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Hello and welcome to another edition of Energy Action’s Market Wrap.
My name is Scott Easton and I head up the Trading and Pricing Team here at Energy Action.
Today I’d like to discuss recent electricity and gas pricing in the wholesale market and identify the factors that have led to a dramatic increase in prices.
I’ll also be discussing AGL’s recent announcement to demerge its business into two separately listed energy companies.
Finally, I’ll be providing an update on Energy Action’s Renewable Backed Electricity Supply Agreement and why this product is an ideal alternative to a traditional Power Purchase Agreement.
Turning now to electricity and gas markets, the charts show the dramatic increase across all states in the forward pricing for calendar year contracts during 2022, 2023 and 2024.
This is largely due to recent generator outages in QLD and Victoria which resulted in higher cost gas-fired generation meeting market demand. 2022 and 2023 contract prices have risen by over 20% in the last few weeks as prices jump by an average of $10/MWh.
We’re seeing prices rise rapidly on bad news but not revert to previous levels, given the majority of the causes (with the exception of Callide Unit 4) have been resolved. This is known as the ratchet effect, where prices rise but fail to revert. The current COVID lockdowns across NSW, VIC and South Australia were expected to decrease electricity demand but have not materialised due to higher heating demand. Electricity prices are now approaching a key resistance level, with the expectation that prices will break through an 18-month high.
In the gas market - wholesale prices have risen to unprecedented levels, peaking at $52/GJ at the Victorian Hub. The Victorian Gas Hub’s daily weighted average price by calendar quarter, along with our estimate of the Sept Quarter, which will rise significantly in response current quarter pricing
The key factors that have produced all-time record gas hub prices include the combined effect from:
1. Unexpectedly high export demand from Asian countries that ran down inventories during 2020 and are now replenishing storage levels. This resulted in domestic gas being diverted to export markets.
2. The increase in gas-fired generation to meet demand due to baseload generation outages, exacerbated by a flood at the Yallourn power station.
3. Unplanned maintenance event at the Longford gas production facility, which also resulted in storage levels at the Iona gas storage facility depleted.
4. Recent unseasonably cold weather has increased the demand for both gas and electric heating, with the majority of additional electric heating supported by gas-fired generation.
The combined effect of all four factors sent gas prices to unprecedented levels. However, Longford has since returned to full production, Yallourn is back online, the cold weather will pass and Asian gas demand will fall back to prior levels, we expect gas prices to stabilise by Q4 2021, subject to the ratchet effect.
These events have pushed up the forward contract price for 2022 and 2023 gas, now trading between $8.50 and $8.70/GJ.
Turning now to AGL’s recent announcement to demerge its business into two separate businesses, AGL and Accel, by Q4 of FY22. The key differentiator being Accel’s ownership of existing coal-fired generation assets, while AGL will focus on leveraging its customer base with the multi-product strategy. The separation appears to be around wholesale and retail operations although the asset structure is more aligned to coal and renewable generation.
It's unlikely that the demerger will have any impact on the energy markets although we have seen recent improvements in AGL’s competitiveness during our auction and RFP procurement events.
Environmental certificate markets: The forward curve has shifted up in response to greater demand from corporates, with many taking a future position to purchase Large Generation Certificates (LGCs) and Australian Carbon Credits to demonstrate their progress towards Net Zero.
LGC prices process remain in backwardation. Prices of 2024 LGCs ha doubled since March this year from $9.70/certificate to $22/certificate.
The spot price for ACCUs has increased from $16/certificate at the start of this year, to $22/certificate earlier this week.
Most corporate have established a Net Zero strategy and we’re now encouraging corporates to move now to establish an implementation strategy, with the expectation that price will continue higher.
We’re now conducting Renewable Backed RFPs for the supply of renewable energy in a simplified supply agreement. The benefits of this product include shorter contracting periods, reduced transaction costs and fast execution times. Our product offers customers a lower risk option to a traditional PPA and fully complies with Net Zero schemes such as the RE100 and Climate Active. The advantage of this product over other alternatives includes recognition of the generation source and the option for our customers to promote their environmental achievements via photo licensing.
Well, that concludes this week’s Energy Market Wrap. I’m Scott Easton for Energy Action and remember don’t pay too much for your energy.