For our final edition of 2021, we’ve highlighted some key observations to assist corporates in their decision regarding ‘when’ to forward contract.
For corporates not already contracted for 2022, the obvious answer is now! You’ve placed yourself in a forced buyer position. For 2023, 2024 and 2025, the outlook is somewhat different.
According to the electricity price cycle, we consider current price levels to be within 10% of the cycle peak. This means structured products are back ‘in play’.
Progressive purchasing is a structured product that allows large retail customers to choose when to lock-in fixed pricing for future periods. Purchases are made for each calendar quarter at any point in time (up to 1 month prior to consumption) and offers buyers a hedging strategy to manage price risk. This is particularly advantageous during a declining market because it avoids locking into a fixed-price contracts now (near the peak of the current price cycle) and allows corporates to average-down their purchase costs during a declining market.
The ideal time to enter a fixed-price contract was between February and May 2021. If you missed the low, 2022 prices have risen by between 30% to 40% (depending on the state – refer to page 4 charts). While your options are now limited for 2022, a progressive procurement contract may prove the best option for 2023, 2024 and 2025 in the event that prices begin to trend down again.
The electricity price outlook appears reasonably positive for contract years beyond 2022. We have been unable to identify the underlying fundamental reasons for current price levels, particularly in QLD, and consider the electricity market to be approaching an over-priced position.
All major retailers offer progressive purchase products and some Retailers offer a similar product for small electricity consumers. Now is an opportune time to consider a progressive purchase method for 2023, 2024 and 2025. We are also seeing extremely high levels of competition among retailers who are keen to secure structured product sales.
The following charts show ‘flat’ contract-year electricity pricing by State. All states, other than QLD, have seen forward prices converge and start to ‘round-off’. This is most notable in SA where pricing has moved to downtrend for 2022 and 2023.
November spot prices rose significantly during November (compared to the October average monthly price), with positive movements across all state markets. Higher pricing from TAS generation flowed into VIC and SA, pushing prices higher by 89% and 159% respectively. These increases were from an extremely low base. QLD was again the outlier by setting the highest average monthly spot price of $96.54/MWh and has set the highest state price over the past 3 months.
We consider exposure to spot prices during the summer months should be avoided particularly during the first half of January and particularly for QLD loads.
The LGC forward curve continues to show modest price backwardation with the cost of 2025 LGCs currently trading at $21.50/certificate. We expect corporate demand will continue to increase LGC prices and expect the level of backwardation over the forward curve to disappear over the longer term. ACCU’s (Australian Carbon Credit Units) have also increased significantly and are currently trading at $41.50/certificate. These certificates were seen as a lower cost alternative to renewables in order to offset carbon for corporates seeking to decarbonise. It’s important to note that ACCU’s can’t be used for a renewable energy strategy but are now priced similarly to LGC’s.
The message for certificate purchasing is to act sooner rather than later. We encourage coporates with a 2025 Net Zero strategy to strongly consider making a forward purchase of LGCs to hedge against further price increases.