What's going on in the Australian Energy Market?
As a preamble while we're waiting for others to join.
Over the past 20 years, I've worked in the energies and utilities industry.
I've never seen a period of greater turmoil which can only be described as market failure.
The Australian energy market was not designed to accommodate the conditions that are currently present, particularly the rapid transitioning to renewable generation and the impact this has had on generator bidding, behaviour, capital maintenance in the base load generation sector and the vertically integrated nature of the industry or Jen Taylor's that operate on both the buying and selling side of the wholesale market.
The purpose of this presentation is to provide you with a description of current market conditions and our outlook on future conditions have aimed to do this in an objective and non political way.
At the outset, I'd like to declare that energy action is a strong advocate for renewables.
We have advised renewable projects in terms of market fees abilities and actively support a number of corporate in the development and implementation of net zero and decarbonization strategies.
The reason I make this declaration is as we present our current market conditions, it requires a critique of the consequences of a rapid transition to renewables and the government's energy policy.
The purpose of this presentation is to provide you with a description of those current conditions and the outlook of future conditions so that you can make an informed decision regarding your energy procurement activities.
With this said let's move to the presentation overview.
Today we'll be looking at the electricity market and describe the current market conditions and why prices are at record.
Highs will also look at the energy markets, outlook or future conditions and how market conditions impact future prices.
And what this means for your procurement activities will take a look at energy market policy and why intervention is required, particularly in our market failure condition will provide some recommendations for you in terms of electricity contracting and that summarised in two words is to prepare Now.
We will then take a look quickly at the gas market and outlook conditions there are improving but are still not favourable in terms of prices.
Will then take a brief overview of environmental certificates and the costs and why a decarbonization plan is becoming more critical.
I'll then finish the presentation with a summary and in particular, with reference to what customers should be doing next.
Uh, in terms of their procurement activities.
So let's jump into it.
It's a busy slide, but the key here is to look at the market curve, the market price curve, and in particular that of 2023.
We can see that we are at record highs in terms of electricity and gas prices.
And as most know, that has been fuelled by global inflation, in particular the war in Ukraine and the impact on gas and similar energy prices.
We're looking at a situation where there are regulated supply restrictions again, particularly relating to gas, uh, and energy market policy failure, where we can see that the current market conditions and will describe how these Kurds reflect, uh, the market's response to energy policy.
The central issue that has led to our current market conditions is the intermittent nature of renewables or intermittent generation, and, uh, the I guess failure of baseload generation availability, or the failure of corporate companies that own that base load generation to provide the capital investment, the capital maintenance required to maintain plant availability and reliability.
We'll look at how baseload has responded both to current policy settings and current market conditions, which we're seeing quite opportunistic bidding strategies in the wholesale market, which has forced prices, as you can see from these charts to record highs.
The ultimate position is that customers are in fact picking up the costs, uh, both in terms of subsidising renewables and the energy policy issues that are driving prices to where we see them.
At the moment, many customers have contracted for their 2023 procurement, but those that haven't faced with 3 to 400% increases compared to their prior contracting period.
If your organisation hasn't or doesn't have the resources to actively monitor and manage your energy procurement, then really you need to appoint someone that can do that for you because the consequence of getting it wrong is extremely costly.
In the current market environment, the costs of not planning procurement, we will see over time impacting corporate viability and particularly energy intensive industries such as manufacturing and mining.
These charts just show the different state markets are the first charts showing New South Wales and Queensland.
These ones, Victoria and South Australia, all demonstrate a very similar pattern at slightly different levels but very similar pattern where we saw a significant increase in the market.
We've seen this drop off very recently and then a rebound.
So all state markets experienced this approximate 30% decline, and that was in response to the threat of government intervention.
So the IPCC produced a report a few weeks back encouraging the government to impose a gas reservation policy or trigger mechanism for East Coast gas.
Uh, and that threat was sufficient for electricity and gas prices to drop.
And so we saw this decline several weeks back, where there was approximately a 30% drop in prices across pretty much each of the state markets.
