The electricity supply-side response to plummeting wholesale energy prices has begun with Origin Energy shutting down generation in one of its units at the massive 2880 MW coal-fired Eraring power plant in New South Wales.
Coal-fired baseload generation plants are under immense strain as wholesale electricity prices have plunged to a six-year low. Put simply, coal has become unprofitable.
The causes are weak demand due to the COVID-19 pandemic, a very mild summer, and a glut of renewable energy hitting the market.
The situation for coal generators is looking dire, as power plants need wholesale prices to be at least $50 per Megawatt Hour to break even.
The current average wholesale prices are hovering at around $40 per MWh and are expected to soften further before showing any signs of recovery.
Last week, AGL Energy posted a loss of $2.28bn, prompting talk of demergers and serious questions being asked about whether the gentailer business model is still viable.
GL CEO Brett Redman said that some coal plants were struggling to cover operational costs.
Energy Security Board Chair Kerry Schott warned that some coal plants are going broke and could close four to five years ahead of schedule.
This week, Origin saw bottom-line earnings slashed by 98% to just $13 million.
Wholesale prices are unsustainable and it’s going to get messy – Origin CEO
Chief Executive Frank Calabria made himself clear: “These wholesale prices are unsustainable and there will be a supply response. It’s only whether it will be planned or unplanned.”
Mr Calabria has warned that there will be a messy fallout as a result of the ultra-low prices on the National Energy Market.
Electricity supply-side response may be forced as coal plants can’t cover operational costs
His comments suggest that other operators may endure forced outages as investment is cut back, or that they may decide not to generate electricity because it simply does not make financial sense.
In a typical non-Covid summer, February is a bumper month as the mercury hits sweltering levels and pushes demand sky-high.
Origin projects more challenging times ahead, with profits expected to drop further in the June half and continue softer in 2022.
Credit rating agencies are also flagging potential downgrades to Origin’s credit ratings.
The developments are worrying because coal still produces 75% of the country’s energy.
That ratio is eaten up very quickly by the sheer flood of renewables on the market, but that also needs to be backed by readily dispatchable power such as pumped hydro and large-scale batteries.
If the entire coal fleet would suddenly disappear from the market, the lights would go out and electricity prices would be stratospheric because supply would be so low.
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