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Energy Action

Energy Market Wrap

Monthly Edition Released: 19 July 2021

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Electricity Contract Market

Electricity prices remain in strong uptrend with retailers once again withdrawing active price offers prior to expiry. Prices have jumped by up to 20% over the past fortnight.

It is easy to think you’ve missed the boat and decide to wait for prices to fall again. The risk, of course, is that prices continue higher.

We continue to see a strong likelihood that prices will remain in uptrend, offering limited opportunities during retracement. For the last 6 editions of the Energy Market Wrap, we’ve been encouraging corporate to avoid delays and contract their purchases to 2024 and consider 2025 pricing.

For corporate yet to contract, the current market is demanding at least 20% more. There is some hope on the horizon. The Callide outage is expected to return to market and the Yallourn interruption has been resolved, resulting in lower demand for higher cost gas-fired generation. These plants were partially responsible for the latest jump in pricing (for both electricity and gas). While this is a short-term factor, we expect some relief to electricity and gas pricing as the contribution from gas generation decreases.

We also note that the economy remains poised for longer lockdowns in NSW and VIC, along with the introduction of lock downs in other states. It remains unclear how this might influence future pricing.

We have updated the following charts which show ‘flat’ electricity pricing by State. Since our previous update, the gradient (or rate of price increase) in both QLD and NSW for 2023 electricity has increased significantly. The rate of increase for VIC and SA has caught-up with NSW and QLD for contract years 2022,2023 and 2024.

Electricity Spot Market

July month-to-date spot prices retraced in NSW and QLD which saw average prices decrease by 30% and 55% respectively (compared to the prior month average). Victoria is currently showing the largest increase of 76%, followed by SA and TAS. The fundamental factors driving the latest spot price increases relate to the level of gas fired generation directly associated with last month’s supply outages in QLD and Victoria.

Renewable generation remains the key to longer-term influence over spot prices and the continuing risk of further rationalisation in the baseload generation sector. Although renewables have very low short-run marginal costs, their impact is felt through the effect on merit order dispatch, particularly impacting baseload generation. At some stage in the future, renewable generation projects will need to recover their long-run marginal costs, associated with capital and returns to equity, placing greater upward pressure on electricity price levels.

Wholesale Gas Market

Wholesale gas prices recently hit all-time highs due to a number of factors that have combined to produce unprecedented pricing. These factors are mostly short-term influences that are likely to dissipate over time. The industry is forecasting average prices for Q4 2021 around $7/GJ but this is dependent on the level of export demand and duration of the current cold snap.

The key factors producing record prices include:

  • Unseasonably cold weather across most of Australia’s capital cities which has led to additional heating demand for both electricity and indirectly for gas.
  • Export demand for LNG remains unexpectedly high, with volumes significantly higher than the same period in prior years. Many Asian energy consumers ran down storage levels during the height of Covid in 2020 and are now purchasing additional gas to replenish low inventories.
  • Increasing gas-fired generation due to base load outage at Callide. This, combined with a flood at Yallourn’s coal mine resulted in short term baseload shortages.
  • Supply from Longford, which accounts for approx. 50% of east coast demand, has undertaken 2 weeks of unplanned maintenance to one of its gas processing facilities.

The combined effect of these disruptions to supply and increased demand have resulted in unprecedented prices for wholesale gas. These impacts are short-term in nature but have placed upward pressure on 2022 and 2023 contract prices. Given the above influences, we suggest consumers seek forward pricing or evaluate wholesale pricing during Q4 2021.

Environmental Certificate Market

  • LGC prices remained steady, trading around $34/certificate.
  • VEEC’s traded higher in response to supply concerns during lockdown. Currently trading over $62/certificate.
  • ESC’s continue to trend higher, currently trading at $34/ certificate.
  • STC’s remain relatively stable just below the retail price cap at $38.85/certificate.
  • ACCU’s (Australian Carbon Credits) continue to trend upwards, trading at $22.00 /certificate.

The LGC forward curve continues to show significant price backwardation with the cost of 2025 LGCs currently trading at $12 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 doubled during the past 3 months.

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