The future of energy generation and storage

[Smurf1976]

Following from yesterday's look at solar, I will now look at wind farms from a financial perspective.

My aim here is not to say "buy shares in xyz" but rather to point out what you should look for when investing in any company which operates these assets. There are similarities to solar so if you haven't read that then read it before reading the following.

First I'll post a couple of charts which show the total output of all wind farms in Victoria and SA over the past 7 days.

Note the correlation between the two. SA leads Victoria a bit as you'd expect with weather moving across, and there are occasions when they aren't correlated, but broadly speaking we do see both going to very low and very high outputs at the same time.

Between the two it amounts to a ~3000 MW supply source that is running flat out sometimes, is virtually at zero at other times, and is somewhere in between that.

Where this matters from an investment perspective is two fold:

1. The combined average load across the two states is about 6850 MW including that supplied by customer owned generation (eg rooftop solar). As such that 3000 MW represents a very significant portion of supply, especially if it occurs at times when demand is below average and/or solar is producing high outputs, and the consequences of that are just basic supply and demand economics.

The average spot market price received by wind generation in SA over the past 12 months was $83.18 which compares with the average for all electricity (all sources) of $140.74 so there's a substantial price discount associated with that "all or nothing" aspect.

2. Physical constraints causing generation to be constrained off. In the SA context total within state wind generation above about 1295 MW is technically problematic without bringing additional gas (or diesel) plant online to provide sufficient inertia and having the required system load to enable that to occur. That's getting a bit technical but in short you can't generate power that has nowhere to go and the wind generation does require synchronous plant (that is, gas or diesel in practice) online at low output to support it technically.

Due to the low prices which occur at times of high wind output the gas-fired plants owners generally don't want to be running and the diesels most certainly don't. For this reason AEMO frequently issues directions which compel them to remain on when they otherwise wouldn't due to it being uneconomic to do so.

There are works planned in SA to install synchronous condensers (that's a great big rotating machine that's connected to the grid and spins - in layman's terms it's a motor but its purpose is to tweak the grid not to move anything mechanically) which along with the SA - NSW transmission line provide a workaround up to a point. There will still be limits though as there are in every other state.

So what does this mean for investors?

First and foremost - if you're investing in wind then what you want is your wind farm to be somewhere that:

1. Has a decent wind resource. Might seem obvious but the point does perhaps need to be made that not everywhere is suitable, there's good spots and there are bad spots.

2. Can physically get its output into the grid without local constraints. The transmission lines leading to it need to be able to handle the load, as an issue that's separate to the broader one of what's going on within the state or nationally in total.

3. Is not near other wind farms influenced by the same weather which then brings about low prices and/or state wide limitations on total wind farm production. This is particularly an issue in SA at present but Victoria is fast approaching the same point. Eventually so will the other states.

4. As with solar, it is wise to understand how their Power Purchase Agreement actually works. Specifically, does it have limitations such as not applying if the spot price goes below zero? And does it cover the full output of the wind farm or only a portion?

Have a look at this map: https://www.ecogeneration.com.au/wp-content/uploads/2018/01/ECO_Wind_Map_201802.pdf

It shows clusters of wind farms in NSW, SA and especially the area west of Melbourne through to the far south-east of SA hence the "all or nothing" issue being seen at state level which depresses market prices when they're all running heavily.

 

[Smurf1976]

Adding to my recent posts on solar and wind from a financial perspective, I should perhaps clarify that electricity is a market in the say way that shares or oil are a market.

There are electricity futures traded on the ASX.

Physical dispatch of generation is via the spot market administered by AEMO.

Any substantial generating company will have a trading room which looks much as you'd expect it to look. It's a trading operation in much the same way as any other apart from the fact that it's linked to physical production.

So looking at it right now and using plant in Victoria as the example, we find (among others) that the two (of four at the plant) currently operating units at Loy Yang A are both running at full output, that Mortlake Unit 1 (the half that didn't go boom recently) is running at just under half its capacity and that all machines at Jeeralang are off.

That this is so comes down to price subject to technical limits. That is, whatever price AGL are offering supply from Loy Yang A at right now is cheap enough to see it fully dispatched for the units online. Whatever price Origin are offering from Mortlake has resulted in it running at just under half capacity (of the one machine they have running) and whatever price Energy Australia are offering for supply from Jeeralang has priced them out of the market given there's no need under current circumstances for all plant to be running.

