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Energy Insights

Energy Prices at Cyclical Lows, But For How Long?

This is usually the time of year that energy markets brace for peak energy demand associated with higher consumption over the summer months. This, and the wave of contract renewals that fall due at the end of each December, typically converge to place upward pressure on energy prices and drive volatility.

However, as we know, 2020 is different from previous years. We have seen the COVID-19 pandemic change the nature of energy demand amid temporary business shutdowns and an exodus of people from offices and worksites as they worked from home. Essentially, the pandemic lifted residential energy use as it constrained commercial and industrial use, with overall demand declining.

Over the course of 2020, we have seen energy prices continuing their downward trajectory that started from its peak in mid-2017, reaching levels that we believe to be at or near the bottom of the current pricing cycle. In recent months we have seen wholesale electricity prices continue to trade sideways in the absence of clear direction on demand levels that will remain opaque until the economy emerges from the pandemic.

The sideways price movements are a function of both supply and demand-side forces acting to keep a cap on prices. Production costs remaining at or near the cost of generation curtailing prices, and current demand levels are influenced by reduced economic activity, the expected limited short-term growth in renewable capacity and increasing roof-top solar capacity.

As a result, far more businesses energy buyers than previous years have already brought forward their energy contract renewals to take advantage of the lower price environment. This means that fewer businesses will be vying for contracts in the lead up to December 31, reshaping the extent of the typical ‘renewals cliff’.

However, electricity demand will rise over the summer peak demand period, which will lift prices, even if, amid reduced overall demand, there is less price volatility this summer compared to recent years. In fact, AEMO has indicated in a recent report that the reliability outlook has improved for this summer.

As businesses have moved quickly to lock in lower energy prices, we have also seen contract lengths extending, with most businesses renewing contracts out to 2023 and in some cases, 2024. Again, businesses are taking advantage of the current point in the pricing cycle to lock in lower prices over the long-term, ahead of the economic recovery and the likelihood of steadily increasing demand.

Our outlook remains that both wholesale and retail prices will remain generally steady until greater economic certainty returns, notwithstanding seasonal fluctuations. And amid the continued lower price environment and with demand set to increase over summer, there is a substantial opportunity for those who are yet to renew contracts to do so while conditions remain favourable.

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