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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 July 2022

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    Electricity Contract Market

    The week, the federal government appears to have convinced AEMO that the solution to intermittent generation is more intermittent generation.

    Wholesale electricity prices have begun to settle from recent highs, particularly for 2023 contracts. Prices for 2024 and 2025 are also showing modest declines since recent highs in early June. However, prices in NSW and QLD have not dropped sufficiently to break the current uptrend.

    Electricity prices in NSW are now trading at:

    • 2023 contracts: $202/MWh (down 7% from recent highs);
    • 2024 contracts are $134/MWh (down 4.3% from recent highs)
    • 2025 prices reached $125/MWh (unchanged).

    The price outlook remains cautionary, with recent price weakness insufficient to call an end to the current upward trend. If current prices levels remain, it is difficult to see how this won't impact the viability of industry and manufacturing. Government intervention will be needed to address the short-term factors rather than signalling long-term solutions.

    The electricity spot market also surged with average monthly prices now around $400/MWh in NSW and QLD. Spot prices in the remaining NEM states averaged approx. $300/MWh.

    Carbon market prices continue to increase despite some big announcements from state and federal government concerning incentives for renewable investment. The market appears to be unmoved by the supply- side talking points.

    What this means for commercial and industrial customers:

    Any short-term solution to the current energy crisis must include addressing baseload generation capacity, needed to transition to a renewables solution. The probability of a short-term solution dropped with the news that Origin attempted to sell back their Eraring Power Station to the NSW Government who weren’t interested in addressing physical supply issues, investing in an interim solution and placing downward pressure on forward pricing. The strategy now relies on using intermittent generation to solve the problem with intermittent generation.

    Customers remain distressed over being forced to contract at extraordinary prices for 1 July 2022 contracts rather than risk a worse outcome from default rates.

    We are now turning our focus to 1 January 2023 contracts and starting to see price weakness emerge. We consider a hold/watch position is warranted with a view to entering a 2023 contract over the next 2-3 months. With this in mind, we recommend customers commence the procurement process immediately to ensure they are in a position to act quickly, in the event prices move higher.

    We know prices cannot remain at current levels without causing mass damage to Australia’s economic position. What remains unclear, is how long it will take to move to lower price levels.

    We continue to recommend business consider progressive procurement to avoid a single point of renewal and implement a procurement strategy that is capable of lowering average purchase prices.

    State Electricity Market Prices

    NSW & QLD

    NSW and QLD electricity prices have reached extraordinary levels by historical standards. Recent price weakness is yet to reverse the trend. This is welcome relief from the vertical rate of price increases over the past month.

    We consider the balance of supply and demand will remain tight (insufficient reserve) primary due to lower baseload availability, transmission maintenance and unfavorable weather conditions for renewable generation.

    The charts show price weakness for 2023 contracts on NSW and QLD. 2024 and 2025 prices retreated to a greater extent in QLD compared to NSW.

    We expect 2024 and 2025 contract prices to weaken over the remainder of this year, prior to the close-out of 2023 calendar year contracts on 1 January 2023.

    We recommend commercial and industrial customers act immediately to prepare their 2024 and 2025 procurement activities to improve speed to market, should further price shocks emerge.

    VIC & SA

    Recent cold weather continues to impacted the amount of solar generation and heating demand for VIC and SA.

    Contract price levels have recently decreased in VIC and SA by a greater proportion than the northern states of the NEM.

    SA prices remain above VIC levels for all contract years despite their much higher level of renewable generation.

    SA prices are particularly sensitive to the amount of interconnected capacity transferred from VIC and indirectly, from TAS.

    We expect the market will continue to settle in VIC as greater baseload becomes available. This will produce similar price outcomes in SA over the remainder of 2023.

    We recommend contract customer act immediately to prepare their 2024 and 2025 procurement activities to improve speed to market.

    Energy Policy Outlook

    The federal government remains convinced that the solution to intermittent generation is more intermittent generation.

    While we accept that geographical separation does improve the availability of renewables (because weather conditions differ by region) the short term policy outlook remains a train wreck.

    The Government recently committed Australia to a 43% reduction in carbon emissions by 2030, with legislation yet to be passed.

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

    Many commentators are now comparing our electricity system to less developed countries, while our electricity costs are amongst the highest in the world. This suggests the current policy settings require a re-think.

    Electricity Spot Market

    Monthly Average Price Trend

    Wholesale electricity spot prices continue the upward trend during the month of June with increases of 24% in NSW and 27% in VIC. compared to May’s average price levels.

    Electricity spot prices rose across all states for the fourth consecutive month, with the exception of SA.

    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 usually 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 May 2022.

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

    Renewables contributed 33% of generation during the month.

    Source: Open NEM

    Gas Market

    The next producer gas release is expected in September. Until then, most retailers are fully sold or have limited supply.

    This has left consumers without an option but to accept offer prices rather than move to default rates or hub prices.

    From the charts below, spot prices are consistently at or exceeding $40/GJ (depending on the state).

    While production remains close to record levels, gas flows from the south to the north via the QSN link continued to increase, consistent with east coast gas feeding into LNG exports from Queensland.

    With limited options to increase short term gas supply and the moratorium on new exploration licenses in VIC and NSW, the outlook is for a continuation in high pricing throughout 2022.

    Environmental Certificate Market

    • LGC spot prices moved slightly higher to $49.80/ certificate. Spot demand remains relatively stable for RET compliance.
    • ACCU's (Australian Carbon Credit Units) remain stable at $35.40/ certificate, after the rapid drop in April from the previous Government’s decision to release supply.
    • VEEC prices were also trading higher at $70.50/certificate.
    • ESC traded slightly higher to $31.10 /certificate.
    • STC’s continue to trade just below the retail price cap at $39.95/ certificate.

    LGC Futures Market

    The LGC forward curve continues to show price backwardation with the cost of 2025 LGCs increasing to $37.68/ certificate.

    We expect corporate demand will re-emerge for 2025 LGCs, pushing prices higher to meet interim decarbonisation targets.

    The message for carbon markets is a likely increase in pricing until further details emerge relating to government support for promoting renewables investment.

    Consistent with Labor’s policy to strengthen the Safeguard Mechanism, demand for ACCUs over the medium term is likely to increase.

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