The wholesale electricity market remains in a sideways trading range. The last few weeks has established a range movement of approximately $5/MWh. We expect this pattern to continue and see ‘timing’ as the key to securing favourable retail pricing.
Contract volumes have failed to support any significant upward price movements. QLD, VIC and SA are currently at the low point within the current trading range, while NSW is near the high, for 2022 and 2023 contracts.
We consider the current wholesale contract price has stabalised around the long-run marginal cost of generation. Our initial analysis shows retail electricity contracting activity remains subdued. September and October are traditionally a busy time for calendar-year contract renewals.
Most business customers took our advice to forward contract out to 2024 and in some cases 2025, resulting in a highly contracted retail market, which is now impacting wholesale contract volumes and pricing. Demand for LGC’s remains high on the back of corporate voluntary environmental activities, particularly for 2024 and 2025.
The price for 2025 LGCs continued higher last week, trading at a high of $22.50/certificate.
The following charts show ‘flat’ contract-year electricity pricing by State. Since our previous update, all states have broken the strong uptrend and are now trading in a sideways pattern. The current trading range varies by approximately $5/MWh across most states. SA, VIC and QLD all show greater price weakness compared to NSW, particularly for 2023 and 2024 contract years.
September’s month-to-date spot prices decreased across all states compared to August’s average monthly price.
SA has shown the greatest decline of 82% with a larger proportion of supply originating from Tasmanian dispatch via Victoria. Tasmanian generation is associated with high water storage levels supporting increased generation dispatch into Victoria.
We consider average spot price levels set in August as a reasonable short-term outlook and the key influence on longer term pricing remains dependent on the amount of renewable projects which are currently impacted by long connection lead times.
Looking forward, we see retail gas prices softening from current levels, reflecting the market’s supply position prior to the July disruptions. We expect this to translate into lower pricing towards the end of this year.
Gas retailers tend to contract over shorter forward periods, generally 1 to 2 years (compared to 3-5 years for electricity). Recent contract volumes suggest customer are deferring and this has placed retailers under greater pressure to forward contract with the likely outcome being lower prices during Q4 2021.
We consider the current retail market remains over-priced and expect contract prices to continue to stabilise over the remainder of 2021.
We continue to encourage customers seeking 2022 contracts to commence procurement with a view to securing contracts in early to mid-November.
The LGC forward curve continues to show price backwardation with the cost of 2024 LGCs currently trading at $24.25/certificate. While 2025 certificates rose to similar levels last week. We expect corporate demand to increase with an expectation that LGC prices are likely to reach a fair value of between $30-$35/certificate across all years to 2025.
ACCU’s (Australian Carbon Credit Units) have also increased significantly and are currently trading at $24.50/certificate. These certificates are 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 corporates adopting a renewables strategy.