Following on from Tuesday’s article on how coal generation has been adjusting to recent market conditions — particularly in NSW — this article looks at what comes next as large-scale batteries enter the market in earnest.
As discussed below, the volume impact is bigger than the price impact. There are a number of gross assumptions in the note below, but I don’t think they detract from the message: batteries are going to materially erode coal generation profits, and likely gas profits as well. In fact, they may do more damage to coal than to gas.
Batteries take volumes, not just price
In the previous note, I discussed the history and recent coal generation outcomes with a particular focus on NSW. A comment was made—and I paraphrase—that batteries wouldn’t change average prices very much, because they only impact at peak. A plot from yesterday’s note illustrates this.
Coal profitability by time of day
Futures prices are sitting at around $100/MWh and even if that’s a natural contango, it still suggests plenty of price for coal generators. However, we do know that about 3.5 GW of new batteries are coming to NSW or even more.
So how will that impact profits? The first step was to think about spot prices. I assumed that this amount of batteries would be enough to see average evening peak spot prices in NSW no higher than $225/MWh but you can make your own number up. This only reduces average price by about $5-7/MWh.
However, if we assume that coal bears all the volume loss, and it won’t—hydro and gas will lose some as well but let’s put it all on coal, then notional spot profit in $bn can take up to a 40% hit.
If you also take account of depreciation, fairly high as end of life approaches, accounting profits are not looking so good.
Of course it won’t work out like this; the idea is just to sketch out the impact of batteries in broad strokes. Although we think about price, it’s the impact on volumes and revenues that matters more.
About our Guest Author
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David Leitch is Principal at ITK Services. He has 33 years of experience in investment banking research at major investment banks in Australia. He was consistently rated in the top 3 for utility analysis between 2006 and 2016.
David has been a client of ours, and a fan of NEMreview, since 2007. He has been a long-time contributor of analysis over on RenewEconomy, and very occasionally contributes to WattClarity! You can find David on LinkedIn here. |
This “analysis” is embarrassing to see on Watt Clarity. You guys are better than this.
The article is fine until the author seemingly decided it was too difficult to work out the impact on coal generators and instead decided to assume that every coal generator in NSW would run at ~50% load when prices are at their peak. If the headline wasn’t based on this final assumption, it wouldn’t be such an issue.
I’d love to see an analysis diving into the dynamics of greater battery capacity on the grid. Including higher daytime pricing, reduced emission intensity (less gas for peaking) and coal retirement projections. It seems that batteries won’t have a huge impact on coal (compared with their impact on other generators). There won’t be enough of them to justify bidding lower than coal to stop coal from matching demand (minus wind) during the night.
Reneweconomy-tier analysis from WattClarity with this article. Sad.
Thanks Bill. I’ll go back to Reneweconomy. By the way other than the podcast I have no professional relationship there. I contribute to put something back after a fairly successful career in in investment banking research. I have a huge amount of time and respect for Wattclarity and the quality of its work and I’d hate for it to be diluted with my “reneweconomy” tier. Very happy to have my points debated, never happy but will always accept where I am wrong and actually over a very long period of time have mostly kept towards the front of the analysis curve. If you want to be early you will be wrong. Perhaps batteries wont have any impact on evening coal volumes any more than solar had an effect on daytime ones. I would be open to the point that charging the batteries has an impact on midday volumes but equally there will likely always be plenty of low cost solar. Still I abandon the watt-clarity field. It’s not that I mind criticism Ive had a fair bit of it in my career and from very very senior people, but I really don’t want to upset the quality diet that Wattclarity has. regards