If AGL upped their price enough then they'd be switched off by AEMO. If Energy Australia dropped their price from Jeeralang then they'd be running. Etc.

Note there that price bids can be complex and contain multiple bands. That is, for the one physical generating unit a company might offer 50% of its capacity at one price, 40% at a higher price, 10% at a price that's seriously high. They'd do that if they want to keep the plant running and can't go below 50% capacity for technical reasons, are happy to run it up to 90% so long as they're making money but don't want to flog the absolute crap out of the machinery running flat out unless they have to. So they're using price to keep the plant running at 50% minimum but not beyond 90% unless there's a compelling need.

Note that's a hypothetical example not a real one used by any particular company. Pure coincidence if anyone has that exact bid in but the principle is used by most of having different amounts of capacity at different prices with the "must run" volume for technical reasons generally priced extremely low to ensure it gets dispatched.

The primary difference to the share market is that with electricity the volume is outside the control of traders. If you, I and everyone else turns the air-conditioning on then volume is going up no matter what, that's not something the traders have control over. That's unlike shares where there's no external influence requiring that x number of shares in BHP or Woolworths change hands tomorrow.

 

[rederob]

You say we should look at the U.S and model off them, when in actual FACT, we are doing better than them?
Especially when it comes to solar, we are actually putting in more as a percentage of generation.
So there isn't really any need to keep thrashing us, we are doing o.k.

What I said was that the USA is integrating solar and storage as a "package." And States are contracting for capacity by time of day, as distinct from just any capacity, which is not the case in Australia.
Australia is in a policy vacuum and has been for years.
The other point is that neither Australia or the USA are the "world."
Global investment in renewables is almost 3 times that of new coal and gas-fired generating capacity.

 

[Smurf1976]

Australia is in a policy vacuum and has been for years.

On that point everyone should agree.

I'll go a step further though and say that in some aspects not having a policy has been the policy. That is, it wasn't simply that we didn't have a policy but rather that a conscious policy decision had been made to not have an energy policy.

It seems strange but it's arguably true that this has been the case particularly in regard to gas.

 

[sptrawler]

From the article I posted earlier:
AEMO is currently the only organisation with a blueprint and a vision for the future. In the next few weeks, AEMO is to release the scenarios for the next version of its Integrated System Plan, its 20 year blueprint on how to manage the transition in the grid that will be released later this year.

It won’t be for 100 per cent renewables, although it might not be that far short.

Its first version focused largely on the policies being proposed by the two major parties – the 26-28 per cent emissions reduction target from the Coalition and the 50 per cent renewable energy target and a 45 per cent emissions cut by 2030 proposed by Labor .

Unlike some I don't profess to be the font of Knowledge, but I do think too many politicians make statements and set goals, that they have no idea if they are at all possible to achieve.
So is it better to have a policy that drives investment, without direction, co ordination or underlying business plan, or devise a plan then encourage the investment.
I personally would rather the Government left the technical side to engineering, then formulated a plan based on the outcomes of that engineering blueprint, one would think we have grown past the knee jerk back of the napkin policy formulation.
This isn't batts in ceilings, or even telephone lines, the grid is the backbone of the economy, stuff it up and we are in deep manure.
There is no point in having a policy, if it is a crock of $hit, IMO.
One hopes that when Morrison does make a policy decision, it is something that can be achieved, with the minimum of fuss and the best outcome for Australia.

 

[rederob]

Unlike some I don't profess to be the font of Knowledge....

If you have facts which are different from sources I have used then please provide that information.
FYI, AEMO is not a policy making body but, instead, the operator of the market that results from government policy.
The rules for how our electricity market works are enshrined in federal legislation called, unsurprisingly, the "National Electricity Law."
As smurf1976 notes, a lot of what occurs in the market is transparent, and how the NEM treats participants - including the financial framework - are summarised here.

So is it better to have a policy that drives investment, without direction, co ordination or underlying business plan, or devise a plan then encourage the investment.

