I can’t believe it’s not b[e]tter?… spreads getting better in NSW

The Federal Government announced this week that they will step into the electricity market (through the state-owned Snowy Hydro) to build up to 1,000MW of gas-fired generation to fill the gap left by the Liddell Power station for the 2023-24 summer unless the market can demonstrate final investment on dispatchable power by 2021.

It comes at a time when

  • AEMO announced in the ISP that no new gas is needed for the NEM
  • AEMO electricity statement of opportunity suggests that only 154MW of capacity is needed – this is to meet the more strict interim reliability standard (which is 3x more stringent than the actual reliability standard)
  • Rough capital cost for an OCGT would be $1,250/kW which is more than the cost of battery storage
  • Total rough short-run margin cost for new GPG to $81-$87/MWh
    • Fuel cost to run a gas-powered generator would be >$75-80/MWh given future gas projections recovering to $6.50/GJ by next year (plus $1/GJ for transport)
    • Variable O&M cost is ~$6-$7/MWh

So couldn’t we just use storage to fill this gap? We are already seeing a number of market participants looking to batteries to add value to their projects, either to offset FCAS costs, firm renewable dispatch to increase hedging options, reduce MLFs, time-shift generation, arbitrage energy markets and play in FCAS markets.

So while FCAS accounts for a significant amount of value in current storage projects in the NEM, what is the potential value of battery storage energy trading? Figure 1 shows the increasing value in NSW for batteries to shift generation in the market and realise the energy spread value. With battery storage cost falling to well below the capital costs for OCGTs, as well as the fuels costs trending to ~10/MWh, and spread increasing from ~$130/MWh in 2018, to ~$145/MWh in 2019 and up to $288/MWh so far in 2020. Admittedly this is taking the spread between the lowest and highest 30min price, so actual spreads that want to use a full cycle per day trading will be slightly less.

Surely the value here for battery storage is a sign to the government that we don’t need more gas-powered generation. Also, if we are projecting a tightening of gas supplies on the east coast and the government wants to push gas prices lower, then building large GPG is counterproductive.

Batteries are dispatchable they now compete with GPG as peaking assets in their own right and winning in huge capacities. In the US, Vistra Energy is building a 400MW/1,600MWh battery to replace a gas peaker. With new markets emerging in the NEM it won’t be long before projects like this begin to look feasible in the Australian market.