In this quarter’s update, Lasanthi Weerasekara and Grant Shannon look at the ASX Cal23 Futures Swap Contract and spot prices in Qld, NSW & Vic since Oct 2021. They also discuss ongoing price volatility, LGC price movements and gas trends.
Hi and welcome to Shell Energy Australia’s Wholesale Market Review for November 2022.
Starting off, we will look at the ASX Cal23 Futures Swap contract and end of day prices in Queensland, New South Wales and Victoria, going back just over a year to the start of October 2021.
In this slide, we’ve highlighted some key events that have driven pricing dynamics over the past year.
In early 2022, prices began a steady rise, as global energy constraints saw generator fuel costs, specifically coal and gas, increase. This pushed the marginal cost of generation higher.
From May and into June, we witnessed the onset of extreme spot prices, due to an almost perfect storm of high winter demand, generator outages, ongoing fuel constraints and weather events.
The ongoing high spot prices meant a breach of the cumulative price threshold and the activation of the Administered Price Cap.
As generators struggled to operate economically with the price cap due to already high fuel costs, the withdrawal of capacity from the market saw AEMO take the unprecedented action of the suspension of the spot market.
The forward markets remained stable at these record levels – at the time at least – during this uncertain period.
It is these sentiments that have led to a separation of the spot and forward market dynamics.
The lifting of the suspension of the market coincided with milder weather, returning generation and higher renewable output.
This resulted in softening spot prices, and in turn forward contract prices, as the physical market began to return to more “normal” operation.
Relief was short lived, and contract prices began to trend upwards again, pushing to new highs.
Contract prices since have been quite volatile, with unprecedently large movements both up and down occurring on a day-to-day rather than month-to-month or year-to-year basis.
Factors influencing this volatility include continuing high fuel costs, the impending retirement of Liddell power station, the tight gas market in 2023 and concern about the potential impacts of market intervention.
SPOT PRICE
This chart shows a rolling 30-day average of spot prices in Queensland, New South Wales and Victoria, going back to October last year.
We can clearly see highlighted the volatility in Qld in Q1 22, and the extreme spot prices that led to increasing contact prices and the Administered price cap/market suspension period.
In the last few months, we can see the spot prices have come down and stabilized around ~$150 in Queensland and New South Wales, and ~$100 in Victoria, though Victoria continues to push lower.
However, with premiums in the contract prices, we can see that the market expects potential volatility in the early summer and stronger prices coming into Cal year 2023.
Despite lower spot price outcomes over the last couple of months, forward contracts continue to see volatility at higher price levels.
To highlight this, we combine the data.
SPOT PRICE AND FORWARD CURVE
While correlation of movements is not perfect, we can see that spot price outcomes have been a major influence on forward contracts.
This is unsurprising given the step change we have seen in spot prices this year.
But in the last few months, contract prices have continued to push higher despite lower spot price outcomes.
FORWARD LARGE-SCALE GENERATION CERTIFICATE PRICES
Last time we talked about LGCs, in the Q3 2021 update, we saw how the spread between forward contracts for 2022 to 2025 surrender years had rapidly tightened on the back of increasing voluntary surrender demand.
This trend has not only continued but has accelerated over the past year with even 2027 and 2028 compliance year contracts approximately doubling in price.
The long-term supply/demand balance was expected to be significantly oversupplied with respect to the demand which results from the mandatory surrender targets applied to liable entities (who are largely energy retailers).
Given this, market participants long-held the expectation that later-dated contracts would turn out to be very cheap as we approached their respective compliance years. However, we can see as final surrender numbers for compliance year 2021 rolled in (after the surrender cut-off in February 2022) contract prices for 2023 and onward traded up noticeably.
This was because more than expected certificates were surrendered voluntarily.
At the same time, the number of certificates that were being created over the year was lower than expected due to significant delays in large-scale renewable projects.
In short, with the significant growth of voluntary surrender demand expected to continue to 2030 (as companies race to meet their own net-zero and renewable energy targets) and supply-chain issues impacting renewable projects are expected to linger in the near-term, market participants over the past year have continuously adjusted their price expectations up for all vintages.