An excellent question.
The most recent COAG Energy Council Meeting was 19 December 2018. As smurf1976 also notes, a policy of no policies again ensued, as attested by the communique.
So we have neither a plan to drive investment, nor a framework setting that encourages investment under laissez faire.

 

[sptrawler]

Unfortunately policy is clap trap, if it is based on ideologically driven beliefs, as has been proven over and over again.
As the article said, the AEMO is setting out a blueprint of scenarios, to achieve a safe secure transition to renewables, the Government will no doubt then develop a policy to support that blueprint and achieve the goal.
You really need to settle down a bit Rob, you will give yourself a heart attack, as I said it will be sorted.
At last we may have a Government that does it once and does it right, rather than throw the crap at the fan and hope for the best, to appease a vocal illogical minority.

 

[SirRumpole]

At last we may have a Government that does it once and does it right, rather than throw the crap at the fan and hope for the best, to appease a vocal illogical minority.

A statement of supreme optimism if ever I heard one.

 

[sptrawler]

A statement of supreme optimism if ever I heard one.

I did say MAY, it would be novel.
At least they are taking their time, rather than making crazy policy to feed the media circus, I hope it shows a degree of maturity.

 

[rederob]

Unfortunately policy is clap trap, if it is based on ideologically driven beliefs, as has been proven over and over again.

Where is any policy?
If there is one in the wind... what do you think it will look like?

As the article said, the AEMO is setting out a blueprint of scenarios, to achieve a safe secure transition to renewables, the Government will no doubt then develop a policy to support that blueprint and achieve the goal.

AEMO does not need any government policies to support its operation. It already has a legislated framework allowing it to adapt to the market, and that is why it can accommodate changes in government ideology.

You really need to settle down a bit Rob, you will give yourself a heart attack, as I said it will be sorted.

Ok, by whom?
You have made this comment dozens of times here and there is nobody with a clue trying to "sort it."

At last we may have a Government that does it once and does it right, rather than throw the crap at the fan and hope for the best, to appease a vocal illogical minority.

You realise this government will commence its 7th year in power this week.
So please tell me when they are going to do something, anything, just once instead of sitting on their hands and leaving us with the crap that keeps hitting the electric fan.

 

[sptrawler]

With regard the grid, you are better off having no policy and regulating the suppliers, than having poor policy that brings about a catastrophe.
Too much policy in the past has been driven by emotional clap trap, that is pushed by a rampant media feeding an ideological pack of chanters, to do it with the electricity network would end up in tears.
I think wait and see, rather than pushing a barrow. Just my opinion.

 

[Smurf1976]

To clarify, my recent posts about solar and wind are focusing purely on investment in the sector, eg buying shares in company which owns or is planning to develop, such assets.

I'm intentionally ignoring what's wrong or right and just focusing on what is with regard to the market and what makes a good wind / solar development versus a bad one from a financial perspective.

What's good in a broader national economic or environmental sense, or good technically, is of course a different thing and not necessarily the same. Some of what's needed from a technical perspective is rather unprofitable by its very nature hence the problem that in a competitive market nobody wants to own those bits. That's another story from my posts about assessing one company's assets versus another from the perspective of investing in that company however.

 

[sptrawler]

The network tends to get smaller the further you move away from the load and the generators, one of the problems will be, that is exactly where you want to put your solar farms and wind generators. So in reality exactly the opposite to what is there.

Also with the system, I guess you will want to be able to push a lot of power from an area of high output and low demand, to an area of low output and high demand. That will require some robust multi way interconnectors.

So I guess smurf, a lot of money is going to have to be spent on the H.V transmission system, the Federal Government will probably have to stump up a lot of it, but it will be a hell of an infrastructure project. IMO
Done properly, it could be amazing.

 

[rederob]

With regard the grid, you are better off having no policy and regulating the suppliers, than having poor policy that brings about a catastrophe.

Operation of the grid is legislated, and requires no policy, as it's AEMO's role. Legislation to change the National Electricity Law is the only way to change how AEMO operates the grid.

Too much policy in the past has been driven by emotional clap trap, that is pushed by a rampant media feeding an ideological pack of chanters, to do it with the electricity network would end up in tears.

The NEM was developed over 20 years ago, and refined a bit by successive governments. The ideological framework for the NEM was based on largely economic principles, with technical considerations an afterthought.

