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In the energy market for both electricity and gas, we can see that there's nothing mitigating pricing and the our outlook continues to be pessimistic. Our view is that it’s not possible to say when the market will break, and there will need to be significant changes that influence long-term supply to overcome the short-term factors holding prices at current levels. Our expectation is for current price levels to continue and be here for the short to medium term.
In commodity markets, the price of oil continues to increase and is having an impact on coal prices. What we’re seeing generally is a high inflationary energy environment, driven by world markets’ response to the war in Ukraine, coal generation outages, and weather impacting renewable generation.
At home, the Victorian gas market is coming under pressure because of shortages due primarily to the rundown in the Iona Gas Storage Facility in southwest Victoria, which holds approximately 26 petajoules of gas. The market operator, AEMO is concerned that there will be physical constraints in the Victorian gas market, with most locally produced gas being shipped north to Queensland for export.
In Victoria, the gas market is fairly concentrated, with three big exporters of Santos, Shell and Origin. Gas shortfalls are expected to continue through to September, with Victoria impacted the most.
Another reason that we're seeing gas shortages now is because gas demand is up as a result of the need for gas-fired generation. We're seeing higher outages for coal-fired power stations and also an increase in heating demand expected at this time of the year, particularly in the southern states of Tasmania and Victoria, and to a lesser extent NSW.
While heating demand naturally has a short term impact on gas prices, in the longer term, the greatest impact on the gas market is state government policy – in particular, the restrictions for gas exploration currently in place. What will break or alleviate pricing is new gas and we can't see that from any state other than Queensland which still has exploration licensing in place. Both the Victorian and NSW state governments have a moratorium or ban on the granting of exploration, licensing or the expansion of existing production, and that's restricting new supply. So the only augmented increase in gas supply is going to come from Queensland exploration. To date there has been little appetite for the Federal government to impose a East Coast gas reservation policy or to impose taxes on exports.
In the electricity market, upward pressure in terms of prices and of business costs, led the market operator, AEMO to step in June and cap the wholesale electricity market at $300 a MW hour. As a consequence, electricity generators are claiming compensation, stating that their costs were higher than revenues during the $300 cap period.
The government has said that taking this action saved the market $800 million, and that the intervention was favourable. That is, it would have been $800 million more had they not capped the market, or $2.4 billion in total. The government’s point of view is that they have limited costs to $1.6 billion; costs that would have been borne by consumers. The market’s response to that is that it was ineffective or that it really hasn’t produced the outcomes needed in the current market.
In New South Wales, we're seeing electricity pricing retrace back to previous highs. Our view is that the uptrend has not been reversed and technically it continues to be an uptrend. For Queensland, on the other hand, we're seeing a downtrend. Time will tell whether that reverses back and follows a similar path to NSW.
The overall result is that we're still in very high price territory, with $200 plus wholesale prices, which, feeds into retail prices.
In Victoria, a very strong uptrend remains, currently around $150 /MWh. While this is slightly below New South Wales and Queensland, it’s still in a strong uptrend. In South Australia, there’s a similarly mixed result to Queensland.
Overall, we can see that the next movement is generally upwards. There are no short term influences that indicate that there would be price weakness coming through the market. Our view is that market prices can't be sustained at these levels in the long term.
Prices are also being affected by policy position. In our view, we see the need for a gas reservation policy on the east coast – as they have on the west coast – rather than just the trigger. And we need to see some direction around coal-fired generation, in terms of increased base load capacity. Right now, there’s no real change to the availability of base load coal-fired generation and no change to gas availability. These potential solutions of gas reservation and capacity have little or slow political traction, and so current high prices will, we believe, be here for the short to medium term.
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