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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 August 2022

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    Electricity Contract Market

    Energy markets remain in turmoil with 2023 wholesale electricity prices in NSW and QLD trading around $180/MWh, while VIC traded at $120/MWhand SA at $150/MWh.

    Electricity prices dropped very recently in response to the potential for greater government intervention in the gas market, via a trigger mechanism, to redirect gas exports into the domestic market. This would lower the cost of gas-fired generation but more importantly signals the government’s resolve to address policy settings.

    In light of recent declines, our price outlook for Cal 2023 is more optimistic over the next 6 months, with greater potentialfor declines in 2024 and 2025. 2024 electricity contracts are currently trading between $90 and $140/MWh (depending on the state). 2025 is currently trading at a 6-8% discount to 2024 price levels.

    The monthly average for electricity spot prices also continued higher during July in the southern states but declined slightly in NSW and QLD. Spot prices across the states continue to trade between$320-$400/MWh.

    The outlook for future pricing remains heavily dependent on the government’s resolve to intervene. The AER is also investigating sensitive financial information on retailer hedging and continues to review generator bidding behaviour.

    Our advice to uncontracted electricity consumers is to seek pricing for longer term agreements that offer the potential to smooth pricing over a 3 years. This approach seeks to reduce the price shock during 2023 by averaging prices out to 2025.

    What this means for commercial and industrial customers:

    While the government has signaled an intention to intervene, the current policy settings do not address improvements in baseload availability that are necessary for a rapid transition to renewables.

    There are a few positives in our price outlook:

    • AER’s review of retailer hedge positions and generator bidding behaviour
    • Government signaling to use the trigger mechanism to improve domestic gas supply on the east coast.

    Ultimately, the Government will need to address baseload generation availability to avoid a dramatic increase in business failure and address energy cost inflation.

    Our advice to customers is to look for longer term contracting (out to 2025) to take advantage of lower prices during 2024 and 2025. We recommend a 'smoothed' price offer that averages the price over a 3-year period.

    State Electricity Market Prices

    NSW & QLD

    NSW and QLD prices recently retreated by up to 10% over the past few days. While this is a welcome relief from the extraordinary increases over the 6 months, uncontracted consumers are faced with 200% to 300% cost increases during 2023.

    We consider the balance of supply and demand will remain tight due to declining reliability in baseload plant (insufficient maintenance expenditure). Very little has been done to address this situation.

    These charts show recent price weakness for 2023 electricity contracts, and to a lesser extent, improvements in 2024 and 2025 electricity prices.

    We believe the optimal contracting strategy is to secure longer-term contracts that smooth prices to approx. $80- $100/MWh over a 3-year period (depending on the state).

    VIC & SA

    Recent cold weather conditions continue to reduced the amount of renewable generation, along with additional heating demand in VIC and SA.

    Recent price decreases are a likely response to the AER’s financial enquiry and the market’s reaction to greater government intervention.

    We recommend contract customer act immediately to prepare their 2024 and 2025 procurement activities and look for a 3-year contracting period to smooth costs.

    Energy Policy Outlook

    The federal government appears more willing to alter it’s policy position in the gas market which is also signalling greater likelihood of intervention in the electricity market.

    The Government’s commitment to a 43% reduction in carbon emissions by 2030 is still the source of concern for electricity market pricing. This is due to the rapid transition to renewables and the lack of interim measures to address baseload availability.

    While we agree with the critical need to transition energy to lower carbon intensity we continue to recognise the pitfalls from not doing this in an orderly approach to planning and interim fuels that provide security of supply.

    Electricity Spot Market

    Monthly Average Price Trend

    Wholesale electricity spot prices continue the upward trend during the month of July with increases of 23% in SA, compared to the prior month’s average price.

    The primary reason was due to baseload plant outage, higher input fuel costs and lower levels of solar output.

    Another factor was the level of gas-fired generation required to operate in the absence of baseload power and solar output.

    During the month, gas-fired generation was required to meet higher levels of operational demand and generally sets the spot price.

    We continue to recommend avoiding spot price exposure in all states.

    Generation by Fuel Type

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

    Approximately 11% of electricity generation was sourced from gas-fired facilities, a slight increase compared to last month.

    Renewables contributed 31% of generation during the month, while coal-fired generation was 59%. Gas-fired generation represented 10% of generated electricity.

    Compared to the prior month, coal-fired generation increased by 3%; gas-fired generation decreased by 1.5% and renewables decreased by 1%.

    Source: Open NEM

    Gas Market

    Retail competition remains weak in the contract gas market with most retailers fully sold. The notable exception is Origin.

    We are hopeful that the wholesale gas release in September this year will increase the level of retail competition, although it does not directly impact the amount of gas available to the domestic market.

    The ACCC’s latest report, released on Monday, recommended the federal government take steps towards triggering LNG export controls through the Australian Domestic Gas Security Mechanism (ADGSM), in response to an estimated 56 petajoule shortfall in the east coast market next year (if gas that could be shipped as LNG is sent offshore).

    Current gas pricing remains extremely high, between $28-$32/GJ during 2023 and slightly lower at $25/GJ for 2024.

    Gas producers have reassured the market there will be no shortfall of supply next year, saying it will respond to customer demand by injecting more gas into the domestic market.

    Environmental Certificate Market

    The Security & Investment Commission recently put directors on notice regarding mandatory reporting and climate disclosures. Australian companies were forewarned about the need to implement and report on climate strategies in response to the International Sustainability Standards Board’s recommendations.

    We expect these requirements will have a significant impact on future certificate pricing through increased demand for decarbonisation activities.

    Latest certificate prices are:

    • LGC spot prices moved slightly higher to $51.00/ certificate.
    • ACCU’s (Australian Carbon Credit Units) continue to decline, currently trading at $28.00/ certificate.
    • VEEC prices traded lower to $67.75/ certificate.
    • ESC traded slightly higher to $32.75 /certificate.
    • STC’s continue to trade just below the retail price cap at $39.90/ certificate.

    LGC Futures Market

    The LGC forward curve continues to show price backwardation with the cost of 2025 LGCs trading lower at $36.40/ certificate.

    We expect the planned corporate reporting requirements, announced by the SIC, to increase the demand for LGC and push prices higher over the next 3 months.

    The message for carbon markets is a likely increase in pricing until further details emerge relating to government level of intervention in the baseload electricity market.

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