What would price impacts be, if Hazelwood were to close in March 2017 as rumoured?

Given the ongoing speculation (in places like this article in the Age today, and hence bouncing around on social media), we’ve fielded a few calls from journalists and others for our insights into what is likely to happen to electricity prices in Victoria, and further afield, if a closure occurs.

In parallel, I have noted a number of commentators providing their own perspectives on what’s likely to happen – ranging across the full spectrum of the Emotion-o-Meter, from:
(a)  She’ll all be hunky-dory; to
(b)  The sky will fall in.

Rather than repeat my perspective in further one-on-one calls, I thought it more efficient to refer to my prior comments in September, and add this brief post….

1)  Let’s start with reality

Firstly, let’s get the obvious out of the way (at least, it should be obvious, but does not seem to be):

No-one can know what the price impacts will be.

Anyone telling you anything else is simply selling you something (perhaps talking their own book?)

2)  Here’s three big reasons why it’s not possible to know

As I’ve noted on WattClarity before, the NEM is a complex place.

It is because of these complexities that it is impossible to know what the price impacts will be.  Here are three big ones (and that’s not a comprehensive list):

2a)  The east-coast network is beset by numerous transmission constraints

This is our starting point, as an industry – and it’s something that’s likely to become more complex in the future if more remote-site low-emissions generation sources connect to the grid.

Given we have invested $Millions in the development of ez2view as the ‘top-shelf’ means for understanding how the network operates, and impacts on pricing and dispatch outcomes in the market in real time, we understand a little about this subject.  Yes, that’s us talking our book:
1.  It’s complex
2.  “Models” that just stack up available capacity for the NEM and compare against demand (or even at a region level), without taking both “System Normal” and the more transient constraints into account in forecasting what outcomes might be are woefully inadequate, or just downright misleading.

In their cases, those models are a long way from reality.

Here’s three cases in recent history where the transmission network had a major bearing on price outcomes in the NEM:
1.  The problems in Tasmania through the early part of 2016.
2.  The price escalation seen in South Australia in July 2016 – which itself followed on from some other emerging pricing patterns.
3.  The (very) unfortunate blackout in South Australia of 28th September, where transmission issues played a key (but not a solo) role.

There are many, many more that fly under the radar of the broader group of energy sector stakeholders, but which still have an impact on pricing and dispatch patterns (practically) each and every day.

2b)  Participants will (quite naturally) change their behaviour

It’s a market, right.

Participants changing their behaviour in response to changing market conditions is a natural part of a well functioning market.   It’s what we want them to do – as this helps to deliver the lowest cost, most sustainable outcome over the long-term.

AGL’s not going to know how Engie will change its bidding behaviour and contracting strategy for Loy Yang B as a result of the closure of Hazelwood – and how this will flow through to Origin, etc….

What hope does an independent commentator have?  Zip.

2c)  Developments that might follow on…

Back in September, I flagged the possibility that other flow on developments would also combined to impact on prices (citing Portland smelter, and industrial unrest at Loy Yang A as 2 examples).

There are plenty more.  It’s possible (though not certain), for instance, that higher spot prices in VIC and elsewhere would provide more impetus to the acceleration of the sluggish development of renewables projects stacked up but waiting for developers to pull the trigger.  … but this would then have more of an impact on the viability of remaining thermal plant, … and so the cycle would continue.

In summary, the next time you read an article somewhere else purporting to tell you that the prices will go sky high, stay the same, drop (or even “won’t affect power prices as much as you might think” – whatever the hell that actually means?) then it might pay to reflect on the fact that:
1.  The commentator cannot know; and
2.  Hence it might pay to wonder how/why they are “talking their book”.

Wouldn’t it be smarter if we, as an industry, collectively accepted that the future is unknowable – hence stop making unrealistic promises to the broader community, who will surely hold us to account?  Again.

That’s all I have time for today.

About the Author

Paul McArdle
One of three founders of Global-Roam back in 2000, Paul has been CEO of the company since that time. As an author on WattClarity, Paul's focus has been to help make the electricity market more understandable.

3 Comments on "What would price impacts be, if Hazelwood were to close in March 2017 as rumoured?"

  1. Hi Paul
    I am still a Learner so I am chasing information rather than voicing my undeveloped opinion.
    Can you explain the AEMO spot price for electricity in more depth please.
    Alternatively point me to some resources.

    I have been informed that Wind Farms have negotiated a set price per KW for 20 years.
    Does Snowtown Wind Farm really get paid $112 per KW for all the electricity they produce?
    Thus the spot price does not affect them at all.
    Is it not true that large industrial electricity users, eg ALCOA, have negotiated a fixed rate (tariff) and so are not included in the spot price.
    Is it not true that large power stations bid for and get a locked in amount and price 24 hours earlier
    So the spot price only reflects the small amount of shortfall or surplus electricity requirements for that 30 minute time frame.
    Sometimes, not often, the AEMO price is negative. As in -$2.34.
    I am to believe that all electricity providers are paying some one to take their power.
    A very poor business model I would think.

    Please set me straight

    • Thanks Stephen,

      That’s a few questions there. I’ll try to respond in more detail in future posts (weaving into other commentary) but here are some starters:

      Q1) Explain the AEMO spot price?

      The AEMO has run educational courses for many years. I’ve actually never been on one myself, but we have sent other team members on some from time-to-time. More recently they have created this “General Public elearning – National Electricity Market (NEM) Overview” which, at only $220, is probably high value for money.

      Q2) Do wind farms (and other generators) have long-term contracts in place?

      The NEM is what’s known as a gross pool, meaning that all big generators actually receive the spot price for the energy they generate. The spot market also (largely) dictates how they are dispatched. Hence they all care about what happens in the spot market.

      That said, most generators have a range of hedges in place to provide (partial) protection from the volatile revenues that come from spot. Some hedges are in the form of long-term PPAs (power purchase agreements) like you mention.

      These hedges are not complete protection, so all big generators should still be concerned about what happens in the spot – though in reality some don’t realise this until they get burnt one way or another.

      Q3) Do large loads have long-term contracts in place?

      Because the NEM is a gross pool, ultimately all energy users are buying with reference to the spot price. As is the case for generators there are (most times) hedges in place that have the effect of smoothing the pain (or the benefit). These hedges can be of various durations – though long-term ones (e.g. 20, 30 years) are legacies of arrangements in place prior to the current market starting in 1998.

      Q4) How does bidding work?

      Generator offer prices (they are called “bids” in the NEM) are fixed the day before for the current trading day, but volumes in price band “buckets” can vary up to real time. Hence, dispatch volumes are only decided by AEMO in real time.

      Hence the spot price really, really does matter.

      Q5) Can prices go negative?

      Yes, they can drop to a floor price of -$1,000/MWh – and sometimes do (like yesterday in QLD for a dispatch (5 minute) interval). When this occurs, yes, suppliers are paying the AEMO (on behalf of wholesale customers) to take their power.

      Does this help?

      • Much appreciated Paul

        One more. Do wind farms have a guaranteed price for their electricity

        I have two themes in life
        Don’t hurt anyone and try to understand things

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