Given the ongoing speculation (in places like this article in the Age today, and hence bouncing around on social media), we’ve fielded a few calls from journalists and others for our insights into what is likely to happen to electricity prices in Victoria, and further afield, if a closure occurs.
In parallel, I have noted a number of commentators providing their own perspectives on what’s likely to happen – ranging across the full spectrum of the Emotion-o-Meter, from:
(a) She’ll all be hunky-dory; to
(b) The sky will fall in.
Rather than repeat my perspective in further one-on-one calls, I thought it more efficient to refer to my prior comments in September, and add this brief post….
1) Let’s start with reality
Firstly, let’s get the obvious out of the way (at least, it should be obvious, but does not seem to be):
No-one can know what the price impacts will be.
Anyone telling you anything else is simply selling you something (perhaps talking their own book?)
2) Here’s three big reasons why it’s not possible to know
As I’ve noted on WattClarity before, the NEM is a complex place.
It is because of these complexities that it is impossible to know what the price impacts will be. Here are three big ones (and that’s not a comprehensive list):
2a) The east-coast network is beset by numerous transmission constraints
This is our starting point, as an industry – and it’s something that’s likely to become more complex in the future if more remote-site low-emissions generation sources connect to the grid.
Given we have invested $Millions in the development of ez2view as the ‘top-shelf’ means for understanding how the network operates, and impacts on pricing and dispatch outcomes in the market in real time, we understand a little about this subject. Yes, that’s us talking our book:
1. It’s complex
2. “Models” that just stack up available capacity for the NEM and compare against demand (or even at a region level), without taking both “System Normal” and the more transient constraints into account in forecasting what outcomes might be are woefully inadequate, or just downright misleading.
In their cases, those models are a long way from reality.
Here’s three cases in recent history where the transmission network had a major bearing on price outcomes in the NEM:
1. The problems in Tasmania through the early part of 2016.
2. The price escalation seen in South Australia in July 2016 – which itself followed on from some other emerging pricing patterns.
3. The (very) unfortunate blackout in South Australia of 28th September, where transmission issues played a key (but not a solo) role.
There are many, many more that fly under the radar of the broader group of energy sector stakeholders, but which still have an impact on pricing and dispatch patterns (practically) each and every day.
2b) Participants will (quite naturally) change their behaviour
It’s a market, right.
Participants changing their behaviour in response to changing market conditions is a natural part of a well functioning market. It’s what we want them to do – as this helps to deliver the lowest cost, most sustainable outcome over the long-term.
AGL’s not going to know how Engie will change its bidding behaviour and contracting strategy for Loy Yang B as a result of the closure of Hazelwood – and how this will flow through to Origin, etc….
What hope does an independent commentator have? Zip.
2c) Developments that might follow on…
Back in September, I flagged the possibility that other flow on developments would also combined to impact on prices (citing Portland smelter, and industrial unrest at Loy Yang A as 2 examples).
There are plenty more. It’s possible (though not certain), for instance, that higher spot prices in VIC and elsewhere would provide more impetus to the acceleration of the sluggish development of renewables projects stacked up but waiting for developers to pull the trigger. … but this would then have more of an impact on the viability of remaining thermal plant, … and so the cycle would continue.
In summary, the next time you read an article somewhere else purporting to tell you that the prices will go sky high, stay the same, drop (or even “won’t affect power prices as much as you might think” – whatever the hell that actually means?) then it might pay to reflect on the fact that:
1. The commentator cannot know; and
2. Hence it might pay to wonder how/why they are “talking their book”.
Wouldn’t it be smarter if we, as an industry, collectively accepted that the future is unknowable – hence stop making unrealistic promises to the broader community, who will surely hold us to account? Again.
That’s all I have time for today.