National Energy Markets update

Energy briefing update - March 2022

NEW RECORDS SET FOR RENEWABLES GENERATION IN Q4 2021

The march of renewable generation output continued in the fourth quarter of 2021, resulting in several new records being set. The latest data from the Australian Energy Market Operator (AEMO) shows that cooler than average spring and early summer temperatures, coupled with increasing penetration of renewables, drove the share of renewables generation in the National Energy Market (NEM) to a record high of 61.8 per cent. Minimum operation demand records were set in South Australia, Victoria and NSW; new record lows for NSW were recorded three times in the quarter. 

Consequently, black coal-fired generation declined to its lowest fourth quarter average since the NEM began operating in late 1998. Gas generation also hit new record lows in South Australia, recording its lowest average output since 2003. 

The quarter also saw a rise in both prices and price volatility. Despite the NEM’s average mainland cost falling to $57/MWh, a 13 per cent decrease on the previous quarter, it remains almost a third higher than the comparable quarter of the previous year. 

The average costs, however, mask stark differences between states. Queensland, for example, experienced its highest ever quarterly average price, at $97/MWh, due in part to the higher reliance on thermal generation and the coinciding higher prices of black coal and gas – see the gas update below. Limited import capacity from lower-priced southern regions was another contributing factor. Meanwhile, Victoria’s average price of $28/MWh was the state’s lowest fourth quarter price since 2014.

So what? Beyond the headline numbers about increased output from renewables and lower demand, the quarterly data on price volatility and regional variations is especially noteworthy. As the national policy update shows, the early closure of coal-fired power stations such as Eraring will speed the transition to new forms of generation in particular markets. 

Having an eye to regional differences in the speed and structure of this transition, notably in the source of generation, will become increasingly important for businesses forecasting future operational outlays. For example, the wholesale spot price trended steeply higher in the northern regions, such as NSW and Queensland, while South Australian and Victorian prices were flat or lower. 

As outages and closures of ageing generation units move ever closer, businesses will benefit from maintaining a close eye on their energy demand. This is especially pertinent if fuel costs continue to rise as expected.

Gas prices continue to rise with Russia’s invasion of Ukraine

Russia’s invasion of Ukraine has caused substantial volatility and price increases on global oil and gas markets. Oil prices rose by more than 20 per cent in the week ended 4 March, and have doubled in a year. They are rapidly approaching record highs of around USD$140/ barrel, not seen since 2008. 

Although oil hasn’t been sanctioned, western nations are turning away from Russian oil and gas, increasing demand for non-Russian supply while new production is likely to respond only slowly. Uncertainty about the future security of energy supplies is also placing upwards pressure on prices. This is already being felt at the petrol pump back home, with average petrol and diesel prices above $1.80/L, and hitting $2/L.

Although a long way from the conflict, Australia’s other energy markets are exposed to international prices through the export of coal and liquefied natural gas (LNG). LNG export prices – typically linked to the oil price – are high and rising, and could impact domestic natural gas prices in the coming weeks. And there could be worse to come, with predictions of oil hitting USD$185-200/barrel by years’ end. A sustained push by Europe to reduce dependence on Russian gas could see elevated demand for LNG for years while efficiency, electrification and renewable gas efforts build up.

Back to usual programming, in the fourth quarter of 2021, AEMO reported that gas demand was steady or falling, but prices rose sharply. AEMO reported that total east coast gas demand was flat against the comparable quarter of 2021, chalking a one per cent decrease. East coast gas generation demand was also down to its lowest level since 2003. Four new synchronous condensers in South Australia came online at the end of November, substantially reducing the future use of gas generation plants to maintain grid stability. 

However, the price of gas remains high by Australian standards. Domestic prices averaged $10.60/gigajoule (GJ), almost 80 per cent above than $5.95/GJ in the same quarter of 2020. The average price was driven by higher demand in the latter parts of the quarter. A colder than expected November and December, and maintenance at the Longford Gas Plant meant that almost two-thirds of bids for gas sat at record high levels in the $11-20/GJ range. 

International prices have been far higher. The Australian Competition and Consumer Commission (ACCC) netback price, which is indicative of international spot prices, was within touching distance of $40/GJ in November, while Asian LNG hit a record $67/GJ, thanks to a combination of supply issues meeting northern winter demand with low storage levels. 

So what? Local gas prices might be lower than international prices, but they are stubbornly hovering around $10/GJ and above. Looking ahead, COVID-19 restrictions and supply chain and production capabilities are expected to normalise. However, low overseas storage levels and Russia’s invasion of Ukraine will continue to impact near-term pricing, with high prices and volatility expected to continue in the near term. Consequently, volatility in gas prices continues to be a crucial business risk that needs to be carefully managed. 

What’s going on in WA?

Unusual weather patterns drove a four per cent increase in WA’s Wholesale Electricity Market’s (WEM) average underlying demand: cooler than average temperatures at the start of the fourth quarter and a four-day heatwave at the end of the quarter. The unusual fourth quarter weather also produced an unusual set of records: both lows and highs in operational demand were set. 

In mid-November, minimum operational demand touched a record low of 761MW, with distributed PV generating 67 per cent of the total underlying demand. Then, at the end of December, heatwave conditions pushed operational demand to a record fourth quarter high of 3,869MW. This was just shy of the overall record maximum of 4,006MW.

The quarter also saw large-scale renewables and distributed PV accounting for almost 40 per cent of total underlying demand. 

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