In response to that threat that a gas reservation policy and its impact on electricity is through the marginal cost of generation that is, gas fired generation, which generally sets the price for electricity in the spot market.
And so the threat of government intervention was significant enough to produce that drop in market prices.
The market reacted to government intervening since that report was released, we've actually not seen the government act on that recommendation, Uh, and so the market no longer sees energy policy intervention as a threat.
And so we've seen prices rebound from this chart.
Uh, and they are trending back towards the previous high that we saw a few weeks back.
This really isn't good news for corporate, particularly those exposed to 2023 contract prices.
That is, customers that haven't secured a contract, a fixed price contract for the calendar, 2023 period.
Uh, unfortunately, um, uh, with the rebound that customers exposed to 2023 are running out of time and and really, uh, it's a situation where customers are just forced to enter into contracts, uh, at the prevailing market conditions.
We move now to economic policy.
As just described, you can see how the threat of government intervention impacts the price for electricity.
And this simple chart on the screen there just shows the balance between three key areas of energy market policy.
Uh, that equally impact if you change one aspect of this pyramid, uh, it impacts the other two and they consist of sustainability objectives, which we are seeing a lot of announcements in the in the news and press regarding the government's commitments.
We're seeing competitiveness or really, what's meant by that is cost competitiveness being impacted or high pricing? And we're also very recently seeing the security of supply issues being effected.
That is, we saw a memo, enter the market, suspend the wholesale market and were forced to direct generators to dispatch generation to avoid what was effectively the threat of blackout or lack of supply in terms of energy policy, Uh, appears, um, that we're overlooking the need to effectively plan for the transition to renewables.
This significant move away from what was once a a base load, a designed market to a market that is having a higher proportion of renewables.
And the government's recent announcement of a 43% reduction in carbon emissions by 2030 is in fact discouraging capital maintenance expenditure on base load generation.
And that is in fact having a significant impact on plant reliability.
As we know, there have been significant outages from baseload plant, which has caused the extreme pricing that we're seeing in the market at the moment.
And really the only solution presented for the intermittent C or firming of renewables that we've seen is more intermittent generation.
And so we've described this as a train wreck in the making.
That, uh, trying to address intermittent C with more intermittent C doesn't appear to be a logical response.
Along with, as we mentioned the government's failure to act on the recommendations, uh, to implement domestic gas reservation policies and beyond just the implementation of that policy but the government's willingness to enter or intervene in the market.
And so the markets responded to that situation.
We've also seen state governments, particularly in New South Wales and Victoria, imposed moratorium some very long term but imposing restrictions or in fact, bans on new gas exploration.
Uh, so it really shows, um, an underlying, uh, you know, ignoring the need for a transitional fuel, uh, as we transition from a base load industry to a higher proportion of renewables industry.
So the two key economic policy imperatives from our perspective, the gas reservation policy or that trigger mechanism we just mentioned and improving baseload plant availability, uh, both effectively transition in providing a transitional fuel and an interim, uh, security of supply and cost competitiveness as we transition towards renewables.
So, really, both of these two imperatives appear inconsistent with the current policy settings, and there's nothing in place in the short term to mitigate what we're seeing at the moment in the electricity market, which is extremely record high energy prices and similarly, uh, as a side note, uh, inflation.
Uh, we're also seeing a significant energy cost inflation, obviously, through the pricing, uh, impacts, uh, other aspects, uh, removal, Or, uh, the reinstatement of the fuel excise duty.
Approximately 20 cents per leader is also having an inflationary effect.
Uh, and in our outlook, we're seeing a higher or greater influence on unions for wage growth.
And so all these things are leading to inflationary pressures in the economy.
Uh, and certainly as we see energy prices that are yet to but in the process of, uh, impacting on the calculation of CP, I do we expect that current inflation, at 6.1% will grow to approximately 8%.
And the point of mentioning this is that if you are currently contracted and it is linked to CPI escalation, then you would be budgeting for an approximate 8% increase in your year on year price increases.
