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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 April 2022

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    Electricity Contract Market

    The charts clearly show electricity prices climbing out-of-control. We continue to see industry held captive to profiteering and generator biding behaviour. While we know perfect markets only exist in textbooks, it might be time for the ACCC to take a closer look at the electricity market.

    In the past week, electricity prices have increased in NSW by over $15/MWh for Cal 2023, Cal 2024 and Cal 2025 contract years.

    It’s a similar story for QLD with price increases over $10/MWh for Cal 2023 and Cal 2024.

    Prices have also begun to trend up by $4 to $5 /MWh in SA and VIC.

    We continue to see the inflationary impacts on energy prices from global energy demand, high commodity prices, opportunistic bidding behaviour and maintenance activities all contributing to current price levels.

    We expect prices for electricity and gas to remain around current levels throughout 2022 and forecast CPI to trend towards 10% by the end of the year.

    European gas markets appear to be moderating from proposed peace talks from Russia and the Ukraine.

    Wholesale gas prices are currently trading around $14/GJ, with retail offers between $15.00 - $16.50/GJ.

    At this point in time, we are unable to offer our customers an outlook on future pricing. While we consider the electricity market to be grossly overpriced, there is no clear indication of when prices are likely to moderate. The two options are: buy now and avoid further increases or defer and risk becoming a forced buyer at contract expiry.

    We have seen many customers opting to defer contracting and are now facing 20-30% price increases from the levels they deferred.

    Prior to the events of the past few weeks, we recommended customers enter contracts immediately to avoid further price increases, particularly for gas renewals. Since last week’s jump in prices, we are no longer able to recommend whether to buy or hold- off. We are unable to apply our traditional analysis (based on supply and demand) to current market conditions.

    The outlook is now significantly worse for 2023, 2024 and 2025. Prices for NSW 2025 calendar year contracts increased by a further $20/MWh since last month’s $20/MWh increase.

    NSW electricity prices have increased over 70% since mid-January. QLD prices are currently trading under $80/MWh, an increase of $25/MWh since mid-January.

    NSW has now overtaken QLD as the region with the most over- inflated prices.

    We recommend corporate avoid adopting a single point of renewal (fixed price contracts) and recommend larger customers consider a Progressive Purchasing arrangement for 2023 and 2024.

    While progressive purchasing products do not exist for gas, we believe it may not be the right time to entering into long-dated supply agreements.

    In last month’s market wrap we stated you should act immediately or “snooze and you loose”. Unfortunately, prices have increased so rapidly since last month that only the fastest to act have avoided the recent price increase.

    State Electricity Market Prices

    NSW & QLD

    This section takes a closer look at NSW and QLD electricity contracts by comparing the costs of purchasing calendar year electricity in 2023, 2024 and 2025.

    Most customers are aware they can purchase electricity for future periods, at any time. This means if you acted on our advice to contract for 2025, you’ve avoided the recent price jump.

    An alternative strategy is to install solar. If you’re sick of paying high electricity prices, solar is now a cheaper option (and there is time to have it installed and operating during 2023).

    This option feeds into a corporate Net Zero strategy and is a lower cost alternative to GreenPower due to the treatment of RET compliance costs under a Climate Active approach.

    If you’ve been considering solar, the current price for 2023, 2024 and 2025 electricity contracting means the payback on a solar project just decreased by approx. 1218 months for installations over 100kW, compared to current market prices in NSW and QLD.

    VIC & SA

    The outlook is more favourable for VIC and to a lesser extent, SA, where forward contract prices have moved to $60/MWh.

    2023, 2024 and 2025 prices jumped but remain at a discount to 2022 price levels.

    We believe VIC prices represent reasonable value in the current market environment and recommend Victorian customers consider extending their electricity supply agreements to 2025.

    While SA is currently higher priced than Victoria, we encourage customers to consider extending their electricity supply agreements to 2025.

    Quarterly Contract Prices

    The follow quarterly price charts are to assist Progressive Purchasing customers, who purchase electricity by calendar quarter, rather than locking into fixed contract pricing. These customers ‘hedge’ the price they pay for electricity, often up to three years in advance.

    This means they have more ability to hedge against price movements and take advantage of lower prices where they occur into the future.

    Our general advice to customers is to hold their current position with a view to increase hedge levels during 2023.

    Electricity Spot Market

    Monthly Average Price Trend

    Electricity spot prices rose in all states except QLD. QLD spot prices decreased from $162/MWh last month to $147/MWh during March.

    We continue to recommend avoiding any exposure to QLD and NSW spot prices.

    We continue to see mixed results from the spot electricity market with a general upwards direction across all state markets during the past 6 months.

    Generation by Fuel Type

    Electricity spot prices are indirectly affected by recent upward pressure on gas price via the amount of gas-fired generation required to be dispatched to satisfy electricity demand.

    The following chart shows the proportion of electrical generation, by fuel type, during March 2022.

    During March approximately 6% of electricity generation was sourced from gas-fired facilities, as slight increase from 5% last month.

    If this is representative of future demand for gas- fired generation, we expect the global issues causing higher domestic gas prices will have a limited impact on the overall price of electricity in the short term.

    Renewables contributed approximately 30% of generation during the month, a 5% decrease from last month’s results.

    Gas Market

    Recent pricing for wholesale gas remains above the YTD average price with prices ranging from $13.50/GJ in VIC to $15.50/GJ in QLD.

    We expect Australian gas to continue being diverted to export market and placing greater upward pressure on domestic gas prices throughout 2022.

    We consider retail gas prices are likely to trend in a range from $14/GJ to $18/GJ over the remainder of 2022 and recommend customers consider wholesale or hybrid supply contracts (part fixed and part spot) to hedge supply costs.

    Environmental Certificate Market

    • LGC spot prices continue to rise on the back of corporate demand. Currently trading at $48.00/certificate. The CER recently released the RET compliance percentage which increased from 18.54% to 18.64%. This modest increase is unlikely to have any significant impact on LGC prices.
    • ACCU’s (Australian Carbon Credit Units) slumped from a decline in demand to $30.50/certificate. The global crisis is stemming the demand for voluntary Net Zero.
    • VEEC prices also slumped from recent highs of $83 to $65.00/certificate due to an increase in supply.
    • ESC prices remain reasonably stable at $35.75/certificate under the NSW government’s energy efficiency scheme.
    • STC’s continue to trade just below the retail price cap of $40/certificate, at $39.90/certificate.

    LGC Futures Market

    The LGC forward curve continues to show price backwardation with the cost of 2025 LGCs currently trading at just under $33.00/certificate.

    We expect corporate demand will continue to increase LGC prices and expect the level of backwardation over the forward curve to disappear over time.

    The message for certificate purchasing is to act sooner rather than later. We encourage corporates with a 2025 Net Zero strategy to consider making a forward purchase of LGCs to hedge against further price increases.

    Ready for change? Contact us.

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