Perfect storm drives down NEM wholesale electricity prices, but “the only way is up”?

Reputex, a respected forecaster in the energy industry is reporting that while wholesale energy prices have been driven down during 2020, “the only way is up?”. Below is an excerpt from their full article which you can read here

The coronavirus pandemic has helped to create a perfect storm for the wholesale electricity market. With lower gas and coal prices, reduced operational demand, the commissioning of large renewable energy projects, and increased hydro and coal-fired availability seeing NEM regional average prices fall to to $33-59, 17 to 45% below the same period last year, the lowest level since 2014-15.

 

We discuss the current price environment and the key drivers of our Central Case forecast below.

Lower operational demand

Despite the widespread economic impact of the COVID-19 pandemic, its impact on Australia’s total electricity demand was modest (compared to international markets) due to the large reduction in commercial demand being offset by large increases in residential demand, along with the continued operation of large industrial facilities, which make up a relatively large proportion of Australian electricity demand.

Compared to Q2 2019, operational demand is down 2 per cent, with COVID-19 contributing an estimated 2 per cent reduction and increased distributed photovoltaics (PV) resulting in a further 1 per cent reduction, partially offset by a 1 per cent increased heating requirements due to cooler weather. The overall decline remains within recent trends, however, energy consumption is projected to continue to decline for the next several years, leading to a medium-term loosening in the supply-demand balance though the first half of the decade.

Commissioning of large-scale renewables

Just 0.6 GW of solar and wind capacity have been commissioned so far in 2020, down from 2.6 GW in 2019. Although utility-scale solar and wind continue be built at an impressive rate, the final step of delivering electricity into the grid has experienced major delays in some zones due to outdated grid infrastructure.

Despite this, more than 3.8 GW of new wind and solar remains committed to enter the NEM. Existing supply between construction and final commissioning will also increase output as transmission restrictions and other curtailment issues are resolved. In total, we anticipate the commissioning of 4.7 GW of large-scale renewables over the next two years, driven by large wind projects in NSW and VIC. This excludes more than 2 GW per year of behind-the-meter supply that will also be added at current build rates.

Collapse in fossil fuel prices

The largest driver of the drop in wholesale prices is the role of gas. COVID-19 has caused demand to collapse, driving significant price volatility in the oil, LNG and thermal coal markets. Brent Crude oil prices reached a low of around A$30 per barrel towards the end of April, before recovering to between A$60-65 per barrel. Japan Korea Market (JKM) liquified natural gas (LNG) prices fell to a record low of A$2.77/gigajoule (GJ).

 

 

The only way is up for wholesale electricity prices?

Given that the current low wholesale price environment is being driven by a perfect storm of downward drivers (which are likely to persist), as one or more of these factors change, wholesale prices may now have nowhere to go but up in the longer-term.

Low fossil fuel prices, along with continuing soft demand, are anticipated to keep wholesale prices significantly lower than we have recently experienced over the medium-term. We forecast prices to stabilise around current levels, between $40 and $65 per MWh, except during summer quarters when the market is estimated to remain tight during certain periods.