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Energy Action

Energy Market Wrap

Monthly Edition Released: 1 May 2022

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    Electricity Contract Market

    With the Election cycle in full swing,we have chosen to share past content,in a non-political way, supporting theorderly transition to increasing the proportion of renewable energy while maintaining supply security. The balancing act requires an orderly transition to ensure reliable electricity supply without holding industry to ransom.

    We are strong advocates of renewables and advise our corporate clients on Net Zero and decarbonisation strategies. We also recognise the cost implications from extreme energy policy positions and uncertainty. During April, we provided a mid-month updated because contract electricity prices in NSW and QLD finally broke (refer to charts).

    However, the price adjustment was short lived, with AGL announcing disruptions to its Loy Yang asset. Since then, a second unit outage has sent wholesale prices significantly higher.

    This price volatility has also been attributed to energy inflation. CPI figures released last week show 20-year highs and an annual rate of 5.1%, driven by housing and global fuel prices. It’s only matter before this translates into interest rates and capital of time higher market adjustments.

    In our April edition, we signaled an expectation of hyper inflation, trending towards 10% and the behavior of profiteering companies presenting as energy friends of the environment disguised as take-overs and early retirements.

    So, what does this mean for commercial and industrial customers: We have seen many customers opting to defer contracting and are now facing 30-50% price increases from the offer levels they declined. The risk for smaller customers to defer contracting remains the likelihood of higher pricing into the future. This risk is because of the limited procurement options, forcing small consumers into fix-price supply agreements.

    Given the limited options available to smaller electricity users, were commend a procurement strategy that maximises market-based competition, such as reverse auction or RFPs.

    For larger corporates, we recommend avoiding long-term fixed-price supply agreements, in favour of hedging instruments, such as progressive purchasing or indexed pricing to avoid a single point of contract renewal.

    Prior to the events of the past few weeks, we recommended customers enter contracts immediately to avoid further price increases. With recent prices drops and rebounds, we expect wholesale prices to remain highly volatile.

    State Electricity Market Prices

    NSW & QLD

    NSW and QLD electricity contract prices remain over valued by historical standards however, we are concerned that prices will rise in response to any further price shocks, such as a generator outage or unusually warm weather.

    This is now the reality with a second unit in outage at Loy Yang, impacting all state market prices.

    VIC & SA

    The recent outage issues associated with AGL’s LoyYang power station pushed VIC prices significantly higher.

    While SA was less affected by Loy Yang’sannouncement, prices remain at January 2020 levels,where significantly less renewable capacity existed at that time.

    We expect SA prices to continue to increase from the impact of changes to interconnected baseload capacity, which has a far greater impact on pricing than changes to intermittent generation capacity.

    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’ electricity purchase prices, often up to three years in advance and avoid locking into a single price for the entire contract period.

    This means they have more ability to hedge against price movements and reserve the ability to outperform the market, should market prices decline over the forward period.

    Electricity Spot Market

    Monthly Average Price Trend

    Wholesale electricity spot prices surged in the first three months of 2022 to average $90 /MWh across the NEM, compared to the average price of $57/MWh during Q4 2021.

    Electricity spot prices rose significantly across all states. VIC had the greatest increase compared to the prior month of 157%, in response to Loy Yang’s outage announcements.

    We continue to recommend avoiding spot price exposure in QLD and NSW. We now add VIC to the list, in response to short-term supply restrictions.

    Generation by Fuel Type

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

    During April, approximately 5% of electricity generation was sourced from gas-fired facilities.

    Renewables contributed approximately 40% of generation during the month, a 10% increase from last month’s results, primarily from wind.

    The change in mix is more a reflection of baseload capacity outage, rather than cost of production (merit order) with renewables taking advantage of restricted supply conditions in Victoria.

    Source: Open NEM

    Gas Market

    Recent pricing for wholesale gas remains above the YTD average 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 $12/GJ to $16.00/GJ over the remainder of 2022 and recommend customers consider wholesale or hybrid supply contracts (part fixed and part spot) to manage supply costs.

    WA Energy Market

    WA gas prices have more than doubled since the same time last year coinciding with a decrease in domestic consumption from mining and industrial use.

    We expect gas supply diversions to offshore markets will continue to place upward pressure on WA gas prices, until demand eases in European markets.

    However, prices are significantly below East Coast levels and currently ranging between $7.90/GJ and 8.50/GJ.

    WA retail electricity is similarly below NEM levels, with prices ranging from $55 - $62 /MWh for 2022 contracts showing flat or very modest increase for 2024 contract year pricing.

    Environmental Certificate Market

    • LGC spot prices remained relatively stable at $48.00/certificate as attention is diverted towards global concerns over energy security.
    • ACCU’s (Australian Carbon Credit Units) slumped from a decline in demand associated with energy security. Recent trading is at $28.00/certificate, halving in price since February this year.
    • VEEC prices also slumped in late March and have since traded higher, at $57.00/certificate.
    • ESC prices remain reasonably stable at $34.00/certificate, slightly lower in recent trade.
    • 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 currently trading higher at $34.65/certificate.

    We expect corporate demand will re-emerge for 2025 LGCs, pushing prices higher due to corporate demand from interim Net Zero milestones.

    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 commence a hedging strategy.

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