What are our recommendations? So moving to a response to what we've just described, um, you can limit the cost impact to your company, and one way to do that is taking advantage of market weakness.
And that is being ready to act or respond quickly to what we're seeing These significant movements in price.
So being in a position to be able to contract on price volatility or down trends on and and the importance there is that we can see this price movement has occurred reasonably quickly over the course of a few weeks and that it's imperative that you're in a position to be able to take advantage of those price drops before they pass by before we moved to higher pricing levels.
As can be seen from this chart, The consequence for uncontracted customers for the calendar 2023 period is really you need to procure your energy immediately, but you really have no choice.
It will be painful in terms of the year on year increases, but we recommend that you act immediately in terms of securing fixed price energy contrast for calendar year 2023 for the out years 24 25 26.
The recommendation is to start planning now for your procurement.
Don't wait thinking prices will drop.
What we've seen is a lack of willingness for government to intervene or to alter energy policy.
And so what this means is that prices in the future are less likely to drop, were more likely to see a bounce back in this curve back to previous highs for 2020 for electricity.
Um, our outlook and it is quite dire is that we're concerned that 2020 for prices, which is represented by this green line on the chart.
We'll start to look like 2023 prices over the course of the next roughly 12 months.
And the reason for that is as you approach the consumption period as we approach 2024 we'll start to see prices increase because the medium term turns into the short term.
And what we're seeing in the short term, uh, is a lack of intervention, a lack of solutions to address what we're currently seeing.
Uh, and by that logic, um, there's every reason to believe that 2024 will resemble what we're seeing in 2025.
So the point here is to not differ 2020 for we were looking, expecting government intervention to continue this price pattern downwards to a more stable and towards the long run cost of generation.
That hasn't so that those conditions have changed.
And so we're now recommending that you consider entering into 24 25 26 contracts immediately.
And one way to do that is to explore fixed price contracts or even structured products to manage price risk.
And these products are designed to average costs over time or even outperform the market through an active hedging strategy.
So without a change to the current market conditions, we're really seeing a potential train wreck coming for 2020 for as we see that midterm period turn into a short term period as we get closer to, uh to 2020 for effectively part way through 23 turning now to the gas market and looking at the dynamics there.
We're seeing a similar situation for electricity, primarily impacted by global supply and demand.
But retail competition within the domestic market remains very weak, with most retailers being fully sold and a large proportion of domestic supply being diverted to overseas markets or LNG exports.
Retailers that do have gas, uh, seeking prices, global prices or looking to have prices on global parity, meaning that they're charging between 28 $32 a gigajoule for 2020 2023 supply agreements.
And that's dropping slightly forward to $18 to $22 for the 2024 period.
And that range just reflects, um, you know, the individual customers load profile.
So how peaky your usage is, or how varying your usage is over time creates that range.
We're seeing some supply relief, and particularly that from Queensland who doesn't have a moratorium in place.
And a company called Cenex operating out of the Surat Basin in Queensland are proposing an additional 60 pedestals of supply during 2023 are, which we believe is sufficient.
The IPCC report, which was released a few weeks ago, indicated that there would be supply shortfalls of roughly 50 for particles of gas in 2023 so we're seeing additional new supply coming to market solutions such as LNG.
Export controls, which we've discussed in this presentation through application of the Australian domestic gas security mechanism, are now less likely to be imposed or we've referred to this as government intervention and so we're seeing a reluctance on government's behalf to intervene in the market.
The recommendation for gas is also to contract and contract for your supply for 2023 particularly in 2024 beyond.
Now the outlook remains more favourable but still unfavourable In terms of historic pricing, it's, um there is some relief inside, so it's not a train wreck, but it is, at this point in time, extremely high priced, As you can see from those ranges provided above.
We are seeing some downward pressure on gas hub pricing or spot prices that will eventually feed through to contract pricing.
But because of the lack of supply retail supply in the market, uh, we're not seeing that occur, uh, in the short term, so timing remains uncertain as to when there will be longer term relief for gas pricing.
Greater gas re retail competition is likely to emerge from around September with a wholesale gas release.
