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Energy Action

Energy Market Wrap

Monthly Edition Released: 16 August 2021

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    Electricity Contract Market

    Wholesale Electricity prices have entered a ‘saw tooth’ trading pattern over the past fortnight, reminiscent of the side-ways pattern we saw in Q4 2020. The market lacks direction with generators keen to push prices higher while a lack of contracting volume is forcing prices lower. We expect this pattern to continue and see ‘timing’ as the key to securing the best retail pricing for our corporate customers.

    Supply disruptions in the electricity and gas markets have now been addressed. Contracting volume will determine if the next trend is up or down. We can now start to isolate how Covid lockdowns are impacting electricity demand and contracting volumes. Our initial analysis shows electricity contracting activity remains subdued. This is due to uncertainty around the economic outlook and due to the high level of contracting that took place during Q1 and Q2 2021, where the majority of corporates took advantage of 5-year lows and contracted out to 2024 and 2025. With prices are now trending towards the long-run marginal cost of generation, calendar year contracts for 2023 and 2024 continue to offer reasonable value relative to historical pricing.

    We’re also seeing the cost of renewable energy prices increase significantly on the back of corporate demand for LGCs. The price of 2024 LGC futures are now $25/certificate compared to prices around $10/certificate, earlier this year.

    We have updated the following charts which show ‘flat’ electricity pricing by State. We have provided trend lines for 2023 contract prices, to show the rate of price increase. Since our previous update, prices failed to drop below the trend line and failed to signal an end to the strong upward trend in electricity contract pricing, although the rate of price increase is slowing.

    The rate of price increase remains highest for SA, given their level of renewable generation and the firming requirements from VIC generators. Both NSW and VIC show an identical rate of increase, followed by QLD. QLD pricing continues to settled since supply disruptions last quarter.

    Electricity Spot Market

    August month-to-date spot prices have dropped significantly since the extraordinarily high price levels set last quarter. June, and to a lesser extent July, were impacted by significant supply disruptions which saw prices increase significantly in QLD and NSW, visible in below chart.

    Plant outages during June and July demonstrate the underlying risks associated with electricity (and gas) and the cost associated with firming renewable generation. These experiences remind us that the costs associated with different fuel sources have a very different impact on the cost of generation and that the risks of price volatility can occur at any stage in the price cycle.

    Wholesale Gas Market

    Wholesale gas prices continue to settle around $8/GJ after the restoration of supply disruptions which resulted in all-time highs during last quarter. With the majority of factors now addressed, average prices are now trending lower one again.

    We expect gas prices to continue stabilising and suggest that now is not the ideal time to switch from wholesale to a fixed-price retail contract. We consider other mitigations are preferable if an immediate solution is sought.

    One such option is a hybrid contact. A hybrid contract offers exposure to wholesale pricing and combines with a fixed price arrangement to provide more stable gas price outcomes. This product is analogous to fixing a portion of your home loan and leaving the residual on variable rates. Another alternative available to gas customers is purchasing a price cap, which limits the maximum wholesale price.

    Our analysis shows wholesale customer that switched from fixed price contracting in January 2021 are no worse off than retail rates that prevailed at that time. We consider contract rates will decline in-line with continued stabilisation in the wholesale gas market.

    Environmental Certificate Market

    • LGC prices continue to trade around $35/certificate
    • VEEC’s traded higher in response to supply concerns and are currently trading at $67.25
    • ESC’s continue to trend higher, currently trading at $36.65
    • STC’s remain relatively stable, with prices just below the retail price cap at $38.90
    • ACCU’s (Australian Carbon Credits) continue an upward trend, trading at $22.35 /certificate.

    The LGC forward curve continues to show price backwardation with the cost of 2024 LGCs currently trading at $25.15 certificate. While 2025 certificates are trading at $14.25 /certificate.

    Outyear pricing remains in uptrend as corporates continue to place greater demand on future certificate purchases to deliver their Net Zero and environmental strategies. 2024 LGC prices have more than doubled during the past 3 months from $10/certificate to $25/certificate.

    ACCU’s (Australian Carbon Credit Units) have also increased significantly. These certificates are seen as a lower cost alternative to renewables in order to offset carbon for corporates seeking to decarbonise. This approach is not considered a renewable energy strategy.

    ACCU’s are currently trading at $22.35/certificate. This represents a significant increase in the spot price for ACCU’s which traded at $16 earlier this year.

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