In this quarter’s update, David Guiver, VP Shell Energy Australia (Trading and Supply), along with Andrew Hines, Senior Energy Trader, talk about the NSW power market and some of the volatility that we’ve seen over the quarter. They also discuss the gas market and in particular the LNG netback price and the Wallumbilla hub price and the relationship between those two price references. And take a look at the energy efficiency market and in particular the Victorian scheme.
Welcome to Shell Energy’s quarterly wholesale market update. Quarter 4, 2020. Three great topics today. We’re going to take a look at the New South Wales power market with the volatility that we saw over the period. We’re going to take a look at the gas market. Some really interesting data around the LNG netback price and the Wallumbilla hub price and the relationship between those two price references. And, of course in the energy efficiency market, we’re going to take a look at the Victorian scheme. Some really incredible price shifts over the last quarter and we’ll share some information about those changes.
To take you through a detailed analysis, Andrew Hines our Senior Energy Trader with Shell Energy is joining us again with this edition, over to you Andrew.
Thanks, David. Hi, I’m Andrew Hines, one of the Senior Energy Traders, here, at Shell Energy. In this first section, we’ll be talking about a topic on power. Specifically, we’ll be looking at the price volatility that we recently saw in New South Wales across Q420. After a period of relatively low power prices throughout the NEM, this is the first quarter where we’ve seen a consistent amount of price volatility throughout the quarter. In the following chart, we’ll be looking at some of the aspects of the market that have been driving this price volatility, mainly, the balance between supply and demand. In these charts, we’ll be representing this by looking at the average daily demand and the average peak demand reached within that day. And then comparing that to the average, what we’ll call the reserve margin.
The reserve margin is the difference between the total available capacity and the total demand at the corresponding time. So, if we look at this chart, what we see here in red is the daily demand. The darker columns represent the average across the day. Whereas the lighter columns represent the maximum half-hourly demand reached during that day. Below that, in yellow, we see the reserve margin.
So, this is that difference between the total availability and the total demand. The darker bars represent the difference between the average. So, the average total demand on the day and the average total availability throughout that day. The lighter colour represents the minimum reserve margin.
So, this was the reserve margin at the highest demand point during the day. Looking across Q420 in New South Wales, we can see that there was a tightening of the reserve margin. This was due to a number of outages, specifically, in the baseload generation plants within New South Wales. Of interest, we can see that there’s a few instances, where the reserve margin, what’s actually on this chart, is actually shown as positive.
This was where the maximum demand was greater than the total available capacity at that point. These were half hours where there was insufficient local capacity. So, generational capacity within New South Wales to meet that maximum demand. Now, let’s add the price onto this chart. So, what the bars represent is the average daily spot price for each of the days across Q420.
So, we can see we had several days of highest spot prices. And, in general, this corresponded to days of higher demand. So while high prices did generally occur on the high demand days. We do see one day early in the quarter, which is the 23rd of October, where we had strong spot prices, but what looked like a relatively average demand day. The highlight on this day is we can see that the reserve margin was much tighter on this day compared to the other days of a relatively similar demand. So, it was this tightening of supply that would have been putting upward pressure on the spot price for that day.
Looking further into the quarter, we can see that while there was strong prices on the highest demand days these didn’t correspond to the highest price day. Looking at the most volatile day, we’ll see that while the demand was high, it didn’t reach the heights that we saw a few days earlier. This is because there was a much tighter supply-demand balance due to lessening of the reserve margin due to outages on that day. So, what this is highlighting, it’s not only demand that drives higher prices, but it’s usually it’s a mixture of when we have higher demand days and we have a tightening of that supply-demand balance. Demand is only one side of that coin. We also have the availability. If we have a tightening of the availability, we would generally see higher prices. Now, as we discussed, we did see some days, where the reserve margin went negative. Those were days where there was not enough local available capacity to meet the demand for that day.
The power system in New South Wales is connected to both Queensland and Victoria. So, not only is the price in New South Wales impacted by available capacity within the state, it’s also impacted by how much power can flow south from Queensland and north from Victoria. On this next slide, here, we’re comparing the same chart for Queensland as for New South Wales, on these high price days. So, here, we’re looking at a comparison of the highest demand day in New South Wales and the highest price day. Comparing the two days in New South Wales, we saw while the demand was low on the higher day, there was a tightening of the reserve margins.
So, a tightening of the supply. If we look at the same chart corresponding to Queensland, we can see that comparing these two days, there was also less available capacity in Queensland on the higher price day in New South Wales. Given that on this day the Queensland would have been supplying power into New South Wales, the lessening of available capacity in Queensland would have influenced the price in New South Wales and hence help to drive a higher price in New South Wales. Now, let’s look at the same comparison with Victoria. So, comparing the higher demand day in New South Wales with what it looked like in Victoria, we actually see that it was a rather low demand day in Victoria, meaning that there was plenty of surplus capacity in Victoria, which could then flow into New South Wales and help service their power. Looking at the higher price day in New South Wales, we can see that this coincided with a higher demand day in Victoria.
