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Coronavirus lockdown slams electricity prices

Power demand in Australia’s national electricity market will fall by the most on record over April and May due to the COVID-19 shutdown, cutting electricity prices and rendering high-cost coal generators uneconomic, consultancy RepuTex said.

The national power grid faces a sharp but temporary reduction in demand through to the end of May due to corporate office and small business shutdowns and reduced output from larger industrial facilities.

A 22.5 per cent fall in demand across the market is expected in May compared with a worst case 40 per cent decline under a full lockdown scenario.

NSW and South Australian electricity demand plummeted in March to its lowest level since the national power market was created in 1998.

In Europe, Italy’s electricity demand dropped 20 per cent, highlighting the risks facing Australia’s electricity sector.

Wholesale electricity spot prices — down by half from a year ago to $45 per megawatt hour range in most states — could fall below $40 per megawatt hour to levels where high-cost coal plants will struggle to break-even.

“The coronavirus pandemic has helped create a perfect storm for the wholesale electricity market, with lower demand, lower gas prices and the commissioning of large renewable energy projects expected to depress electricity prices depending on the extent and duration of lockdown restrictions,” RepuTex analyst Bret Harper said.

Commercial services account for 28 per cent of national electricity demand in Australia with households contributing 24 per cent and manufacturing 22 per cent.

Electricity prices even at current levels are testing break-even points for black coal generators in the national electricity market, with further falls in demand likely to see operators cut supplies to balance the market.

“Generally below $50 a MWh gets uncomfortable for the highest cost generators and we are currently down in the $40s which is not sustainable and it could go even lower than that,” Mr Harper said.

Prices may then rebound to the $60 a MWh level in June and average $69 a MWh for the 2019-20 financial year overall with restrictions eased by July and back to normal consumption levels a year later, RepuTex says.

Investors who piled into renewable projects and corporates that signed power purchase agreements at higher prices may also be vulnerable to the price trend, according to the Ai Group which represents big manufacturers and industry.

“Wholesale power prices have been falling and the futures say they will fall a lot further back into territory last seen in 2016,” Ai Group’s Tennant Reed tweeted.

“Eventually this may cause problems for generators, accelerating closure of the weakest links and maybe disappointing recent investors and power purchase agreement buyers.”

Baseload electricity futures for 2021 in Victoria and NSW have fallen below $60 a MWh in line with a pledge by Energy Minister Angus Taylor for wholesale prices below $70 a MWh by 2022.

While much attention over the summer was focused on ensuring sufficient supplies were in place to meet peak demand, generators and large users will increasingly be rethinking how periods of low demand and high renewables penetration reshape the way supply is dispatched and prices struck.

The boom in clean energy generation in Australia sparked a big response from large users looking to lower their power bills and boost their exposure to large-scale wind and solar projects around the country.

However, the power purchase agreement market tapered off in 2019 as headwinds hamper the timeline and financing for some renewable developments.

Large-scale clean energy projects should still proceed but smaller developments may struggle to get the green light partly due to the lower Australian dollar and higher supply chain costs.

“Big international renewable players have economies of scale and supply chains and can compete at very low prices,” Mr Harper said. “They remain the lowest cost game in town.”

Source: The Australian