been an increase in other energy users voluntary surrendering certificates in order to offset their load.

The Clean Energy Regulator has also indicated an increase in the volume of redemptions. These are certificates that have been surrendered by liable entities who shortfalled a small percentage of their liability in previous years. In order to do this small short surrender, again, they need to surrender certificates that they didn’t surrender in previous years this year. So the expectation is for these counterparties who shortfalled the less than 10% last year is to roll this forward into the next year. To do this, they need to make good on their short surrender from last year, hence an increase in this redemption volume.

So the most recent numbers from the Clean Energy Regulator indicate that there will be a surplus of just over 1 million certificates at the end of 2020. As a comparison last year, we had an overhang of just over 7 million certificates. So the key takeaway from these numbers is that we’re seeing a tightening of the supply demand balance for calendar year 2020 LGCs, as we’ve seen a decrease in supply due to a lessening of creation of certificates and an increase in demand brought on by an increase in the volume of voluntary surrenders through the year.

In this section, we’re expanding our repertoire, and we’re looking at the East Coast gas market. Specifically, we’re looking at the dynamics of the flow on the Southwest Queensland pipeline. The Southwest Queensland pipeline links the export facilities in Central Queensland and the Queensland gas fields with the markets both New South Wales and Victoria.

The purple line on the chart looks at the difference in price between the Victorian gas market and the Brisbane SDTM gas market. A positive value on this chart represents higher gas prices in Victoria and lower gas prices in Brisbane and vice versa when it’s a negative value. So since 2016, see a fairly regular seasonal variation in directional flow across the Southwest Queensland pipeline. During the winter months, when there’s high demand for gas in Victoria due to heating load, we can see that the flow is overwhelmingly south, so flowing towards where the demand is. During the summer, as this demand for gas down south decreases, we can see more gas flowing north.

The dynamics of the price differential between Victorian and Brisbane spot gas generally follows this same pattern. When there’s a greater demand for gas down south, and we see gas flowing south, we see that there’s a higher price in Victoria. When the direction of gas flow changes, i.e. there’s more gas flowing north, we can see a higher price in Brisbane. This makes sense because gas is flowing from the lower price region to the higher price region.

Also on this chart, we can see that year on year since 2017, the total volume has been increasing year on year as the amount of local supply down south has been decreasing. If we zoom in on September, we can see that there has been a bit of a change in this price versus flow direction dynamic. Even though gas is still flowing south, so flowing out of Queensland into Victoria, the price is actually switched around. In other words, Victorians spot gas is below Brisbane spot gas, but gas is still flowing from the north into the south.

Due to warmer weather, gas demand in Victoria has dropped off and we’ve seen higher amounts of storage at the Iona storage facility. This has been drawing in on gas from the north; however, the price differential has still remained low in Victoria due to the decrease in demand. This increase in the amount of storage and change in the spot price has seen increased southerly flows as participants look to manage contractual volumes in the lead up to the end of the year. So the key takeaway from this is that the recent low spot gas prices in Victoria is due to an increased amount of southerly flow, so an oversupply of gas in the southern region.

Thanks for listening everyone. I hope you found all that information interesting. Back to you, Dave.

David Guiver

Thanks, Andrew. Great analysis there. We trust this information helps your organisation and, of course, feel free to reach out to your ERM Power account manager if you have more questions. And please, keep those ideas coming for the next edition of the quarterly update.

Thanks again.

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