This meant that the reserve margin was tighter in Victoria. So, similar with the influence we saw from Queensland, where there was less available capacity with power flowing south from Queensland, there would have been less or higher price power, which would have had to flow from Victoria into New South Wales. So, both of these would have helped contribute to this higher price day in New South Wales, even though it wasn’t the highest demand day. So, the main point we can take away from these charts is that it’s the supply-demand balance, which is going to determine when we see high price days. We may see high demand days in one state but if there is a plenty of available capacity to meet that demand, we won’t see the volatile prices. In New South Wales, on the day where we saw the highest and most volatile prices, it was due to not only a strong demand day but a lessening of availability there and also a tightening of surplus capacity in the interconnected nodes.
In this section focusing on the environmental, we will be talking about the Victorian Energy Efficiency Certificates or “VEECs”. In Q420 we saw a sharp increase in the price of VEECs which was driven by a new scheme announcement. This focused on both the supply and demand side with an increase in the target which is driving up the demand and a decrease in supply due to the number of certificates now being created by the different activities. So the Victorian Energy Efficiency Certificates are created by activities which act to reduce demand by installing energy efficient appliances, for example, LED lightbulbs, more energy efficient hot-water systems and appliances like that.
In Q4, 20’ there was a sharp increase in the price of spot certificates for VEECs, this was driven by a couple of aspects that came out of a scheme announcement through Q4. What we see in this chart is the history of the VEEC price for spot certificates going back through the entirety of Cal 2020. Looking through the start of the year, you can see that the price, while gradually moving upwards, was relatively stable. Then we see a point relating to the scheme announcement where we saw a sharp rise in the VEEC price and then we’ve seen it continue to increase at a lesser rate through the backend of the year. This rapid increase in price was driven by a scheme announcement which saw changes to both supply and demand dynamics for VEECs.
Firstly, we saw announcements of the targets going forward and we can see in this chart that the target is continuing to increase. The target is set as a number of certificates created and each certificate represents a tonne of carbon which is abated by the created activity. The created activity reduces electricity demand through the energy efficiency and this offsets the amount of power that needs to be taken from the grid and based on the grid intensity, this will reduce the amount of carbon. So with the announcement of a continuing increase in the target, this means that there is a greater number of certificates that retailers need to surrender in order to meet their liability.
So hence there is a greater demand for certificates. With the increase in renewable generation throughout the NEM, this means that the average carbon intensity of power taken from the grid is decreasing. This means that for every megawatt-hour offset by a more efficient appliance there’s actually less carbon being saved. This means that the activities for installing new energy efficient appliances are creating less and less VEECs. As we continue to see the emissions intensity of the grid fall, there’ll be a greater number of activities i.e., greater number for example of lightbulbs that need to be installed to create a similar number of VEECs, this will put pressure on the supply side. So the main point we can take away from this segment is that the rapid increase in the price of VEECs was due to the tightening of the supply/demand balance. This was due to an increase in the future targets which are driving up the liability and hence the demand for certificates and a tightening of supply due to a falling emissions factor which means less certificates are created for the same activity.
In this section focusing on gas, we will be looking at a comparison of domestic gas prices with LNG export prices. What we’re looking at on this chart here is a history of the price on the Wallumbilla Gas Supply Hub versus the ACCC LNG (JKM) Netback price. Both are represented in Australian dollars per gigajoule. Here we are using the Wallumbilla Gas Supply Hub price to represent the domestic gas supply price and the ACCC LNG (JKM) Netback price to represent the export price. What the blue line represents is the combined operating capacity of the three LNG export plants along each of those days, i.e., the 80% number represent when they are operating at 80% of their nameplate capacity. So that means they’re at 80% of how hard they can actually run. What we can see on this chart is that the domestic gas price represented by the Wallumbilla Gas Supply Hub does have some correlation with the export price and that this can have some influence on the level of the domestic gas price. The international LNG market has experienced significant volatility in recent years due to swings in North Asia gas prices, oil prices and the start-up of new projects.
The domestic gas market has been influenced by LNG export prices, but as we can see in the historical prices this correlation isn’t direct, and we can see times where the two prices diverge in their characteristics. This can be due to other international events which are diverging international prices away from domestic gas, or we can see local impacts on the domestic gas market. When the LNG plants are operating at capacity it’s harder for international prices to influence domestic gas prices because there is a reduced path to the international market for the domestic gas. We can see this highlighted in the more recent trends in the international and domestic gas prices. Where both were trending upwards, but as the LNG plants near capacity, we can see that there started to be a divergence with the domestic gas price starting to smooth out.
While the international LNG export Netback price continued to increase. So, the main point we can take away from these charts is that while there may be many linkages between domestic gas prices and international Netback prices there are lots of other factors impacting both of these markets and each will have their own supply/demand dynamics.
Thanks Andrew, great analysis really insightful information there. Of course, we really appreciate your feedback on the videos, so please leave a comment below we really like to respond to that feedback and continually improve the videos. Also if you do have any questions and you do want to get in contact, your Shell Energy Account Manager can always help you out. So please reach out to them also. Thanks again.
