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Energy Action

Energy Market Wrap

Monthly Edition: August 2023

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    August energy market wrap


    There’s no penalty for being prepared when it comes to your energy contracts. We’re in the calm before the predicted hot and dry summer storm.

     Lock in your contract now before the end of year rush. And before the predicted extreme weather impacts our infrastructure and the market.

    Market Summary

    With warm weather moderating electricity contract prices there is opportunity to lock in longer term contracts before the effects of a potential hot summer are felt.

    A sunny and warm winter has increased solar generation and reduced demand leading to less volatile electricity spot prices.

    Gas spot prices declined, but retail contracts have held at higher levels due to supply constraints and limited competition, with future forecasts suggesting continued high costs.

    Environmental certificate markets face varied trends driven by sustained voluntary demand as well as regulatory changes driving supply shifts.

    Energy Market Wrap August 2023 Electricity Contract Price

     

    Source: Utilibox Energy Contract Price Index, using contract prices from Energy Action's reverse auction platform. The index averages these contract prices, so provides insight to pricing trends rather than specific contract price levels.

    The Calm Before The Storm.
    Electricity Contract Market

    Supply Risks. Optimism about operating extensions for Vales point and Eraring suppressed Futures prices through July but firmed in early August*. Various project delays, including Snowy 2.0 & the return of Callide C to service, are driving sustained volatility. The decommissioning of Liddell Power Station, an increase in the baseload outages across the NEM as well as conjecture over the Eraring Power Station and its current expected withdrawal in 2025, are continuing to put upward pressure on contract prices.

    Price and Demand Risks. Contracting in this context presents dual risks: a potential for further price hikes and a surge in demand during traditional renewal periods, but also the risk of missing potential dips in the wholesale pricing. Likely hotter weather patterns in summer 23/24 period may lead to higher transmission constraints, generation outages, and increased demand. Current conditions foretell a consistent volatility in electricity pricing, like those trends seen in 2022 but to a lesser degree.

    Recommendation. Warm winter conditions, the start of the new financial year, and limited scheduled outages mean that electricity contracts are drifting sideways. Given these factors, the recommendation is to establish a long-term strategy to secure fixed-price electricity contracts up to 2026. This offers a chance to secure rates below recent peaks, serving as a buffer against future uncertainties. For larger corporates, longer term arrangements, though few and far between, may also present good value through a period of sustained volatility.

    * Phased Eraring shutdown on cards as price worries mount. AFR Jul 18

    Latest data available from Utilibox

    July 2023 Futures Price Dynamics

    New South Wales

    Slight reduction in pricing across all periods provides an opportunity to take advantage of softer forward prices. The spread in NSW and QLD points to the volatility of the market in these states.

    Victoria

    Prices trended down from May and June but remain above historical levels.

    Queensland

    Prices trending sidewise reflecting the stability provided by improved QLD/NSW transmission capability. High levels reflect reduced generation capacity.

    South Australia

    Prices trended down from May and June but remain above historical levels.

    Sunshine. The Key Driver Behind Falling Electricity Spot Prices.

    Sunshine drives prices. It can also drive volatility. The July electricity spot market saw a downward trend in price in several states. New South Wales experienced a decline, averaging $84.16, compared to $105.21 in June. Queensland's prices reduced to $77.28 from June's $102.65. While Victoria remained steady and slightly up from June.

    Downward price movements during July can be attributed to a couple of key factors:

    1. Unseasonably warm weather patterns, leading to diminished heating requirements and reduced demand. This was particularly evident when compared to May 2023, where states like NSW reached a peak of $195.02.

    2. Solar energy influx in midday hours increasing supply. This solar penetration played a pivotal role in offsetting potential price hikes, especially when contrasted with the earlier months of the year where such stability was not as pronounced.

    3. A reduction in rain fall & cloudy days, allowing more solar generation during daytime hours, and higher wind levels.

    Continuing stable weather and dryer conditions will potentially maintain stable spot prices until summertime with the expected arrival of El Niño potentially causing a hotter summer than previous.

    Monthly Average Spot Price

    All figures in $/MWh. Latest data available from Utilibox

    Gas Spot Prices Dip, Retail Contracts Remain High. East Coast Gas Market.

    Annual Average Spot Price August 2023

    Latest data available from Utilibox

    Spot prices moderated but are disconnected from retail contracts. Gas spot prices fell in July with the disconnect between wholesale and contract pricing remaining. South Australia’s average spot price was $11.33/GJ, lower than June’s $12.93/GJ. Queensland had a price of $10.76 /GJ, down from $12.44 /GJ in June. New South Wales and Victoria also saw lower prices, with $10.68 /GJ and $10.39 /GJ, respectively. However, contract prices remained at $20/GJ across state gas hubs.

    Unfavorable supply forecast. Retail gas market conditions remain tight with unfavorable supply conditions forecast for 2024 and 2025. The WA impact of potential industrial action at Chevron and Woodside LNG exports may result in more domestic spot gas if exporters seek to mitigate export risk.

    Tough contracting conditions. There remains little evidence of retail competition with pricing frozen because of macro level supply constraints. For 2024 and 2025 agreements, large users should anticipate $18-$22/GJ costs, while smaller users should budget for $22-$26/GJ

    Environmental Certificate Markets.
    Trends, Pressures, and Regulatory Shifts

    Small Scale Technology Certificates (STCs) continue to trade at penalty  ($40 per certificate) or close to this level, traditionally trading was higher around compliance times, April, July, October & February but with the clearing house more than 3 million certificates in deficit there is no real incentive for the trades to move away from penalty.

    Large Generation Certificates (LGCs) are currently drifting in a band between $50-60, while this is higher than historical averages it is not at the top of the trading band that we saw when the market tightened dramatically in 2021/2022. The LGC curve is still backwardated. Future contracts are trading below current spot levels and are impacted by both compliance requirements but also voluntary surrenders by business' bumping up their green credentials.

    Victorian Energy Efficiency Certificates (VEECs) have continued to trade upwards since May 2022. Changes to legislation and the removal of eligibility of certain certificate creation methods has put pressure on the volume available for surrender.

    Energy Saving Certificates (ESCs), the NSW scheme has also seen some regulatory changes (April 2023) which has also changed the eligibility of fuel sources & methodologies. It appears to have helped relieve some supply side issues putting downward pressure on ESC prices.

    Australian Carbon Credit Units (ACCUs) while the contract value has drifted down from April 2022 off the back of strong supply volumes, there was a short rally at the end of the Financial Year 22/23 as vintages rolled over. This was short lived and strong supply volumes maintained the downward pressure. Buying small packages continues to be a challenge for corporate buyers.

     

    Latest Spot Trade

    Latest data available from Utilibox

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