Energy markets on the rise as coal and gas prices reach breathtaking heights

It’s becoming clear that 2022 may be the wildest year on record for energy prices.

Most of these charts included in today’s analysis are unfortunately starting to get all too familiar. But the point is, there is still upward price momentum.

Here (in chart below) is the NSW spot price by time of day for the past seven days, and the average is an astonishing $296/MWh.

A fair amount of solar energy is still generated during the day, but because, despite the sun and the wind, some coal, gas and hydropower is still needed, prices are even higher than normal in the middle of the day.

That’s because those fossil fuel-enhancing products still set the price and because the coal capacity (a) is super tight and thus has no competition, and (b) spot fuel prices are off the grid right now, even those midday prices are well over $200/MWh.

The price of coal in $ A has risen nearly 500% in a year.

Yes, Australian generators have contracts, but the temptation must be great to say to the miner, ‘You sell the coal and pay me most of the difference between the spot price of $556 per tonne and the contract price, say, $60 /t . I’ll keep a little coal for emergencies and evening peaks, but the rest you can have.”

The chart below shows only the past 12 months in US dollars. Trust me, we haven’t been here before. I don’t know how things were in WWII, but I’d be surprised if they were much higher. We’re almost in the rationing room.

Not that that happens, just that there is a financial incentive.

At $550/t and 0.34t per MWh, you need an electricity price of $187/MWh to cover fuel costs. Sure, you can now get a lot more than $187.

But the price of coal has risen to this stratospheric level, never dreamed of, for centuries – say three months. It’s old news.

This price came despite China’s annual increase in coal production by 800 megatons from 3.6 billion tons per year to about 4.4 billion tons per year. Go to China! Kill the world, kill yourself.

The new news is gas price, where in the short-term market, the price in Adelaide plunged as low as $48 per gigajoule last week, surpassing $30/GJ in Sydney and Brisbane. Burning gas in an open cycle generator at $48/GJ may require an electricity price of $500/MWh.

Whether spot gas prices in Australia are justified depends on where you look internationally. Ultimately, gas is a lot less “fungible” – that is, tradable – internationally than oil or coal because of the limitations of LNG liquefaction capacity. So in the US, the Henry Hub price is about US$8/GJ.

But the price in Europe is about $A44/GJ. That is, of course, well below the $A100/GJ that represents the peak so far.

And this is not the end of the short-term problems. In Queensland and possibly NSW, the coal supply is physically disrupted by wet weather. Queensland has more open pit mines, ie large open pits, than NSW and so is more vulnerable to rain.

As we noted earlier, some gas units (Swanbank E) sold their gas for LNG. Diesel prices are also high, although still within historical margins, making road transport expensive.

Eleven coal-fired power stations produced zero last week

And then, of course, there are the generator failures. About 6,200 MW of coal capacity was down last week, about 30% of black coal capacity and 12% of lignite. In addition, a unit from Vales Point was at half-mast.

This is of course absurd. Indeed, it makes sense that there is some skepticism. On the other hand, it is also true that generators have some of the production that is currently in forced outage and will have to buy at very high prices to cover.

AGL shareholders have you a pitcher?

Of the plants that failed to produce last week, AGL had 2.4 GW (two units in Bayswater, one in Liddell and one in Loy Yang A). The Loy Yang A outage will cost profits about $70 million.

If I were an AGL shareholder thinking about the split, you’d have to ask yourself if Accel isn’t a complete moron. It is struggling to produce in May 2022, but management wants to tell shareholders that things will still go well in 2040.

Believe that and I’ve got a pot of gold at the end of the rainbow that I’d like to show you. So what if Grok Ventures and Mike Cannon-Brookes close them early? They don’t work anyway. And you will in any case receive management with a clear vision and a fresh plan.

If you are an existing solar or wind generator, this is of course fantastic news. Six months ago, solar developers faced downturn, spot prices were negative or approaching negative, valuations had fallen and banks wanted more equity.

Right now, spot prices for solar farms are over $150/MWh, plus you might get $45 for a renewable energy certificate. Happy Days!

What does this mean for the consumer?

In general, perhaps 40% of the electricity price that households pay for grid power comes from wholesale prices. (By the way, I have to wonder why WA wouldn’t release its numbers).

You can see that in 2020 the wholesale cost was about $100/MWh. Not only was this the cost of the base load, but an additional 30% was added for hedging.

On the other hand, the big retailers will all have hedging. As I’ve discussed many times on these pages, a rule of thumb for a large gen-tailer is that about 25%-30% of the book is repriced each year, so changes in wholesale prices slowly make their way.

The history and rates of baseload electricity are:

If we assume that a retailer’s hedge book is built around a three-year moving average, and if we focus only on NSW and QLD, we might estimate a 10% change in bills for NSW residential and perhaps more than 15% for large business customers who need to close a new deal.

This too shall pass – eventually

According to ITK, what we see is real: the wounded bull scenario Paul Simshauser outlined it in 2009 – although not necessarily related to a carbon price.

The coal generators are injured, they are dead on their feet, but because we cannot build new capacity fast enough, the consequences for consumers are costs and profits for wind and solar operators.

Coal producers don’t care too much about the long-term effects of high prices. It will certainly encourage energy efficiency and substitution, but coal generation is doomed to fail.

Even in Queensland, Australia’s last possession of “coal generation has a future,” generation company management – even if it’s not the Electrical Trades Union or the state government – understands that coal generation is stopping.

So why not let the prices go? And anyway, what could they really do about it?

The gas price and the coal price are realistic. So the only answer, as it is for Europe as it breaks away from the Russian energy embrace, is to grin and put up with it and continue building new supplies.

Prices can certainly be higher. When the market takes such a tear and fear and greed take over, then an overshoot is very possible.

And there are still fundamental upsides: even for coal, because of Russia and despite China’s increase; and for gas, the threat of Russian gas being cut off from Europe is real. When that happens, gas prices go up.

At the same time, however, some of the coal-fired power stations will resume operation and new capacity will gradually be built up. Very gradually, at the current Australian pace.

Goldwind has 500 MW of wind farms that might as well pee into the wind for all the uses they have now. This is a black spot for all concerned and touches on the fundamental disorganization of the NEM. Why on earth is AEMO responsible for transmission in Victoria?

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