We predicted that due to low prices those that have muscle power, will flex their muscle because they have no choice. Origin Energy is now the first to do so.
In our previous article, “The Big 3 retailers facing more pain …” we suggested that the big market players are too invested to remain passive about falling prices, and are obligated to their shareholders to maintain value, so they will be driven to create change.
At Origin Energy’s Half Year 2021 Interim Report, CEO Frank Calibri was quoted as saying:
"I think it’s actually going to be a pretty messy period of time, and I think you will see us running our generation less at Eraring. That’s what you’re seeing now. We have to do enough to keep capacity available when it’s needed and manage within the flexible sort of window of that asset, but [lower generation] is going to be a feature"
- Frank Calibri, CEO at Origin Energy
Origin changes their behaviour
Origin Energy appears to be actioning their own advice as the spot market offers from their coal-fired Eraring Power Station in NSW has shifted capacity from low price bands, into high price bands. This means the plant is running less, but not putting the grid at risk.
The chart below shows the average monthly capacity offered by Eraring Power Station for each month for the last 4 years with the capacity offered, marked on a colour spectrum in the legend:
- orange tones reflect capacity offered at prices above $300/MWh
- purple tones reflect prices between $35 and $300/MWh
- grey tones reflect prices below $35/MWh.
In January 2021, about 25% of the average monthly capacity was offered above $5,000/MWh and in February 2021, this decreased to 12% which coincided with a unit being unavailable from 5 February 2021.
This action taken by Origin Energy is clearly different to the:
- pre-summer behavior
- same months of the previous year
- same months of 2019 and 2018
What has changed?
Wholesale prices are different.
Despite Origin Energy re-pricing capacity, the average NSW spot price for January and February 2021 was only $37.08/MWh which is far lower than the previous 4-years for the same months. The nearest average price outcome to 2021 is 5-years ago in 2016 when Hazelwood Power Station was running. That world seems a long time ago.
Furthermore, the forward prices for the next financial year as at the end of February are also much lower in 2021, than many previous years. The chart below shows the NSW forward market wholesale price for the next financial year, as at the end of February each year.
This strategy of re-pricing capacity into higher price bands aims to induce greater spot price volatility which will typically elevate the forward market price (or slow any decline). Given the forward market is the basis for setting retail prices, an organisation like Origin Energy can receive great leverage from foregoing cash today, in return for a higher forward price into the future which will flow into retail tariffs.
Will we see other gentailers adopt the same practice?
In our next Monthly Report we will dive into this in more detail, so subscribe now so you don't miss it!