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Generators make the most of higher power prices

Generators make the most of higher power prices

By Angela Macdonald-Smith

The first summer since the closure of the huge Hazelwood coal generator in Victoria has proved a boon for other electricity producers, which are under intense pressure to keep the lights on and in doing so are reaping windfalls from higher wholesale prices.

Both Origin Energy and AGL Energy reported gains from the tighter power market in the December half. Origin, in particular, saw the benefits after ramping up output at its huge Eraring coal plant in NSW by 37 per cent, with the plant now running at its highest rate since the company bought it from the state government in 2013.

The shutdown of Engie's Hazelwood plant last March removed 1600 megawatts of cheap, baseload power and sent wholesale prices skyward, putting the remaining generators in the sweet spot.

As reported by the energy regulator in December, fuel costs, particularly for gas, have also risen, while some NSW coal generators were hit by coal supply problems.

Average wholesale power prices in Victoria in the December half of 2017 were more than double the levels of the same period in 2016, according to JPMorgan, with prices in the last month of the year up 184 per cent from a year earlier. Prices averaged just over $92 a megawatt-hour in the half, before surging to $133/MWh in January as hot weather kicked in in the eastern and southern states.

"Taking out Hazelwood, despite what the Victorian government said at the time, was always going to have bigger impact on price than on security of supply, in my view," said Grattan Institute energy program director Tony Wood.

Someone is profiting

"Between the retailers and generators someone is extracting more profit. Clearly the customers aren't benefiting."

Super-aware of the tighter market and fears of potential blackouts, the Australian Energy Market Operator was on the warpath after the Hazelwood shutdown to make sure generators had all the capacity possibly available for the hot summer months. Several generators carried out maintenance work in the lead-up to summer to ensure their plants were at the ready, watching the forecast for suitable breaks between waves of heat to take units down.

"Higher prices are an outcome of the market situation," one industry insider said.

"I don't think generators have much of a choice the way AEMO has been trying to round up every spare megawatt."

AGL would have liked to make more of the tight market but suffered some technical problems at plants including Loy Yang A, which while performing well in the December half "could have been better", chief financial officer Brett Redman said.

EnergyAustralia, while yet to report its December-half numbers, also suffered coal supply issues at its Mount Piper generator in NSW.

But EA head of energy Mark Collette said all the company's plants had performed well on the peak days this summer.

Older assets

"With our older assets, it's crucial for us to take preventative maintenance in the milder moments to ensure we are online during peak times, and we have done this well," he said.

Mr Collette said the lost generation from Hazelwood has been replaced roughly equally by increased generation from black coal and gas. EA's own gas generation output is almost 300 per cent higher than before Hazelwood closed, with the Tallawarra plant n NSW and the Newport plant in Victoria running more frequently to cover both high-demand days and outages from other generators in the market.

Origin said its increased output from both the 2880 MW Eraring generator and the Pelican Point gas plant in South Australia allowed it to reduce purchasing on contract and on the wholesale market.

"If we want to meet the expectations of the community and government and our customers … we have to be reliable and secure over the summer," chief executive Frank Calabria said.

"So [that meant] getting Eraring to improve its output over that period, making sure we had our gas fleet available when we needed it and doing all of those things helps us bring more energy into a tight market."

Origin has made more from the tight market than AGL, whose generation volumes have actually declined about 6 per cent from two halves ago, noted Vertium Asset Management portfolio manager Jason Teh.

"It's good that Origin is capitalising on higher electricity prices because they need to: they've got a whole bunch of debt that they want to clear," Mr Teh said.

Blame the market structure

Mr Wood said the generators should not be blamed for reaping gains from higher prices. He blames the market structure for failing to provide the market signals for the investment in new, reliable supply that would bring down prices.

"That's why the concept of providing some clear signals that will drive investments in the energy mix we want is so critical," he said, pointing to the importance of the proposed National Energy Guarantee to provide that.

Meanwhile, although spot prices were higher in January, the forward prices point to lower rates in the next months and years.

JPMorgan's utilities team said that the reasonable success of the power system in coping with spikes in demand through the summer so far has helped soften forward power contract prices.

"This summer likely represents the riskiest period for system security insofar as there are no further baseload capacity closures expected for some time and new renewable capacity is due to come on-stream," JPMorgan said.

Financial Review

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