Electricity, Carbon and Renewables
a strategic outlook
Strategy analysis is about:
characteristics, trends and driving forces
Structure
Generation, wires, retail
Competitive, regulated, competitive/regulated
Focus on generation
Pricing is driven by:
strategic positioning of generation businesses
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
1
Generation
Strategic Drivers
Vertical integration with fuel
get inputs at production costs and not at market price
Vertical integration with retail
not permitted for govt corporations
deliberate break up at corporatisation
private players strive to vertical integration
NSW saw the sales of coal mines
To renew coal supply contracts, Generators face export parity, 3-4 times historical cost
Gas industry structure is fundamental to driving generator input costs and customer
prices
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
2
Generation
Capital is the biggest cost
Government cost of capital is lower than private and desired returns are less
Fuel
Coal leases held by governments
Needs to be held for a long period for electricity and other infrastructure
Government fuel sources developed by contractors so not inefficient
Long term efficiency driven by fuel resource ownership and vertical integration
Short term efficiency driven by competition to operate fuel resource
Result
Sourced fuel at production cost and not market price; a delinking of local fuel price from
export pricing
Achieved by most state governments until corporatisation
strategic holdings reduce costs of supply of all
infrastructure
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
3
Generation
Achievements
Zero or ½ CPI increases for 10 years prior to corporatisation
Strategic positioning now
Queensland coal generators well positioned
NSW saw the sales of coal mines
Generators face export parity, 3-4 times the historical fuel cost
Production cost $1/GJ; Export price $3-4/GJ ($30-40/MWh, doubles generation cost)
Gas is the new fuel and gas price reflective of export pricing
Gas supply industry structure has to be considered
Very few generators of scale vertically integrated into gas supply
The ones that are have a major cost advantage
First time in history for consumers that fuel will not be
sourced at production cost but export market prices
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
4
Generation
Gas overview
Major campaigns to link local gas price to LNG (export) prices
Applies to gas resource owners that have generation assets
Indicative gas prices
Production cost $3/GJ
Incremental cost $1/GJ
Export market price $5-10/GJ
$5/GJ represents $40/MWh
Result
Major cost impost for customers
Increased profits and reduced risks for vertically integrated entities
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
5
Carbon
To reduce carbon intensity, need to change the merit order from coal to gas
Base load plant sets pool price and it must get its returns to remain viable
Needs to be competitive on an incremental and total cost basis
Fuel
Carbon intensity
Carbon cost
Incremental cost
Coal
$10/MWh
1t/MWh
$60/t
$70/MWh
Gas
$40/MWh
0.5t/MWh
$60/t
$70/MWh
Costs for illustrative purposes only
Total cost changeover is similar
Low carbon prices will not change merit order
and will have limited ability to reduce emissions
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
6
Gas Costs
Gas generators and suppliers compete in the regulatory arena and not the commercial
arena
Gas suppliers want to increase gas price as their product is more valuable
$60/t is $3.75/GJ gas cost equivalent
If gas supplier gets a 50% of the increase, then costs are:
Fuel
Carbon intensity
Carbon cost
Incremental cost
Coal
$10/MWh
1t/MWh
$90/t
$100/MWh
Gas
$55/MWh ($40/MWh)
0.5t/MWh
$90/t ($60/t)
$100/MWh ($70/MWh)
Competition and pricing in the gas supply market is critical to
managing fuel supply costs for non vertically integrated entities
and electricity prices to customers
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
7
Gas Costs
What are the alternatives?
Volumes of gas to meet CPRS trajectories are unmet in historical terms and compete with
LNG projects
Gas is more expensive and regulation assists in securing a commercial return
A carbon market penalises the fuel of choice and increases customer prices unnecessarily
Regulatory intervention vs market pricing of carbon
an alternative is to not impose a carbon price on all
emissions but to limit use of unpopular technologies
wrt emissions and to assist the use of preferred
technologies
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
8
Gas vs Wind
Some parties lobbying for an inclusive market with renewables
Assume wind at $120/MWh and solar at $250/MWh
Fuel
Total cost
Carbon intensity
Carbon cost
Total cost
Gas
$40/MWh
$65/MWh
0.5t/MWh
$110/t
$120/MWh
Wind
$0/MWh
$120/MWh
0.0t/MWh
$0/t
$120/MWh
Solar?
Neither are base load technologies so do not directly compete with gas
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
9
Conclusion
Absolute need to separate markets
Must consider some management by regulation
Best to regulate rather than creating an artificial market
Always has been major cost differences in technologies so separate the markets
Market is simply a way to shadow price and hold costs up
There is no technology on technology competition in
baseload generation costs – never in history and not
now
Good reasons to manage costs differently than to put all
technologies in the one size fits all carbon market
RnP
“Quality Commerce”
RnP Group Pty Ltd - Ron Roduner 0417709063
[email protected]
http://rnpgroup.com.au
10