In this quarter’s update, Andrew Hines, Lasanthi Weerasekara and Grant Shannon look at the slight decline in electricity spot prices. They also discuss gas trends, renewables, and energy efficiency and saving certificates.
Hello and welcome to our latest Wholesale Energy Market Update.
High spot prices continued through May surging to unprecedented levels in Qld and NSW over the first half of June.
This chart shows the rolling 7-day average Spot prices in the four mainland nodes, from the start of May to the middle of August. These extreme prices led to the activation of the Administered Price Cap, which was the catalyst for the suspension of the market.
Once the market returned to normal operation, prices initially returned to the previous high levels. This was short-lived though, and since the middle of July, Spot prices, on average, have been on a steady decline.
NEM DEMAND, RENEWABLES AND GENERATOR BIDSTACKS
To help understand these price dynamics, we consider contributing factors from both the supply and demand side.
The chart on the left shows the rolling 7-day average of total, NEM-wide demand, along with the averaged output from all Scheduled and semi-scheduled renewable generators.
Demand grew as we moved into June, putting upward pressure on spot prices. Post-suspension in July, high demand coupled with lower renewable output combined to push prices back to higher levels.
At the back end of July however, milder weather and an increase in renewable output combined to drive spot price outcomes down.
Additional generation capacity also contributed to this downward trend. The chart on the right shows an average weekly bid stack, across the black coal generators in Qld and NSW. This highlights an increase in available capacity being offered into the market at lower price levels.
FORWARD CURVES
So how have these spot price outcomes impacted the forward contracts?
Looking at Calendar Year 2023 Futures contracts, in Queensland, New South Wales, Victoria and South Australia, prices rose dramatically to new historic highs, following the surging spot prices at the end of May and start of June.
Through the uncertainty created by the market suspension, contract prices remained steady at these record levels. It was not until spot prices began to soften that we saw significant price moves, as the futures contracts followed the downward trend in spot prices.
The falls were sharp, but short lived, and prices did stabilise, and remain above the levels of early May.
The prevailing high contract prices are reflected in the export benchmark Futures contract pricing for both coal and gas – the Newcastle Coal Futures, and JKM.
The charts on the right show the forward curves as at the start of May 2022, and the same curve as at mid-august. Both coal and gas have continued to push to higher levels, as global energy constraints continue.
VICTORIAN ENERGY EFFICIENCY CERTIFICATES – SPOT AND FORWARD PRICES
There has been a lot of action in the markets for Victorian Energy Efficiency Certificates (or VEECs) and the New South Wales Energy Savings Certificates (ESCs).
Starting with VEECs: there has been a lot of volatility since the start of 2021, with many changes to the scheme being announced and implemented.
Changes impacting supply included the progressive reduction of the electricity emissions factor and the gradual phasing out of commercial and residential lighting creation.
Reducing the emissions factor means that fewer certificates per project can be created, which means more energy efficiency upgrades would need to take place to meet the same annual target. In addition, future annual targets also increase.
Reducing eligible lighting activities means that more expensive methods will have to fill the gap – since lighting has been a relatively cheap, simple, and quick form of creation.
A key change that directly affected price was the notable increase in the shortfall penalty price for 2021 and 2022. This is the price liable entities must pay for every certificate they fail to surrender on time.
Increasing this price from $50 to $70 for 2021 and $80 for 2022 effectively raised the price ceiling (when accounting for tax) to $100 and $130 respectively. Collectively, these key changes resulted in the price for VEECs doubling by September 2021.
With prices reaching extraordinary levels, the regulator announced it would be extending the lighting methods by another year and the 2021 surrender due date by 3 months to 31st July 2022. This led to a slight easing of prices by the end of 2021.
VICTORIAN ENERGY EFFICIENCY CERTIFICATES – PRICES AND CREATION
Moving into 2022, it became clear that the dominant form of creation would be refrigerated display cabinet upgrades as certificates from these activities started flooding the market.
However, by May 2022, allegations of potential gaming and product dumping in the scheme prompted the regulator to halve the number of certificates that could be created by this method going forward, while a review took place.
Come the end of June, the methodology was eliminated altogether pending a redesign.
