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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 September 2022

Electricity Contract Market

Energy market prices rebounded on the lack of action to implement the ACCC’s recommendations regarding domestic gas reservations. The impact cuts across both gas and electricity markets by signalling that Government intervention is now less likely and signals that the supply side of the industry can recommence their opportunistic pricing behaviour.

While average spot prices decreased by 50%-60% during August (refer page 6), forward contract prices did not follow.

In NSW, the spot price averaged $148/MWh while 2023 contracts trade at $212/MWh. The divergence between spot and contract markets indicates future supply conditions will worsen.

With 2023 wholesale electricity prices trending back to previous highs, we expect 2023 prices to continue higher.

More optimistically, current price levels for 2024 and 2025 contracts are more favourable than 2023.

We recommend corporates act now to secure 2024 and 2025 supply agreements with the expectation that 2024 prices will resemble 2023 price levels, towards the middle of next year (when the consumption period approaches).

Our message to customers is:

  • Don’t put-off procurement, thinking prices will improve – there are no quick fixes
  • Don’t defer contracting because prices are rising, price indicators suggest future supply conditions will worsen (particularly for electricity).

What this means for commercial and industrial customers

While the government remains silent concerning Energy Policy settings, the current policy settings do not address baseload electricity availability, required for a managed transition to increased renewables.

There are two ‘schools of thought’ when considering energy contracting:

  • Take a short-term fixed price contract at current market rates on the expectation that future pricing will improve when the contract is due for renewal
  • Take a longer-term contract with the intention of averaging (referred to a 'price smoothing') to achieve short-term cost relief at the expense of higher costs over the residual term of a supply period.

Selecting between the above alternatives requires a thorough understanding of your organisation’s risk preferences.

We are convinced of the very real possibility that many organisations will struggle to survive long-term energy costs, if they remain at current levels.

We are also aware of many organisations considering 10-year PPA’s offering attractive prices relative to current market levels, without sufficient consideration of long-term feasibility.

Energy Policy Outlook

Our organisation is a strong supporter of renewable energy and the benefits to the environment from lower carbon emissions.

Our analysis of Energy Market Policy recognises the need for an orderly transition to address:

  • large scale business failure from energy cost inflation
  • energy affordability (avoiding consumers being forced to decide between ‘eating or heating’)
  • Accepting interim fuels during the transition process (or second-best short-term solutions to deliver a desired outcome, such as interim fuels)

The recent experience of some European countries informs us on the importance of an orderly transition. In the short term, energy pricing is dependant on the Government providing energy policy settings that are able to address the underlying causes of market failure, such as:

  • Capacity mechanisms
  • Incentives to maintain baseload reliability
  • Domestic gas reservation (east coast)

Electricity Spot Market

Monthly Average Price Trend

Wholesale electricity spot prices declined dramatically in response to the potential from energy market intervention in the form of the ACCC report and AER bidding behaviour scrutiny.

The primary reasons for the decline is spot prices were increase baseload availability (accompanied by less opportunistic bidding behaviour) and higher output from renewable generation.

During the month, there was a lower requirement for gas-fired generation to meet operational demand due to milder weather conditions resulting in lower heating load. We continue to recommend avoiding spot price exposure in all states.

Generation by Fuel Type

The following chart shows the proportion of electrical generation, by fuel type, during the month of August 2022.

Approximately 6% of electricity generation was sourced from gas-fired facilities, down from 11% last month.

Increases in the supply from renewable generation offset the decrease in gas-fired generation and contributed 35% of supply during the month. Coal-fired generation accounted for 59%.

Gas Market

  • Gas prices reached unprecedented levels during the previous quarter, rising significantly in May and June. July started the current quarter at similar levels before dropping during August. This decrease corresponded with the release of the ACCC’s report.
  • Spot prices averaged $26.55/GJ in Brisbane and $27.82/GJ in Adelaide
  • Victoria’s average price was $26.17/GJ. While Sydney averaged $25.76/GJ.
  • East coast production averaged 5,325TJ/day
  • Gas flows from the south to the north via the QSN link reduced to an average of 31 TJ/day, with strong flows north now reversing to southern gas flows

Retailers with gas are charging $28-$30/GJ for 2023 supply agreements, dropping to $24/GJ for 2024 and $18/GJ for 2025 fixed-price agreements.

New gas sources from the Surat Basin in QLD are likely to improve supply conditions during 2023.

European demand remains the key influence on domestic gas pricing with flows from Russia into Europe ceasing once again, after increasing by 25% of pre-invasion supply levels.

The severity of Europe’s winter remains a key factor impacting domestic gas prices.

Environmental Certificate Market

Latest certificate prices are:

  • LGCs traded higher to $57.15/ certificate
  • ACCU’s traded higher to $28.75/ certificate
  • VEEC prices traded higher at $68.00/ certificate
  • ESCs traded flat at $33 /certificate
  • STC’s continue to trade just below the retail price cap at $39.90/ certificate.

LGC Futures Market

LGC prices represent the cost of renewable electricity. Each certificate represents 1MWh of renewable electricity (or decarbonisation of approx. 1 tonne of CO2).

LGC prices continue to increase in response to increased corporate demand for decarbonisation and the positive correlation with recent conventional energy prices.

  • 2022 LGCs have risen to $60/certificate
  • Prices were mixed over the forward curve with increased volumes trading to the end of the RET scheme in 2030
  • Calendar year 2029 LGCs traded at $17.70 /certificate
  • Calendar year 2030 LGC’s traded at $15.55 /certificate

The outlook for renewable energy prices continues to reflect supply outstripping demand into the future.

ACCU Futures Market

ACCU represent the cost of offsetting the carbon associated with Scope 1 carbon emissions (such as gas and liquid fuels).

Prices rose slightly for 2022 certificates after recent downward pressure on prices.

The debate continues over the quality of ACCU’s being approved under the Emissions Reduction Scheme. Many purchasers are now opting for certificates that can be proven to reducing emissions.

While there was an expectation that the decline in supply of ACCU’s would increase pricing, purchasers appear more reluctant to purchase ACCU’s until the quality issues has been addressed. • 2022 ACCU’s are currently trading at $29.35

Unlike LGC, the forward price for ACCU’s increase over time. • 2025 ACCU’s are currently trading at $33.05 / cert. • 2026 ACCU’s are currently trading at $34.35 /cert.

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