SPOT PRICES – EAST COAST GAS MARKET, JUL TO OCT 2022
Hi and welcome to today’s wholesale gas market update.
Spot prices commenced the period at historically high levels with the Victorian market capped at $40 per GJ.
In mid-July, AEMO issued a threat to system security due to low inventory at Iona. AEMO then triggered the Gas Supply Guarantee for the second time and ordered gas generators to secure supply or avoid drawing from the market.
In August, milder Melbourne weather reduced gas demand. Combined with an increase in supply due to the planned APLNG outage, spot prices traded between $10 and $20.
In September, prices rose to between $20 and $30, Iona refilling at maximum capacity. APLNG commenced their second outage later in the month, prices again falling to below $20.
In October, prices stabilised around $20 a GJ until the second QCLNG train outage commenced, increasing supply into the domestic market.
This period demonstrated the impacts of supply constraints and demand changes which led to volatile and broad pricing outcomes. The ACCC LNG netback spot price continued to rally well above domestic prices.
IONA GAS STORAGE FACILITY – YEAR TO DATE
This year the Iona gas storage facility again played a critical role in keeping the market supplied through winter.
We will now look at the relationship between inventory and price.
1. In Q1 and the April shoulder, spot price was around $10, with almost constant injections after less refilling in Q4 than normal 2. Through winter, gas was quickly withdrawn into record prices 3. In August and through the shoulder season into Q4, gas is typically injected to prepare for next winter, however this year, volatile pricing resulted in gas being churned through the facility, participants capturing a temporal price arbitrage
IONA GAS STORAGE FACILITY – AUGUST TO OCTOBER REFILL
Taking a closer look, almost 4 petajoules have been injected into Iona from August to October.
Despite these injections, participants have also withdrawn gas to the market over at least six periods when spot prices were high, indicating a sensitivity to market price.
Withdrawals in August were well below $20/GJ, increasing to over $20 in September, and further to over $23 in late October.
This demonstrates that supply side offers from Iona to the market have gradually increased their price over time, participants increasingly less willing to withdraw stored gas as the refill season progresses.
This could indicate a greater willingness to keep gas stored for next winter, or reduced capacity or energy to refill, with planned outages at Iona and Longford over the coming months.
At the start of November, participants are also assessing potential market intervention by AEMO and the possibility of price caps.
Spot market price signals are key to informing rational decision making in the market, such as the prudent storage of gas for winter. It will be interesting to watch how the rest of the refill season unfolds.
FORWARD PRICE CURVES – CALENDAR YEAR 2023
Calendar year 2023 domestic forward prices rallied strongly through the end of winter, increasing to $32 a GJ at the end of July.
An over supplied spot market led to a sharp fall of 20% at the start of August, before prices steadily retraced to $30/GJ.
Separately, the new Heads of Agreement was announced at the end of September, providing assurance the market will continue to be well supplied.
Recent uncertainty regarding proposed market intervention has led to a slight softening in the forward price, however full year domestic year gas is still trading at $28/GJ.
International gas markets meanwhile rallied strongly through August with the escalating European energy crisis, full year ACCC LNG netback prices reaching a $40/GJ premium to the domestic market, with European markets trading even higher still.
In October, the price fell to below $50/GJ, with Australian domestic gas still trading well below international prices.
This video has been prepared for information and explanatory purposes only and is not intended to be relied upon by any person. Customers should seek independent advice before making any decisions about electricity contracting arrangements.
If you have any questions, comments, or suggestions for any topics for future updates, please leave us a message and we’ll get back to you.
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In the October 2023 Wholesale Energy Market Update, our trading team discuss the impact of mild winter weather on gas prices and changes to the environmental certificates markets, amongst other market news.
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In the June 2023 Wholesale Energy Market Update, our Trading team discuss electricity futures contract prices, supply and demand of LGCS and the storage levels of the Iona Gas Storage Facility, amongst other market news.
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In the first energy market update for 2023, Lasanthi Weerasekara, Andrew Hines and Grant Shannon discuss the impacts of the domestic coal and gas caps, changing spot price trends and other market news.