That is, it doesn't change the supply and demand conditions.
But what it does is provide retailers with more guaranteed wholesale contracted gas supply.
And unfortunately, details are limited around that September release.
But we see that also as a potential for easing costs or putting downward pressure on gas prices.
So our recommendation is to prepare now, certainly for 23 but in particular for 20 for gas contracting with a view to enter a fixed price agreement before calendar queue for of this year.
Turning now to the environmental certificate markets.
And you can see from a fairly message out, but just focusing in on this, uh, teal blue green line here where we can see the price for L G.
That is the price for renewable energy.
Uh, and that is effectively one megawatt hour of renewable energy represents one l G C certificate and we can see from the chart below the price of those certificates for spot in calendar 2022 l.
We're seeing a price of around $55 per certificate or $55 for every tonne of CO two admitted or the equivalent of one megawatt hour.
So if you wanted to be 100% carbon neutral, you would purchase uh, the equivalent number of certificates as your megawatt hour usage of electricity for scope two emissions in terms of our outlook.
So we're seeing a push towards greater regulation in carbon markets and the S I C recently warned that listing rules will include mandatory environmental reporting.
Um, and that is what is not in place at the moment, the A s I c foreshadowing that coming.
We're also seeing as general observations, uh, an increase in the requirements on Corporates to have decarbonization plans or net zero strategies in place and some of the indicators there are bank borrowing conditions requiring organisations to have a decarbonization strategy in place and in particular from the insurance industry.
We're seeing, uh, insurance companies requiring Corporates that have decarbonization plans in place.
Um, if they want coverage insurance coverage, uh, in and in particular in certain industries, that's becoming more prevalent than others.
So our conclusion is to expect regulatory requirements for decarbonization planning in place on all businesses in the near future.
I'm just moving through quickly because I realise we're approaching time.
Uh, the majority of the government's 43% target will be achieved through the corporate sectors, voluntary activities, uh, and that will most likely occur through a combination of both voluntary and red imposed.
A renewable energy target compliance percentages, which we think will increase to the extent that corporate activities don't account for that 43% target over time.
So we're seeing that corporate demand for L.
C S will increase in order to both achieve what we see as increased compliance percentages or regulated purchases of renewable energy as well as voluntary commitments or the unregulated or zero strategies by Corporates to achieve decarbonization.
So the demand for L.
C s or renewable energy will increase.
However, we also see that these targets will increase the supply of L.
C s or increase the amount of renewable energy projects.
The extent to which one out balances, the other will impact pricing.
And our outlook is for supply to outstrip or exceed demand, with prices expected to decline from current levels by 2025.
And we can see from the below chart here that 2025 prices are currently at $40 and the decline in this forward curve so prices moving into the future decline referred to as price backwardation.
But these prices are decreasing over time, and the reason for that is the increase in supply or the, uh, move for additional projects to come online.
Our concludes our recommendation for corporate is to commence the process of establishing high level decarbonization targets and to start costing those with interim measures being put in place for 2025 2030 targets.
And just as an aside, if you require assistance in developing a decarbonization or net zero strategy, we do have a low cost solution to assist you.
So moving now to our final summary.
Uh, really? What does this mean for you in terms of we've touched on some of the actions that you can take.
Uh, but really, the key message for what to do next is to not put off gas and electricity procurement, thinking things will improve.
Uh, unfortunately, the indicators and in particular, uh, energy policy settings are not supporting, uh, price pressure, lower price pressure.
They're not supporting the market declining.
And so our our view is that by putting off or deferring your electricity procurement, thinking that prices will drop in the future is likely to cost your organisation more than it is less.
Don't avoid making a decision because costs are high.
We know it's painful, and the increases are hurting profitability in corporate Australia.
But please don't avoid making a decision because of those reasons, and that if you don't have internal resources or the expertise to monitor the energy market or you're not sure when or how long to contract for, please contact us.
Let us advise you on those because we do have expertise and are able to assist you in your procurement activities.