ENERGY SAVING CERTIFICATES – SPOT AND FORWARD PRICES
Given the similarities in design and intent of the schemes, ESCs followed a similar run up in 2021 as the action in the VEECs drove market sentiment.
However, the regulator did introduce two changes worth highlighting. The first was to progressively increase the targets for 2022 to 2025 by 0.5% each year. The second and more recent change was to the refrigerated display cabinets method.
Effective from the 1st August 2022, the changes included the introduction of a $250 co-payment per installation to ensure creators could not give fridges to willing or unwilling customers for free.
ENERY SAVING CERTIFICATES – PRICES AND CREATION
Interestingly, we can see that lighting remained a dominant form of ESC supply, as it remains a valid form of creation, and refrigerated display cabinets had yet to have any meaningful impact on supply.
As such, the changes to refrigerated display cabinets were largely proactive to avoid the issues seen in the VEECs scheme. Accordingly, spot ESC prices were unaffected by this announcement.
Forward prices, however, increased as refrigerated display cabinets were originally expected to become a more important form of creation. But with an increase in requirements and decrease in incentives, market expectations of future ESC supply from this activity type were reduced.
HISTORICAL PRICES – VICTORIA DWGM 6am, ACCC NB
Welcome to the wholesale gas market update.
In May, an early start to winter combined with up to 25% of the NEM coal fleet offline resulted in high domestic demand for gas, and a spike in domestic gas prices to above the netback price. This triggered the cumulative price threshold for the Victorian DWGM market, capping price at $40/GJ.
In June, conditions deteriorated further, despite strong gas withdrawals from Iona and increased domestic supply to the market by the LNG producers in QLD, after AEMO triggered the Gas Supply Guarantee.
In July, AEMO further intervened, triggering the Gas Supply Guarantee again, and issuing multiple Threat to System Security notices concerning low levels in the Iona storage facility.
GAS GENERATION DEMAND – YEAR ON YEAR (2022 vs 2021)
Year on year, the increase in demand for gas was even more stark, with gas generation filling the gap from coal unit outages.
In particular, NSW consumption was 475% greater in Q1 2022 than in Q1 2021, and nearly 200% more in Q2. In Victoria, consumption was 363% greater in Q1 2022 than in Q1 2021, and nearly twice as high in Q2.
This amounted to about 15PJ of increased GPG gas demand in the first 6 months of this year. In a market constrained by supply and pipeline capacity, this created the foundation for extreme and volatile pricing.
GAS POWER GENERATION DEMAND – FULL YEAR 2022
Next, we’ll take a look at full year gas consumption from gas power generation.
Starting with the left-hand chart, about 85 PJ of gas has been consumed in GPG year to date, compared to only 70PJ this time last year. Based on last year’s rate of consumption for the last half of the year, we are on track to consume more than 120PJ in GPG this year.
Moving now to the right-hand chart, we can see that this year’s forecast gas consumption of 120PJ is closer to AEMO’s ‘Step Change Scenario’, as outlined in their 2022 Gas Statement of Opportunities.
The 1st of August ACCC inquiry also forecasts increased gas demand from GPG in 2023.
FORWARD CURVES (VICTORIAN GAS, LNG NETBACK)
Finally, let’s take a quick look at full year forward contract prices for gas for 2023 and 2024. For calendar year 2023, the LNG netback price for the entire year is now above $60/GJ, doubling in the past two months after continued energy security concerns in Europe.
Despite LNG netback prices at a record high, domestic gas for next year is trading at nearly $40/GJ less.
For calendar year 2024, forward contract pricing dynamics are similar with LNG netback price at a significant premium to domestic, however continued curve backwardation means that domestic forward contract prices are currently a few dollars lower than 2023.
The same domestic market fundamentals remain for the next few years, including continued forecast decline in the Longford production facility offshore Victoria, high fuel costs for Australian generators, and an aging and gradually retiring coal fleet.
With forward energy prices at their most extreme level to date, there has never been a stronger investment signal to bring new supply to market, which has the potential to put downward pressure on price.
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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8 November 2023
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.
28 June 2023
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.
7 March 2023
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.
