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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 Feb 2022

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    Electricity Contract Market

    Electricity prices continued to rise during the first half of January 2022. The price for a 2023 calendar year contract in QLD and NSW have both passed 2-year highs by more than 22% and 14% respectively.

    If you’re looking to renew a June’22 supply Agreement, your options are limited. We suggest a short position of 12 or even 6 months. We consider current price levels remain over inflated for fixed-price electricity agreements and encourage customers to consider a structured products such as a Progressive Purchasing (refer to December’s Market Wrap for more details). We consider current prices are close to ‘topping-out’ and have begun to ‘round-off’ in VIC.

    One complication remains the inflationary impact on energy prices from tensions on the Russian boarder. We expect the impact on electricity prices will depend on the duration of instability and indirectly from gas pricing. The demand for gas-fired electricity will feed through to higher electricity spot and contract prices, as gas is diverted from domestic markets to Europe.

    This situation will play out in two ways, either shortterm price rises or a sustained longer-term increase. A risk-averse option is to enter contracts immediately to avoid further price increases – particularly for gas renewals. This approach is less risky than guessing the duration of instability.

    The outlook is better for 2024 and 2025 electricity contract prices, which are trading well below 2023 price levels. NSW 2024 contracts are currently 12% below 2023 levels, QLD is 22% below 2023 levels and VIC is trading at a 19% discount to 2023 prices.

    Prices for 2025 contracts are also trading at a discount to 2024 price levels. If you haven’t already secured your organisation’s 2024 or 2025 electricity supply agreement, we suggest you consider a Progressive Purchasing Agreement to avoid a single point of renewal at the peak of the price cycle. This option allows corporates to mage the risks associated with uncertainty from global energy prices while maximising the opportunity to take advantage of weakness in forward market. A Progressive Purchasing Strategy allows organisations to hedge against the potential for higher costs, while being able to take advantage of likely future price weakness.

    State Electricity Market Prices

    This section takes a closer look at NSW and QLD electricity contracts by comparing the costs of purchasing calendar year electricity in 2023, 2024 and 2025. The most notable change is 2025 contract pricing (orange line) shown in these charts.

    Most customers are aware they can purchase electricity for future periods, at any time. This means if you acted on our advice to contract for 2025, you’ve avoided the recent price jump.

    An alternative strategy is to install solar. If you’re sick of paying high electricity prices, solar is now a cheaper option (and there is time to have it installed and operating before 2024).

    This option feeds into a corporate Net Zero strategy and is a lower cost alternative to GreenPower due to the treatment of RET compliance costs under a Climate Active approach.

    If you’ve been considering solar, the current price for 2024 and 2025 electricity contracting means the payback on a solar project just decreased by approx. 12 months for installations over 100kW, compared to current market prices in NSW.

    Quarterly Contract Prices

    The follow quarterly price charts are to assist Progressive Purchasing customers, who purchase electricity by calendar quarter, rather than locking into fixed contract pricing. These customers ‘hedge’ the price they pay for electricity by locking into fixed prices on a quarterly basis, up to one month prior to consumption. This means they have more ability to hedge against price movements and take advantage of lower prices into the future. Our general advice to customers is to remain short in the expectation that the current price cycle indicates a ‘rounding out’ or slowing in the current uptrend in NSW and QLD. The charts also indicate now is an opportune time to commence a hedging strategy in VIC and SA

    Electricity Spot Market

    Electricity spot prices rose in all states except QLD. QLD spot prices remain above $100/MWh and we continue to recommend avoiding any exposure to QLD spot pricing, particularly during the summer months of 2022. VIC spot prices increased by 47% compared to the December monthly average. This was from a low base of $32.21/MWh and current price levels remain well priced at $47.50/MWh throughout January. We continue to see mixed results from the spot electricity market with a general upwards direction over the past 6 months. We continue to recommend customers avoid exposure to spot pass-through contracts.

    Generation by Fuel Type

    As mentioned in the introduction, spot prices are indirectly affected by recent upward pressure on gas price via the amount of gas-fired generation required to be dispatched to satisfy electricity demand. The following chart shows the amount of electrical generation during January 2022, by fuel type. During January, approximately 5% of electricity generation was sourced from gas-fired facilities (primarily open and combined-cycle gas turbines). If this is representative of future demand for gas-fired generation, we expect the global issues causing higher domestic gas prices will have a limited impact on the overall price of electricity during Q1 2022.

    Environmental Certificate Market

    The following analysis looks at environmental and energy efficiency certificate prices. Corporates are required to purchase LGC and STC certificates to satisfy the Renewable Energy Target requirements. However, many corporates are voluntarily purchasing and surrendering additional certificates to achieve their Net Zero strategy. The chart below shows a distinct change in certificate pricing (particularly for ACCUs) from September 2021.

    • LGC spot prices continue to rise on the back of corporate announcements targeting voluntary net zero strategies. LGC’s are currently trading $44.60/certificate and have risen in a reasonably modest trend since September 2021. The modest increase is primarily due to additional supply of LGC certificates from the rapid increase in the installed capacity of renewable energy projects. LGC’s are used to address carbon emissions associated with a company’s use of electricity (referred to as Scope 2 emissions).
    • ACCU’s (Australian Carbon Credits) continue their rapid increase from $18/certificate in March 2021 to a staggering $55.25/certificate in recent trading. Carbon credits relate to activities that reduce carbon emission relative to a ‘base-year’ level of activity. The majority of ACCU are sourced from carbon sequestration, the process of trees absorbing carbon during growth. We expect the demand for ACCUs to continue to increase in response to corporate activities. ACCU’s are primarily used to address Scope 1 carbon emissions associated with a company’s direct use of energy / fuels (other than electricity).
    • VEEC spot prices remain high from limited supply, settling at $80/certificate in recent trade. VEECs are the Victorian government’s energy efficiency scheme designed to reduce carbon emissions by improving the efficiency or electricity usage.
    • ESC prices remain reasonably stable at $36/certificate under the NSW government’s energy efficiency scheme.
    • STC’s continue to trade just below the retail price cap of $40/certificate, at $39.25/ certificate.

    Environmental Cert Futures Market

    The LGC forward curve continues to show price backwardation with the cost of 2025 LGCs currently trading at just under $28/certificate. We expect corporate demand will continue to increase LGC prices and the level of price backwardation to decline over time.

    ACCU’s (Australian Carbon Credit Units) have also increased significantly and are currently trading at $55/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 well above the cost for offsets.

    The message for certificate purchasing is to act sooner rather than later. We encourage corporates with a 2025 Net Zero strategy to strongly consider making a forward purchase of LGCs to hedge against further price increases.

    Ready for change? Contact us.

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