Know your NEM: NEG still a poor mechanism, conjured in haste

Know your NEM: NEG still a poor mechanism, conjured in haste

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NEG still looks like a poorly thought out policy; rooftop solar delivers for Queensland; and Infigen’s nosebleed debt financing fee.

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There will be lots more to be said about the National Energy Guarantee (NEG) and we urge those that are interested to read the NEG consultation paper.

Our simple view is that it’s a poor mechanism, being introduced with undue haste.

Fundamentally we simply don’t see that the responsibility for system wide issues should rest with individual retailers or gentailers.

Any reading of the consultation paper will show the complexity of some of the issues. I’d particularly draw attention to the idea that AEMO can be auctioning off offers for dispatchable capacity.

We’ve defended AEMO’s recent forecast record but that’s not to say that we think AEMO has somehow discovered an elixir that lets them see the future better than anyone else.

As such we aren’t sure that their identification of a reliability gap is going to be all that accurate. And we note they have an incentive to forecast a reliability gap. They will be a naturally biased forecaster.

This is not  a criticism but simply pointing out their incentive. They suffer no pain if there is too much generation capacity but get into very hot water if there is too little.

The consultation paper has an emphasis on markets and contracts solving the problem, but the very fact that there is a need for a reliability guarantee shows that the current market is not being trusted to deliver the required dispatchable generation despite the price signals that would be delivered in the spot market.

Instead the job is being handed to an individual forecasting body.

In addition there is a proposal for AEMO to have a “central book build process” for dispatchable generation.

In short the basis for and the implementation of the NEG seems to us not clearly thought out and the conflict between a private sector and planned approach to new investment seems to be heightened and not solved by the ESB proposals.

Queensland demand

Queensland grid maximum demand hit records several times in the past week, but for the week overall total grid delivered energy supplied was only 1% higher last year and the average price was just $86/MWh, and the maximum half hourly price $388/MWh.

We see that as a good outcome and shows that all  the investment in behind the meter PV is doing something. As Origin noted last week several grid scale PV plants will start in the next few months with Clare the first.

Infigen results – share price up 11%, but for what we don’t know

Infigen these days is being managed by people with more of a background in thermal generation than renewable generation. Two former CEOs of the old Babcock and Brown Power are in senior management at Infigen. This is perhaps a sign of how times change.

A summary of Infigen’s results which shows Ebitda and cashflow is:

Figure 1 Infigen cash flow: Source: Company

The result was good in the sense that ebitda was maintained despite slightly lower wind volumes. Curtailment doesn’t seem to be an issue for IFN.

However, what really caught the eye was IFN’s post reporting date , debt refinancing.

This refinancing provides IFN with $525 m of 5 year debt. The fees paid for this debt were about $25 m or more than 5% of the amount borrowed.

This is a nose bleed fee in your analyst’s opinion, particularly as it is only 5 year debt which will need to be refinanced again.

We would have preferred to see a more balanced debt profile with maturies spread out and obtained not just from one source. In addition IFN is seeking another $80 m of liquidity, if we read the announcement correctly.

Also of note was that IFN’s overall opex works to $27 MWh. Wind farms are expensive to operate in Australia particularly when compared with say $55 MWh PPA prices that the likes of ORG and PARF are receiving.

The weekly numbers

By and large the week was uneventful

Near term futures fell, but those in South Australia remain higher than the rest of the NEM. In year on year terms the futures curve is now flat, ie futures prices a year ago looking forward were similar to those on offer today.

Consumption has grown in Victoria compared to PCP we attribute this mostly to Portland smelter.

Gas prices were modestly softer, particularly in QLD.

REC prices are unchanged but we wonder how realistic the 2021 indicative price is.

Figure 2: Summary

Ten year bonds rose from 2.82% to 2.9% in Australia to be about 50 bps above last year.

Figure 3: Commodity prices. Source: Factset

Share Prices

Share prices mostly recovered modestly.

Figure 4 Selected utility share prices.


Figure 5: Weekly and monthly share price performance


Figure 6: electricity volumes


Base Load Futures, $MWH


Figure 11: Baseload futures financial year time weighted average

Gas Prices

Figure 12: STTM gas prices


Figure 13 30 day moving average of Adelaide, Brisbane, Sydney STTM price. Source: AEMO


David Leitch is principal of ITK. He was formerly a Utility Analyst for leading investment banks over the past 30 years. The views expressed are his own. Please note our new section, Energy Markets, which will include analysis from Leitch on the energy markets and broader energy issues. And also note our live generation widget, and the APVI solar contribution.






