It appears the ‘ratchet effect’ may be at play. 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 now trending towards the longrun marginal cost of generation, calendar year contracts for 2023 and 2024 continue to offer reasonable value relative to historical pricing.
Demand for LGC’s remains high on the back of corporate demand for voluntary environmental strategies, particularly for 2024 and 2025 LGC’s, with many corporate announcing Net Zero by 2025. The price of 2025 LGCs continued higher and are currently trading at $17/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. We expect the next few weeks will establish a trading range where the key factor in securing optimal contract pricing will be short-term timing.
With one trading day left in August, month-to-date spot prices have dropped significantly since the extraordinary price levels set over the past 3 months (primarily due to supply disruptions). Renewable generation remains the key longer-term influence over spot prices along with the continuing risk of further rationalisation in the baseload generation sector. Rationalisation becomes less likely with spot and contract market prices approaching the long-run marginal cost of base-load generation.
The following analysis provides an overview of the wholesale gas market, which is a primary driver of pricing behaviour in the retail market. Wholesale gas prices have recovered faster than expected from recent supply disruptions. The following charts show August hub prices have dropped from the peak set in July.
The reason for downward pressure on wholesale gas pricing is due to the resolution of 4 short-term supply disruptions that occurred almost concurrently:
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 retail 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.
The impact from Asian LNG export demand is expected to have limited impact. While LNG continues to attract higher prices and Asian demand is expected to remain high, export capacity is limited and factored into domestic supply conditions.
The key unknown factor arises from uncertainty around domestic demand for gas during lockdown. There is limited data for summer lockdowns and uncertainty associated with the length of lockdown and level of restrictions in place into the future.
While we believe the current retail market remains over-priced, we have obtained indicative pricing for calendar year contracts:
| Contract Year | Gas Price ($/GJ) |
| 2022 | $8.30-$8.50 |
| 2023 | $8.60-$8.80 |
| 2024 | $9.00 -$9.20 |
Unlike the electricity forward curve, gas pricing is currently increasing over the forward curve. While the ACCC’s recent gas report appears to contrast AEMO’s supply and demand balance, we suspect the ACCC’s position aims to promote supply augmentation.
We expect contract prices to continue to stabilise and suggest that now is not the ideal time to lock into a fixedprice retail contract. However, it is recommended that consumers commence procurement to test the market (for their particular load characteristics and quantities) with a view to returning to market for ‘Round 2’ or ‘Round 3’ offers in early to mid-November. By commencing procurement now, consumers will be in a stronger position to secure favourable incumbent offers. Too often we see consumers defer procurement and underestimate the lead times required, placing themselves in a forced purchaser position.
For customers considering a wholesale arrangement, our analysis shows that during 2021, the recent disruption events placed them in a similar cost position relative to gas contract prices that prevailed in late 2020 (for 2021 retail contracts). We recommend customer consider hybrid contracting and price caps to maximise savings while managing risks.
The LGC forward curve continues to show price backwardation with the cost of 2024 LGCs currently trading at $24/certificate. While 2025 certificates are trading at $17/certificate. We expect corporate demand to increase rather than decrease with an expectation that LGC prices are likely to reach a fair value of between $30$35/certificate out to 2025. 2024 LGC prices have more than doubled during the past 3 months from $10/certificate to $24/certificate. ACCU’s (Australian Carbon Credit Units) have also increased significantly and are currently trading at $23.50/certificate. These certificates are seen as a lower cost alternative to renewables in order to offset carbon for corporates seeking to decarbonise. We are also seeing major retailers entering the market with large forward positions for ACCU. It’s important to note that ACCU’s can’t be used for corporates adopting a renewable Net Zero strategy.
