Understanding and Managing the Surge in Gas Prices

The worst of the seasonal spike in wholesale spot gas prices on the east coast appears to have passed. Having seen gas prices surge by 500% to above $50/GJ, many might be tempted to jump from wholesale to fixed-price contracts. We explore whether this is the right option and what other strategies can be considered. 

The competitiveness of some East Coast manufacturers and other large gas consumers that are exposed to wholesale spot prices was threatened by a surge in gas prices this winter. Both domestic and international supply and demand factors push spot prices to an intraday record high of $56/GJ.

These included:

Relief on the horizon

The issues at Longford, Yallourn and Callide’s generation units (other than the restoration of unit 4, which is scheduled for December 2022) have been resolved, and winter will shortly give way to spring. Some retracing of spot prices in Queensland and New South Wales was evident in July, and prices are beginning to settle around $10/GJ.

We regularly see negative pricing in the electricity market. This suggests that demand for gas-fired generation is already falling. High water storage levels at the Tasmanian and Snow Mountains hydroelectricity stations mean they can take the place of gas-fired generation. Barring any further disruption, both hub and contract gas pricing should decrease further in Q4 2021.

Short-term mitigants

While some large gas users will have faced above-budget invoices of late, the year-to-date average spot price is $7.70/GJ, and some significant users would have paid average rates closer to $5/GJ this year. This suggests wholesale gas customers are no worse off than those on fixed-price contracts from the beginning of the year.

Given our target for a year-end price of $7/GJ, we would therefore caution customers considering reacting to the market ructions by switching to fixed-price contracts that are currently being offered.

Instead, load shifting is one potential way to manage temporary price spikes. This will not work for businesses where the costs of deferring a shift or closing down production during peak gas pricing outweigh the gas savings.

Another option is to enter wholesale contracts with a price cap, whereby gas users pay a premium to ensure the price paid doesn’t exceed $8/GJ, for example. There are also hybrid contracts. These offer exposure to wholesale pricing while including a fixed price arrangement to provide more stable gas price outcomes. It is like fixing a portion of your home loan and leaving the balance on variable rates.

The long-term uptrend in electricity prices

The recent bout of volatility highlights the risks inherent in the wholesale market. Prices can quickly move up but take much longer to come down and rarely return to where they were previously. All the research we have seen, and our own modelling, underpins our belief that electricity prices remain in an upward trend.

Renewable generation remains the critical long-term influence over the spot electricity market amid continuing risk of further rationalisation in the baseload generation sector. Renewable generation projects will eventually need to recover their long-run marginal costs to ensure viable returns on equity and capital. This will place more significant upward pressure on electricity prices. Therefore, we continue to advocate that large users contract their electricity purchases to 2024 and consider 2025 pricing.

To discuss the best energy procurement strategy for your business, contact Energy Action on 1300 553 551 or contact us by clicking here.

Federal Government powers ahead with gas-led recovery

The Australian Government has commissioned a $600 million gas-fired power station in the New South Wales Hunter Valley to fill a 1000 MW gap in generation capacity when the Liddell coal-fired power station closes in two years.

Announcing the go-ahead in May, Prime Minister Scott Morrison said electricity prices could rise by as much as 30% in NSW if the 660 MW open cycle gas turbine didn’t go ahead.

In what is a significant intervention by the Federal Government into the energy market – ordinarily managed by the states – this initiative marks a new development in the provision of energy in Australia.

The government insists that gas is a transition fuel that will support the renewable energy in the system and that without the uplift in capacity this new plant will provide, electricity prices would rise, and the state’s grid would be lacking.

Power shortfall debated

Many in the private sector were not in agreement with the Government, however, arguing that the gap created by the closure of Liddell would be around 200 MW rather than 1000 MW. The Australian Energy Market Operator also leaned into that view, saying that only between 153 MW and 215 MW would be needed.

Others disagree and say the government stepped in where the free market failed to do so and that the new plant will work alongside the 316 MW gas power station EnergyAustralia is building along Lake Illawarra, south of Wollongong.

The Tallawarra B power station will be the country’s first net-zero hybrid plant capable of running on both hydrogen and natural gas and will sit alongside the existing Tallawarra A 435 MW gas plant.

Illawarra hydrogen hub

EnergyAustralia received $83 million from the government towards the power plant expected to be operational by 2023-24 before Liddell closes. Tallawarra is being seen as an essential step towards establishing a hydrogen hub in the Illawarra.

The Tallawarra B plant is the result of an agreement between the private sector and the state and federal governments. Energy Australia plans to offset the plant's carbon emissions over its lifetime through a combination of renewable technologies like green hydrogen and carbon credits. 

Tallawarra will be the first dispatchable power station built in NSW in more than 10 years and will set a new benchmark for gas generators, consistent with the state’s emissions plan to be net zero by 2050.

Impact on pricing

Energy Action believes that the ‘quick start’ nature of the proposed gas-fired power station in the Hunter Valley is likely to assist in ‘’firming’’ the intermittency associated with renewable projects. Should the project go ahead and attract new renewables projects to the Hunter Valley region, it is likely to place downward pressure on electricity prices beyond 2024

Regardless of whether it attracts more renewable projects, the plant is expected to limit price-spikes from supply disruptions and provide greater supply reliability.

At this stage, the announcement of the proposal has had practically no impact on 2024 electricity contract prices. Energy Action remains of the view that customers should be seeking to secure fixed-price supply agreements out to 2024/2025.

For more information about the potential future impact on pricing or any enquiries related to your contract, please contact your account manager on 1300 964 989 or click here.