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  1. Peter Todd 3 years ago

    “don’t see that the responsibility for system wide issues should rest with individual retailers or gentailer”??? Who else are in a better position to make the strategic and investment decisions to achieve the required emission, capacity and other targets. The obvious aim of the NEG is to find the drivers to maximise competition between current and new players in the energy market to deliver the best result for Australia. Who cares if they don’t get it 100% right the first time, as long as they keep improving competition and let it bog down like the fiasko of the current electricity market.

    • Mike Westerman 3 years ago

      Certainly not individual retailers would be the answer to your question, in just the same way that individual generators and retailers are not responsible for individually delivering their energy. The current market was designed for a different era, of few large generators with a limited MC spread, fuel costs sheltered from international competition, with most having their capital contributed by tax payers. Now we have 3 million generators, mostly with almost zero SRMC and low cost of capital, with the large generators facing international parity pricing of their fuel. The Model T was great in its time, a failure in a modern Grand Prix!

      • Peter Todd 3 years ago

        Yes the current system is T Model. It was specifically designed and maintained to create profit for the old generators. 3 million generators or even 6 or 9 million generators will not solve the whole problem. What is needed is competition between the players that can deliver lowest cost low emission electricity at a just acceptable level of reliability. NEG is an attempt to create a system to do this. It is your and my job to make sure they do it right.

        • Mike Westerman 3 years ago

          The tools are there to enable peer to peer trading, but my point was that the NEG doesn’t address what seem to be a) fundamental structural issues in the market design which lead to lack of competition (and the corollary of no mechanisms to open up competition) b) the need to act decisively on our obligations under Paris c) the lack of interest by the Feds and AEMC in a competitive curtailment/demand response market d) the need to meet the quite separate issues of security and reliability which can’t be managed within a short term energy market and so need a separate market (or expanded FCAS market) e) the extension of ossified thinking and failure to vision for the future.

          It has all the hallmarks of a can being kicked down the road…

          • Peter Todd 3 years ago

            I agree with most of your points a, c, d & e. The key to getting the result Australia needs is having bi-partisan political support much more than the current technical details of the proposal. My reading so far on the NEG is that bi-partisan support is still possible and it is still possible to make sure the proposal address your and the many other concerns. The key is to ensure all who are willing to invest their dollars in helping to solve our electricity emissions, cost and reliability challenge are given a level playing field. Fair competition is key, plus having policies and systems that can be changed when it is shown that they are not working as is so lacking with the system we have had for more than 10 years.

      • Ray Miller 3 years ago

        Mike love the analogy, good one.

  2. Ray Miller 3 years ago

    David, I watched ABC Q&A last night (Monday 19th Feb) and noted a question from a business interest re the massive electricity and gas price increases flowing through is having on the Australian manufacturing sector and urgent (like now) action needs to happen to offer some economic relief.

    Could you consider an article explaining how the NEM manages it’s finance?

    There is a massive amount of money flowing around (all hidden), especially as has been reported for some time, generators making a years worth of profit is just a couple of days in summer. Take one day on the NEM with Retailers almost going broke because someone got the forecast wrong etc. Then it takes half to a full year for the various states to flow on overall cost amortized over the next year for ALL the domestic and small businesses, let alone contracts which may take years.
    The massive delay robs everyone from identifying the cause (and perpetrators) and then being able to take planed and co-ordinated timely action. And it would seem very financially inefficient having all these high risks and complexity built into every element of the NEM. Then not to mention all the conflicting drivers and perverse incentives as you highlighted with the NEG.

  3. Gary Rowbottom 3 years ago

    Notably, Qld power authorities and their trading sectors have been directed not to dig their snouts into the trough too far, that’s a big reason why at peak demand the max price was $388 MWh and average $86 MWh. Meanwhile in SA, the mere sniff of a high demand sends the traders bidding to the sky. SA is meant to have the highest prices aren’t they? Therefore of course we should make it so with high bids. Yes please keep talking up that false SA electricity crisis, provides all the cover needed for traders to hide behind while they engage in their Wolves of Wall street wannabe antics. Coalition wouldn’t be wanting to slow them down either, it suits them (and the interests they are beholden to) for SA to have the highest prices.

    ETSA had it about right with their 2005 comment, but the difference doesn’t need to be as great as it is.

    • Mike Westerman 3 years ago

      Their days are numbered. Even though no doubt to some extent self serving, EnergyAustralia says in their Cultana report that pnly 1 or 2 PHES projects will get up before they impact peak prices such as to be a hurdle to further projects. Since they are 200MW out of >1,000MW of PHES in the pipeline, the prices in SA will be the lowest in Australia and stay low as from 2022 or so.

  4. neroden 3 years ago

    5% in refinancing fees is usurious and indicates a company which is considered by financiers to be on the verge of bankruptcy.

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