I think wait and see, rather than pushing a barrow. Just my opinion.

Who is pushing a barrow?
And what are we waiting for? A policy that 7 years on they still cannot work out?

 

[SirRumpole]

The NEM was developed over 20 years ago, and refined a bit by successive governments. The ideological framework for the NEM was based on largely economic principles, with technical considerations an afterthought.

And ever since then power prices have sky rocketed.

Are you defending the NEM ?

 

[sptrawler]

It will be interesting to follow the progress of this proposed solar farm in W.A, they are suggesting putting it in the most fertile agricultural area of W.A, which is also irrigated. It will be a bit of a litmus test IMO, at the moment everyone is giving it the thumbs up, time will tell.

https://thewest.com.au/news/harvey-waroona-reporter/solar-farm-proposed-ng-b881250751z

 

[sptrawler]

A pumped storage facility to be installed near Townsville.

https://www.abc.net.au/news/2019-09...ject-set-to-have-ghost-town-bustling/11467992

From the article:
"The effect of the pumped hydro project generating into the network in peak times will act to depress those peak prices," Mr Harding said.

"The overall benefit will be over $500 million over the term of the project."

Powerline will 'ruin our business': farmer
Genex Power said it had secured most approvals and funding, including a Northern Australia Infrastructure Facility loan of up to $610 million.

It had been waiting on the Queensland Government to agree to help fund the construction of a high voltage transmission line to link the project to the National Electricity Market.

After years of consultation and assessments, today the Queensland Government announced it would spend up to $132 million for Powerlink to build and operate a single circuit transmission line and substations from Kidston to Mount Fox, subject to agreement of final conditions with Genex .

 

[Smurf1976]

A pumped storage facility to be installed near Townsville.

An example of what co-operation, rather than competition, can achieve.

Genex will be the owner, Entura (aka Hydro Tas) has worked on the design and Energy Australia has underwritten it via power contracts.

So that's an ASX listed company working with a government one and a private one on the same project along with an assortment of other contractors and so on.

 

[sptrawler]

A new solar farm in Numurkah, Victoria.
https://www.abc.net.au/news/2019-09-05/solar-farms-helping-revitalise-rural-towns/11481510

From the article:
The state currently has 14 large-scale renewable energy projects under construction, with a further 46 large-scale wind and solar projects in the planning stages .

 

[Smurf1976]

The ideological framework for the NEM was based on largely economic principles, with technical considerations an afterthought.

I think the most common misconception among the general public and in particular business was that the state utilities were inefficient and that the NEM was going to lower costs.

I've still got a stack of printed documentation from that era. Threw a wheelbarrow load out when moving interstate but kept some and in short it was clearly understood by 1993 that additional costs and loss of efficiency, both economic and resource use, would occur and that the expectation of large price reductions was a false one. Words to that effect can be found in documentation from the time.

About the thing that has really played out differently to expectations is solar. As recently as a decade ago not even the most hard line "green" people seemed to think that solar PV was going to be a serious bulk energy source in the near future. At that point it was still very much about what was possible in the longer term not what was actually going to happen right now indeed even those working in the sector saw it as a government project not something that stacked up of its own accord. That's the one thing which I think took everyone by surprise right across the industry and outside it - nobody seriously expected that a third of all homes would have solar on them in two states in 2019 and that solar would collectively be the second largest generation source in the grid when the sun is shining.

Other than that though, well the constraints on Bass Straight gas, that coal-fired plants wear out, that wind energy was going to become viable, that the climate was likely to change etc were all understood back in 1993 with the only uncertainty being the precise timing of events but it was known they would occur most certainly.

Overall the NEM has delivered broadly what it was expected to deliver by those in the know back then. Whether or not that's a good thing is another matter but no real surprises apart from minor detail.

Perhaps the biggest "detail" surprise is in ownership. That gas companies would end up buying major non-gas power stations and becoming dominant in electricity generation and retail wasn't really expected at the time. Once it was privatised many were expecting Telstra to get involved or possibly Coles / Woolworths (especially Coles given that Wesfarmers already had coal mines and an LPG processing plant) but gas companies ending up as the major players wasn't really what most expected.