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With the incredibly low rainfall in much of Australia this Winter and official predictions that we are at the beginning of an El Niño cycle (which typically leads to drought) I thought I would start a thread on the financial and market impacts of a continuation or worsening of the drought.
I emphasise that this is not about cheaply acquiring properties as farmers go broke or any other such questioable activity. But rainfall affects so many things that there must be some opportunities for honest profit (or loss).
I'll start the post with my favourite subject of electricity...
This is not simply about hydro power in Tassie but about a situation which now threatens to affect the industry across all states in the National Electricity Market (NEM). That is, Queensland, NSW/ACT, Vic, Tas and SA.
Whilst much of the industry is publicly owned or represents a drop in the ocean of some much larger entity, there are exceptions to this. I'm intentionally not mentioning specific stocks here - do your own research before investing!
The situation as it stands right now is as follows.
1. Tarong (1400 MW) and Swanbank B (480 MW) power stations (Qld, coal-fired) are both threatened with closure due to water shortage. Fuel burning power stations are big water users and the ongoing water shortage means that maintaining water supply to Brisbane may necessarily take priority over power generation.
Closure of these plants would remove substantial low cost baseload supply from Queensland and thus reduce exports to NSW, or at least increase the price of those exports. Whilst the lights are unlikely to actually go out since Queensland does have a surplus of generating capacity, there would be problems in the event of breakdowns elsewhere in Queensland or NSW.
2. Water storages in the Snowy (3740 MW) are well below normal levels. This may force a biasing of production further towards peak demand times only thus removing significant intermediate supply from the market. Since there would be no loss of peak capacity, the lights won't go out but it does mean that some other (more expensive) power source has to be used more.
3. Water storages in Tasmanian hydro-electric schemes are 31.3% full at present and falling despite Tasmania buying practically all the power it can get (limited by Basslink capacity) from the mainland and some use of local gas-fired generation. Storages fell 0.6% of total capacity in the past week and are about 7% below target minimum levels with that gap steadily increasing.
Whilst a physical supply shortage is unlikely, it does mean Tasmania will be offering much higher prices into the market (in order to intentionally reduce production) if the situation continues. It also means the state will be using far more natural gas than it otherwise would since power generation is the predominant use of gas in Tasmania.
So what does all this mean?
1. Impacts for coal mines supplying Tarong and Swanbank.
2. Higher fuel use by other power stations across the country, particularly Queensland and NSW. That fuel being predominantly coal but also some gas, particularly in Qld.
3. Lower hydro generation at intermediate and off-peak times from the Snowy and Tasmania.
4. The reduced hydro generation must realistically be offset by some combination of increased coal fired generation in NSW and to a lesser extent SA (since Victorian coal-fired plants tend to run flat out anyway) and greater use of natural gas in Vic, Tas and SA.
5. The overall effect is a reduction in some supply (coal-fired plant in Queensland) and hydro generators only selling at much higher prices so as to reduce output. There is also likely to be an effect on hydro generators other than Snowy in NSW and Vic if the situation continues.
So, in short, less supply and some generators achieving this by only selling at higher prices, more coal burnt (except at two plants in Qld) and more gas used. Obviously this is likely to lead to higher wholesale electricity prices.
Financial impacts: More profit for generators selling into the spot market, potential losses for retailers and major indusry buying from the spot market, higher gas demand, some mines sell more coal (or exports are reduced). If it continues long enough, impacts on long term contract prices. Possible policy implications if it gets bad enough.
Do your own research into specific stocks. I posted this mainly to start the thread as I would imagine that areas other than electricity would provide the greatest profit / loss opportunities if the drought continues.
I emphasise that this is not about cheaply acquiring properties as farmers go broke or any other such questioable activity. But rainfall affects so many things that there must be some opportunities for honest profit (or loss).
I'll start the post with my favourite subject of electricity...
This is not simply about hydro power in Tassie but about a situation which now threatens to affect the industry across all states in the National Electricity Market (NEM). That is, Queensland, NSW/ACT, Vic, Tas and SA.
Whilst much of the industry is publicly owned or represents a drop in the ocean of some much larger entity, there are exceptions to this. I'm intentionally not mentioning specific stocks here - do your own research before investing!
The situation as it stands right now is as follows.
1. Tarong (1400 MW) and Swanbank B (480 MW) power stations (Qld, coal-fired) are both threatened with closure due to water shortage. Fuel burning power stations are big water users and the ongoing water shortage means that maintaining water supply to Brisbane may necessarily take priority over power generation.
Closure of these plants would remove substantial low cost baseload supply from Queensland and thus reduce exports to NSW, or at least increase the price of those exports. Whilst the lights are unlikely to actually go out since Queensland does have a surplus of generating capacity, there would be problems in the event of breakdowns elsewhere in Queensland or NSW.
2. Water storages in the Snowy (3740 MW) are well below normal levels. This may force a biasing of production further towards peak demand times only thus removing significant intermediate supply from the market. Since there would be no loss of peak capacity, the lights won't go out but it does mean that some other (more expensive) power source has to be used more.
3. Water storages in Tasmanian hydro-electric schemes are 31.3% full at present and falling despite Tasmania buying practically all the power it can get (limited by Basslink capacity) from the mainland and some use of local gas-fired generation. Storages fell 0.6% of total capacity in the past week and are about 7% below target minimum levels with that gap steadily increasing.
Whilst a physical supply shortage is unlikely, it does mean Tasmania will be offering much higher prices into the market (in order to intentionally reduce production) if the situation continues. It also means the state will be using far more natural gas than it otherwise would since power generation is the predominant use of gas in Tasmania.
So what does all this mean?
1. Impacts for coal mines supplying Tarong and Swanbank.
2. Higher fuel use by other power stations across the country, particularly Queensland and NSW. That fuel being predominantly coal but also some gas, particularly in Qld.
3. Lower hydro generation at intermediate and off-peak times from the Snowy and Tasmania.
4. The reduced hydro generation must realistically be offset by some combination of increased coal fired generation in NSW and to a lesser extent SA (since Victorian coal-fired plants tend to run flat out anyway) and greater use of natural gas in Vic, Tas and SA.
5. The overall effect is a reduction in some supply (coal-fired plant in Queensland) and hydro generators only selling at much higher prices so as to reduce output. There is also likely to be an effect on hydro generators other than Snowy in NSW and Vic if the situation continues.
So, in short, less supply and some generators achieving this by only selling at higher prices, more coal burnt (except at two plants in Qld) and more gas used. Obviously this is likely to lead to higher wholesale electricity prices.
Financial impacts: More profit for generators selling into the spot market, potential losses for retailers and major indusry buying from the spot market, higher gas demand, some mines sell more coal (or exports are reduced). If it continues long enough, impacts on long term contract prices. Possible policy implications if it gets bad enough.
Do your own research into specific stocks. I posted this mainly to start the thread as I would imagine that areas other than electricity would provide the greatest profit / loss opportunities if the drought continues.