Unfortunately, we can't promise to reduce your costs, but we can limit the increase by making good decisions around timing and our application, our understanding of energy markets.
So for 2023 electricity and gas contracting, uh, the simple responses to act now the outlook is not favourable, particularly for electricity.
But there are no mitigating circumstances at this point in time that would suggest that they are going to improve for 20 for Calendar 25 Calendar 26 contracting.
Our recommendation to you is to prepare.
Now we're not expecting greater policy intervention.
Um, that hasn't materialised.
And the signs are that there are There is a reluctance for the government to alter those policy settings.
And so what was expected? Uh, you know, relief for 24 25 pricing and just jumping back very quickly to those charts where you can see that 24 25 pricing are significantly below current 2023 contract year pricing that you can see.
There is some relief and the possibility to be able to blend or smooth costs if you are exposed to 2023 prices by averaging or smoothing your costs over time by taking a longer term or three year agreement and and similarly for 2020 for electricity prices are more likely to look like 2023 prices.
That is that We believe that the forward curve for 2020 for is more likely to resemble this curve as we move towards the end of 2023.
Well, thank you, everyone, for joining us.
That concludes the formal part of the presentation.
Uh, I'm going to turn now to some questions, and we have one from Sebastian.
Uh, will there be grants available to move to electric appliances from gas to encourage the transfer? Um, we know that there is quite a bit of, uh, talk and discussion, particularly in Victoria, as it happens for a move away from gas to electricity.
Uh, and we believe that the process of doing that will involve government assistance or grant to facilitate that move because it's not something that will happen without an incentive to do so.
Question From Sidney B.
What is the reason behind Calendar 24 25 prices being so much lower? So what we're seeing is a transitional process driving 2023 prices higher.
That is, that we're seeing a short term impact if you like.
Um, as we transition, uh, from baseload generation to a higher proportion of renewables.
And so that is considered a short term transition, Uh, and that that there would be over the longer run the longer period, uh, a lowering or de risking in the market.
And so 24 25 prices aren't being impacted by the current conditions in the market.
So it really is a reflection that, uh, the issues that we're seeing the crisis that we're in is a shorter term or or impact in 2023 more so than 2024 2025.
However, as just described in the presentation, our view is that as we approach that short term period if there aren't solutions put in place If they, you know, to address those two key imperatives that I mentioned, which is base load generation increasing the reliability of baseload generation and addressing gas market reservation or the supply satisfying the supply, uh, satisfying the demand for gas in the domestic market before exporting gas.
If those two factors aren't addressed, then what we will see is 2020 for prices resembling 2023.
Because the the medium term becomes the short term.
If that makes sense, are moving to a question from Bryce.
Uh, do you expect the cost of green power to increase over the next 2 to 4 years? You're great question.
It does relate to the supply and demand conditions for those L G C s so L g C s d technically represent renewable energy.
Uh, and that is, in fact, what green power is.
It's just the, um, uh, CRS, the clean energy regulators management of those certificates.
If you like to provide that green power, we are forecasting in terms of our outlook, as we discussed in terms of supply and demand, that being corporate demand for LDCs or renewable electricity as opposed to the supply of those LDCs, the increase in renewable projects.
And we believe that the outlook is for supply to outstrip demand.
And a consequence of that price would be that we would see the price of renewables or green power decline over time.
And we can see that already in the backwardation of this in terms of the prices dropping over this forward curve for those L g.
C or renewable electricity certificates.
Okay, um, we have another question here.
Um, are we seeing more investment in wind and solar at the moment? That's a question from Sebastian.
And yes, we are.
Yeah, we're seeing a significant increase in renewables.
Um, and just as a quick aside, um, renewable, certainly grid scale renewable.
So I think you're referring to there, Sebastian.
We're certainly seeing an increase in rooftop solar or the installation of what's referred to as behind the metre solar.
And that is just exploding.
In fact, to the point that corporate Australia is actually running out of space.
We've actually filled our rooftops to the extent that we have, uh, installing solar.
