Electricity carbon and renewables a strategic outlook
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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:

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Electricity carbon and renewables a strategic outlook
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Generation
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Generation1
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Generation2
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Generation3
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Carbon
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

Coal Gas

Fuel $10/MWh $40/MWh

Carbon intensity 1t/MWh 0.5t/MWh

Carbon cost $60/t $60/t

Incremental cost $70/MWh $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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Gas costs
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:

Coal Gas

Fuel $10/MWh $55/MWh ($40/MWh)

Carbon intensity 1t/MWh 0.5t/MWh

Carbon cost $90/t $90/t ($60/t)

Incremental cost $100/MWh $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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Gas costs1
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Gas vs wind
Gas vs Wind

Some parties lobbying for an inclusive market with renewables

Assume wind at $120/MWh and solar at $250/MWh

Gas Wind

Fuel $40/MWh $0/MWh

Total cost $65/MWh $120/MWh

Carbon intensity 0.5t/MWh 0.0t/MWh

Carbon cost $110/t $0/t

Total cost $120/MWh $120/MWh

Solar?

Neither are base load technologies so do not directly compete with gas

RnP

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


Conclusion
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

RnP Group Pty Ltd - Ron Roduner 0417709063

[email protected]://rnpgroup.com.au

“Quality Commerce”


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