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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 June 2022

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    Electricity Contract Market

    The word catastrophic has been used to describe the current state of Australia’s energy markets. The past few weeks have seen dramatic events.

    Electricity prices reached extreme levels:

    • 2023 contracts are currently trading at $217/MWh;
    • 2024 is trading at $132/MWh and
    • 2025 prices reached $115/MWh.

    We’ve seen anomalies in the retail market with the demise of Weston Energy, electricity retailers turning away customer because wholesale prices are higher than the maximum tariff and Government intervention to cap gas hub prices.

    Even safety mechanisms such as the retailer of last resort (RoLR) is failing customers, where retailers are unable to offer fixed-price gas supply agreements.

    The electricity spot market also surged with average monthly prices above $300/MWh in 3 states and SA prices increasing by over 100% compared to the prior month.

    Carbon market prices also jumped with ACCU’s increasing by $10/ certificates and LGCs currently trading at $48/ certificate.

    Retail gas pricing is also catastrophic:

    • 2022 fixed price agreements are currently trading above $30/GJ
    • 2023 prices exceed $20/GJ and
    • 2024 prices of $18/GJ

    While some of the contributing factors for this catastrophe might be considered short term, we are unable to provide our usual outlook this month other than to express our concern for the viability of many businesses faced with extraordinary increases

    What this means for commercial and industrial customers:

    We continue to see many customers opting to defer contracting and are now facing 60%-80% increases compared to the offers they declined weeks earlier.

    The risk for customers by deferring their gas and electricity contracting (particularly for 1 July renewals) now places them in a forced buying situation with retailers offering “take-it or leave-it” prices and the very real prospect of higher prices continuing throughout 2022. There are very few market-based solution to address current conditions. Intervention is required to administer the market and protect consumers, businesses and industry. One such intervention would be to implementing a domestic gas reservation policy for the east coast. There are limited options for the electricity market other than to recognise the importance of baseload and intermediate generation capacity to compliment an increase in renewable generation. Both would be considered longer term solutions and difficult to achieve under current policy settings.

    Customer now face longer term price increases for both electricity and gas. This risk is increased by the limited procurement options facing most consumers who traditionally purchase energy via a fixed-price supply agreement. Given the limited options, we recommend a procurement strategy that maximises market-based competition, such as reverse auction or tender style methods.

    State Electricity Market Prices

    NSW & QLD

    NSW and QLD electricity prices have reached extraordinary levels by historical standards.

    We consider the balance of supply and demand will remain tight (insufficient reserve) primary due to the following factors:

    • Two units at Loy Yang A Power Station outages
    • AGL decommissioning 500 MW at Liddell Power Station
    • Plans to decommission the remaining 1,500 MW at Liddell in April 2023
    • Origin’s announced early retirement of the Eraring Power Station
    • The destruction and decision to not rebuild Unit 4 at Callide Power Station
    • Insufficient domestic coal supplies due to export market demand (impacting Eraring Power Station)

    VIC & SA

    Recent cold weather conditions have impacted the amount of solar generation and increased heating demand from VIC and SA. Prices levels have increased to a lesser extent than the northern states of the NEM.

    SA prices were affected by Loy Yang’s second unit outage, prices are now double since January 2020 levels, where significantly less renewable capacity existed at that time. We expect SA prices to remain well above 2020 levels while impacted by changes in the amount of interconnected baseload capacity.

    Energy Policy Outlook

    The change in Federal Government is likely to have a significant affect on energy and carbon markets.

    The Government’s announced increase in carbon reduction is as follows:

    • Previous target 26-28% below 2025 levels, by 2030
    • Revised target 43% reduction with details to follow

    We consider this will be implemented through changes to the RET compliance percentage. An increase in the RET compliance percentage will deliver more revenue for the purpose of subsidising the construction of renewable generation.

    We also consider the change in balance of power in the Federal Senate will impact environmental policy.

    The Government’s announcement to invest in transmission capacity is also likely to produce inflationary pressure on network charges, offset by a possible reduction in state pool prices due to increased interregional power flows and the ability to add more grid-scale renewable generation in the long term.

    Electricity Spot Market

    Monthly Average Price Trend

    Wholesale electricity spot prices surged during the month of May with increases of 109% in SA and 71% in NSW, compared to April’s average price levels.

    Electricity spot prices rose significantly across all states for the third consecutive month. 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, required to meet higher levels of operational demand.

    Reserve levels remain tight in NSW and QLD with TAS Hydro providing higher cost interregional supply compared to prior months.

    We continue to recommend avoiding spot price exposure in QLD, NSW and VIC and now add SA and TAS to the list. We continue to see separation between the northern and southern states due to transmission constraints.

    Generation by Fuel Type

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

    Approximately 10% of electricity generation was sourced from gas-fired facilities.

    Renewables contributed 30% of generation during the month, a 10% decrease compared to last month, primarily due to less favourable weather conditions for solar generation.

    While the amount of gas-fired generation is consistent with last month, the marginal cost has increased significantly due to increasing gas prices resulting in higher spot prices across the NEM.

    Source: Open NEM

    Gas Market

    The east coast gas market reacted to the withdrawal of Weston Energy. Consistently high hub prices resulted in a cashflow squeeze between wholesale settlement and retail recoveries.

    Since then, state markets have intervened to cap the wholesale price at levels in-line with maximum retail prices (default rates). Around 200 customers moved to the Retailer of Last Resort (RoLR) and are now actively seeking fixed price contracts in a retail market with limited contract supply. The next producer gas release is expected in September.

    Until then, most gas re-sellers are fully sold. This has left consumers without an option but to accept current prices, move to default rates or accept capped hub prices.

    From the charts below, spot prices are consistently reaching $30-40/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.

    Environmental Certificate Market

    • LGC spot prices moved slightly higher to $48.25/ certificate. Spot demand remains relatively stable for RET compliance.
    • ACCU’s (Australian Carbon Credit Units) jumped by $10/certificate to trade at $35.50/ certificate, after the rapid drop in April from the previous Government’s decision to release supply. The price increase is partly considered a response to the current Government’s ambitious reduction target which is driving new demand.
    • VEEC prices were also trading higher at $52.00/ certificate.
    • ESC traded slightly lower to $29.25 /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 remaining stable at $34.15/ 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.

    Consistent with Labor’s policy to strengthen the Safeguard Mechanism, demand for ACCUs over the medium term is likely to increase and offset the additional supply that resulted when the previous Government released participants from their carbon abatement contracts.

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