And and just as an aside, I know I'll get to your specific question about the increase.
But solar at this point in time is in fact a no brainer.
Uh, we're seeing very short payback periods 18 months, Um, and in some cases, depending on the circumstances out to about three years, that means that with a short payback period and the benefit of offsetting network charges which we know are growing at CPI I, which is also, uh, significantly higher than it has been in the past that by avoiding your network usage charges, uh, through rooftop solar it is in fact, uh, highly feasible at this point in time.
And and really, what we're telling customers is that if you're not installing solar, uh, rooftop solar, you're subsidising someone that is you're actually, uh, you're subsidising you're you're worse off your comparatively worse off than those organisations that are.
And of course, as you produce solar, that can also feed into your decarbonization plans.
Um, but we are to directly respond Sebastian that we are seeing increased investment.
Both, of course, has just mentioned in rooftop and also in grid scale solar.
One of the consequences um, of grid scale renewables is because they are generally remote installations.
That is, they are further away from load centres just because of the nature, uh, installing wind and solar projects and the land required to do that, they are further from load centres.
And so what we're seeing at the moment is an increase in los factors or marginal losses of generation being brought to the consumption point, the point of consumption.
Uh, and undoubtedly, uh, most customers will be familiar with a recent charge for unaccounted for electricity.
That is both a reflection of changing loss factors in the mix of energy as well as some other factors that we're seeing, you know, loss, theft and the like.
It's the difference between the way losses were accounted for in the past, which was traditionally the transmission and distribution factors, which are static and developed a year ahead of time and and the difference between losses from what is, um, planned or expected and what the actual losses are turning out to be.
And that's also a reflection of the costs associated with transmitting electricity over longer distances.
Um, another question here.
Our corporate better off using L.
C s or power purchasing agreements directly with generators.
Great question because a lot of Corporates are asking the same question.
You know, how do I go about sourcing renewable energy? Do I do it through direct certificate management? Do I enter into a power purchase agreement? Um, do I instal solar? And? And the answer is that for different organisations that are different mix, um, generally is reflective of that organization's targets and goals decarbonization targets and goals.
Um, we recommend that, of course, there are benefits and detriments to both situations of locking into a long term power purchase agreement or having short term flexibility.
We are seeing Corporates adjust their targets over time.
Uh, and so flexibility allows you to do that.
So by locking into a 7 to 10 year power purchase agreement, uh, you're effectively locking in your procurement to your decarbonization strategy.
You have inflexibility you.
What we're recommending is you treat them independently and in fact, energy action has developed a supply agreement called our Reza, or Renewable Backed Supply Agreement.
It's an innovative product that overcomes the long term detriments of a power purchase or direct off take agreement that Reza is typically a 123 year agreement, so it avoids that duration risk of entering into a long term power purchase off take agreement and it also overcomes a lot of the transactional costs and the time involved in putting a bespoke power purchase agreement in place.
So if you are considering sourcing renewable energy, we'd encourage you to look at our Reza or renewable back to supply agreement.
But for other organisations, the flexibility that comes from buying and selling L G C s will always outweigh locking into a procurement agreement.
So it just comes down to the organisation's preference for, um for flexibility around their decarbonization.
Well, we've just got a couple of minutes left.
Uh, there is time for possibly one more question.
Uh, that's not forthcoming.
So look, thank you very much for joining the webinar.
My hope is that it's been informative that it's provided you with some insights around what's going on in the market, what the factors are that are impacting prices and how you would respond in terms of your procurement and really as a summary.
Um, from what we're seeing, our outlook and the circumstances, the conditions that are in the market at the moment that we're really encouraging Corporates not to defer.
Not to think that prices are going to drop significantly in the near future and to take advantage of current prices that we've seen for 24 25 that are significantly below 23.
And to avoid deferring that in the risk that 2023 2020 for calendar prices start to look like what we're seeing for 2023.
So thank you very much, everyone.
And if you do have any further questions, please feel free to send them through.
We can answer them offline after this presentation.
Thanks very much, everyone that concludes the presentation for today.