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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 November 2021

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    Electricity Contract Market

    NSW and QLD prices have moved decisively higher, after trading sideways for the past month. QLD remains in a strong uptrend for 2022 and 2023 contract years. Both NSW and QLD continue to show strong upward price pressure while VIC and SA are showing price weakness.

    NSW 2022 contract prices are now trading at 12% below the highs set in late 2019, consider to be the peak in the previous price cycle. QLD has already exceeded November 2019 pricing by 9%, suggesting the price cycle is moving towards down trend.

    Other factors have emerged that impact the length of the price cycle. Changes in regulation, increases in the future supply from renewables and the impact of higher international demand for Australian gas, will determine whether the next phase in price movement is up or down. With two states in uptrend and two in down trend (for 2022 and 2023 contract years), we expect this divergence among the states to continue. This would be favourable for VIC and SA procurement but offset by higher costs in NSW and QLD.

    Pricing for 2024 remains relatively flat or very similar to 2023 contract levels and more likely to move to premium rather than offering lower pricing over the forward curve. This means the days of price backwardation are behind us. Procurement managers should expect to pay a premium for longer duration contracting.

    Our price outlook for the medium term is for electricity pricing to stabalised around the long-run marginal cost of generation. Our analysis shows retail electricity contracting activity remains subdued due to most corporate having already secured retail supply agreements out to 2024 and 2025.

    We expect lower contracting volumes to limit any significant price increases over the short term. The majority of contract renewals are coming from smaller corporate customers who missed the market lows set between March and June 2021.

    While there is less concern for a continuation in the rapid increase in electricity pricing, we continue to encourage corporates to extend retail agreements to 2024. The following charts show ‘flat’ contract-year electricity pricing by State. All states, other than QLD, have seen forward prices convergence. That is, the price for electricity is at similar levels for 2022, 2023 and 2024 (other than QLD). While we expected 2021 prices to drop to 2022 and 2023 price levels, it is now more likely that QLD 2022 and 2023 contract prices will increase.

    Electricity Spot Market

    October spot prices continue to show weakness. However, NSW and QLD are moving in the opposite direction, with prices increasing by 17% and 30% respectively. Tas remains the lowest priced state following an October decrease in average price of 43%, compared with the prior month’s price level.

    Gas Market

    The global energy crisis continues to inflate gas prices as Australian LNG export prices reach record levels. LNG export capacity is limited and the impact is more a product of parity pricing rather than supply availability, influenced to a greater extent by production costs, over the longer term.

    The average year-to-date price in Victoria’s wholesale market is $7.59/GJ, having stabalised from record levels during the power industry disruptions during July 2021. Pricing in Brisbane has been more impacted by export parity pricing, resulting in a higher year-to-date average price of $8.49/GJ.

    The following chart shows October 2021 wholesale gas prices remain in-line with August and September’s average price, at around $8.00/GJ.

    The monthly average price trends are consistent across each of the Australia’s gas hubs. Adelaide set the highest average monthly price of $8.71/GJ, during the YTD 2021 period.

    The margin between wholesale and retail pricing remains tight for gas retailers. Our recent procurement events show retail gas pricing for eastern states is currently ranging between $8.20 to $8.60/GJ

    WA Gas

    The WA gas market rarely aligns with east coast gas pricing however, recent pricing suggests both markets are priced at similar levels, ranging from $8.00 to 8.50/GJ depending on contract quantities.

    Environmental Certificate Market

    LGC spot prices have risen to $40.50/certificate with more corporates announcing voluntary renewable strategies during their recent reporting and greater demand from quarterly compliance purchasing

    • VEEC’s prices retracted recent increase to trade lower at $69.75/certificate compared to recent highs of $83.80
    • ESC prices traded slightly lower, currently trading at $38.00/certificate
    • STC’s remain just below the retail price cap, trading at $38.95/certificate
    • ACCU’s (Australian Carbon Credits) continue an upward trend, trading significantly higher at $35.75/certificate in response to increasing corporate demand.

    The LGC forward curve continues to show modest price backwardation with the cost of 2024 LGCs currently trading at $31.50/certificate. While 2025 LGC’s traded at $22.00/certificate last week. We expect corporate demand will continue to increase LGC prices and expect the level of backwardation over the forward curve to disappear.

    ACCU’s (Australian Carbon Credit Units) have also increased significantly and are currently trading at $35.75/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.

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