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Energy Insights

Electricity Market 2018: Energy Action yearly review and outlook

Potential policy green shoots

The electricity market in 2018 continued to be influenced by ongoing policy uncertainty around reliability, cost and an emissions target. The National Energy Guarantee (NEG) never came to pass but it does remain possible for the government to revisit some of its core mechanisms.

Encouragingly, options remain on the table and discussions are ongoing so perhaps next year will be the one when Australia gets clearer policy around the reliability and affordability of energy, as well as tangible progress towards an emissions target. It is positive too that Labor may form an emissions policy and place greater focus on energy efficiency should they be in power. Any developments along these lines would certainly be beneficial to Australian commercial and industrial consumers of energy.

In the meantime, the Government has proposed new powers to compel vertically integrated retailers to divest generation assets, require retailers to commit to forward contracts for their electricity requirements as a way to ensure sufficient generation and move to underwrite investment in new, dispatchable generation.

And the AEMC’s move to ensure generators provide a minimum of three years’ notice to AEMO should they intend to close down operations, as well as its load shedding initiatives, can both help ensure stability and enable the planning required to manage reliability.

Outlook for prices

Prices across the National Electricity Market (NEM) have come off their peak, but have steadily risen since June 2018, according to the Energy Action Price Index which tracks the average commodity price of retail electricity paid by Australian business energy consumers based on a Standard Retail Contract. The price rise has been particularly sharp for NSW which has climbed by 15% over the past 6 months.

We are also seeing futures market prices continue to increase for calendar 2019 and 2020 with concerns remaining around potential supply shortfalls. Prices will likely remain elevated in the absence of any government action and, certainly in the short-term, converging forces such as higher demand during the summer months and possible generation reductions at Snowy Hydro are working to support higher prices into 2019.

Another contributing factor is the impact of the prevailing higher gas price on the electricity market. The gas situation isn’t helped by the lack of competition, but this is expected to improve somewhat from July 2019 with Cooper Energy and Shell Australia both signaling a significant entry into the Australian market. However, increased competition is unlikely to make a material difference to prices that are predicted to remain in line with export parity levels.

Corporate PPAs – more than meets the eye

Power Purchase Agreements (PPA) have also continued to gather momentum in the Australian electricity market during 2018, with some of the more significant deals – for Telstra, Bluescope Steel and the agreement that Energy Action supported for the University of New South Wales – securing significant press coverage.

Arguably the term PPA is over-used and little understood. It is applied to behind-the-meter solutions such as putting solar panels on a roof and to cutting edge front-of-meter corporate deals, as well as to synthetic PPAs, financial instruments of the type that the Victorian state government is currently introducing.

The headline numbers around some PPAs may look compelling, particularly with renewables reaching grid parity, but this can be misleading when looked at in isolation. For corporates considering the benefits of a PPA, a number of other factors must be taken into account such as the additional network charge that arises from the project being distant from the user. In reality the cost isn’t necessarily lower despite reducing costs being the overarching objective behind companies entering PPAs.

Companies considering these agreements must be informed buyers. They need to understand and manage the associated risks, determine whether or not it will pay off in the long-run and the implications for the grid position.

Implicit in some PPAs is a supply/demand mismatch for the energy user. Typically that is expensive but it appears some people aren’t seeing that yet. So although solar power prices may appear attractive at face value, the commercial model and underlying risks are unresolved. As such, detailed advice on the market trends, pricing and a strong technical grounding is required prior to entering a PPA.

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