This video has been prepared for information and explanatory purposes only and is not intended to be relied upon by any person. Customers should seek independent advice before making any decisions about electricity contracting arrangements.
If you have any questions, comments, or suggestions for any topics for future updates, please leave us a message and we’ll get back to you.
The companies in which Royal Dutch Shell plc directly and indirectly owns investments are separate legal entities. In this Market Update “Shell”, “Shell Group” and “Royal Dutch Shell” are sometimes used for convenience where references are made to Royal Dutch Shell plc and its subsidiaries in general. Likewise, the words “we”, “us” and “our” are also used to refer to Royal Dutch Shell plc and its subsidiaries in general or to those who work for them. These terms are also used where no useful purpose is served by identifying the particular entity or entities. ‘‘Subsidiaries’’, “Shell subsidiaries” and “Shell companies” as used in this Market Update refer to entities over which Royal Dutch Shell plc either directly or indirectly has control. Entities and unincorporated arrangements over which Shell has joint control are generally referred to as “joint ventures” and “joint operations”, respectively. Entities over which Shell has significant influence but neither control nor joint control are referred to as “associates”. The term “Shell interest” is used for convenience to indicate the direct and/or indirect ownership interest held by Shell in an entity or unincorporated joint arrangement, after exclusion of all third-party interest.
This Market Update contains forward-looking statements (within the meaning of the U.S. Private Securities Litigation Reform Act of 1995) concerning the financial condition, results of operations and businesses of Royal Dutch Shell. All statements other than statements of historical fact are, or may be deemed to be, forward-looking statements. Forward-looking statements are statements of future expectations that are based on management’s current expectations and assumptions and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in these statements. Forward-looking statements include, among other things, statements concerning the potential exposure of Royal Dutch Shell to market risks and statements expressing management’s expectations, beliefs, estimates, forecasts, projections and assumptions. These forward-looking statements are identified by their use of terms and phrases such as “aim”, “ambition”, ‘‘anticipate’’, ‘‘believe’’, ‘‘could’’, ‘‘estimate’’, ‘‘expect’’, ‘‘goals’’, ‘‘intend’’, ‘‘may’’, ‘‘objectives’’, ‘‘outlook’’, ‘‘plan’’, ‘‘probably’’, ‘‘project’’, ‘‘risks’’, “schedule”, ‘‘seek’’, ‘‘should’’, ‘‘target’’, ‘‘will’’ and similar terms and phrases. There are a number of factors that could affect the future operations of Royal Dutch Shell and could cause those results to differ materially from those expressed in the forward-looking statements included in this Market Update, including (without limitation): (a) price fluctuations in crude oil and natural gas; (b) changes in demand for Shell’s products; (c) currency fluctuations; (d) drilling and production results; (e) reserves estimates; (f) loss of market share and industry competition; (g) environmental and physical risks; (h) risks associated with the identification of suitable potential acquisition properties and targets, and successful negotiation and completion of such transactions; (i) the risk of doing business in developing countries and countries subject to international sanctions; (j) legislative, fiscal and regulatory developments including regulatory measures addressing climate change; (k) economic and financial market conditions in various countries and regions; (l) political risks, including the risks of expropriation and renegotiation of the terms of contracts with governmental entities, delays or advancements in the approval of projects and delays in the reimbursement for shared costs; (m) risks associated with the impact of pandemics, such as the COVID-19 (coronavirus) outbreak; and (n) changes in trading conditions. No assurance is provided that future dividend payments will match or exceed previous dividend payments. All forward-looking statements contained in this Market Update are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Readers should not place undue reliance on forward-looking statements. Additional risk factors that may affect future results are contained in Royal Dutch Shell’s Form 20-F for the year ended December 31, 2019 (available at www.shell.com/investor and www.sec.gov). These risk factors also expressly qualify all forward-looking statements contained in this Market Update and should be considered by the reader. Each forward-looking statement speaks only as of the date of this Market Update, 16 February 2021. Neither Royal Dutch Shell plc nor any of its subsidiaries undertake any obligation to publicly update or revise any forward-looking statement as a result of new information, future events or other information. In light of these risks, results could differ materially from those stated, implied or inferred from the forward-looking statements contained in this Market Update.
We may have used certain terms, such as resources, in this Market Update that the United States Securities and Exchange Commission (SEC) strictly prohibits us from including in our filings with the SEC. Investors are urged to consider closely the disclosure in our Form 20-F, File No 1-32575, available on the SEC website www.sec.gov.
16 September 2021
In this quarter’s update, David Guiver, Andrew Hines, Lasanthi Weerasekara and a new guest, Lead Gas Trader Grant Shannon, look at the correlation between the power and gas markets. They also examine the composition of NEM power generation by fuel source and the impact of the Callide and Yallourn events.
25 May 2021
In this quarter's update, David Guiver, Andrew Hines and guest energy specialist, Lasanthi Weerasekara, look at the East Coast electricity markets, supply and demand in the large generation certificate market, and East Coast gas, with a focus on Queensland domestic prices.