Australia’s energy markets are delivering unprecedented electricity price increases and volatility. As significant electricity users, water utilities are clearly exposed to these forces. Balancing these risks is the opportunity to adopt alternative technology solutions and participate in existing and emergent markets. This Emerging Issue identifies the technology solutions and markets, shows how some water utilities are already moving ahead, and implores others to act.
Australian electricity prices have increased by 183 per cent on average over the last 20 years — almost three times an overall increase in prices. Even as recently as July 1st of this year, three major retailers announced price increases of up to 20 per cent.
Further, wholesale electricity market prices are at historic highs, and volatility is also up – Figure 1.
Figure 1 – Historic and Forecast Wholesale Electricity Prices throughout Australia
These electricity price increases are being driven by various forces, notably including:
- an increase in wholesale gas prices (see Figure 2) driven substantially by LNG exports;
- generation capacity withdrawal; and
- investment uncertainty for new generation assets.
Figure 2 – Historic Wholesale Gas Prices in Victoria
An almost perfect correlation between exists between wholesale gas prices and wholesale electricity prices: every $1/GJ increase in gas prices leads to an increase of about $10/MWh in the cost of gas fired electricity.
Water utilities are significant users of electricity (e.g. treatment plants, pumping stations and general operations) and are therefore inherently exposed to the current price volatility and increases.
Clearly, the energy issues fall into two distinct categories:
- average energy price
- peak energy price.
Average energy price
MHC expects that every water utility will already be managing average energy price risk by tendering for energy supply, working collaboratively with peers, investing in energy efficient plant, etc.
New and potentially cost-effective supply solutions are now strongly emerging, for example including:
- deploying on-site generation capacity, including of course diesel (already well adopted), gas (expensive in the current market), wind, solar, and biogas;
- corporate Power Purchase Agreements (PPAs), to access particularly solar and wind developments and potentially by-pass the role of Energy Retailer.
Peak energy price
Importantly, the operational imperatives associated with managing energy peak demand must be fully considered in assessing options (e.g. treatment plants, pumping stations, general operations).
Exposure to volatile energy prices is a quite different risk and has its own potential solution suite. Some water utilities have already chosen to implement their own electricity demand response solution; examples are shown in Attachment 1.
In the last few months the Australian Renewable Energy Agency (ARENA) in consultation with the Australian Energy Market Operator (AEMO) have activated market mechanisms to help manage overall peak supply market risk over the next 3 summers. These programs are outlined in Attachment 2.
MHC expects that this contracted demand market may well in due course be replaced by a bidding market.
So, while the immediate opportunity to participate in these programs has passed, further opportunities exist to use hard assets, data analytics and software to manage peak price risk. Examples opportunities include:
- on-site thermal peaking generation capacity – presumably gas or diesel
- advanced demand response enabling hardware, communications and software to interface (directly) with market price signals and control the operation of plant, naturally within defined operational parameters
- energy storage (batteries).
HOW DO WATER UTILITIES MOVE TOWARD A SOLUTION?
MHC is encouraging all major energy users to develop a comprehensive strategy to manage energy price risk and volatility.
Leveraging its intimate knowledge of both the energy markets and water utility operations, MHC has developed a bespoke Energy Strategy Diagnostic which is applied to rapidly develop an indicative business case for water utilities to benefit from:
- deploying on-site generation capacity, including of course diesel (already well adopted), gas (expensive in the current market), wind, solar, and biogas – for energy and peak;
- corporate Power Purchase Agreements (PPAs), to access particularly solar and wind developments and potentially by-pass the role of Energy Retailer;
- exploring options of participating further in energy retail markets through either becoming an alternative energy seller (exempt retailer) or aligning their brand to an existing retail licence holder;
- advanced demand response enabling hardware, communications and software to interface (directly) with market price signals and control the operation of plant, naturally within defined operational parameters; and
- energy storage (batteries).
Contact Paul Minnock for more information