National Energy Markets update
Energy briefing update – June 2022
Eastern Australia energy crisis
At the time of writing this article, Australian energy markets in the eastern states are in a state of serious crisis. While periods of volatility and tight balances between supply and demand have been seen before in Australian energy markets, the first half of this year has seen massive and sustained price increases to both electricity and gas in eastern Australia.
Electricity prices in the National Electricity market are now roughly four times higher than they were at the start of this year. While price variation across days, weeks and months can see occasional very high spikes in the price of electricity, the average price of electricity on the wholesale market is now well above $300 in some states.
Gas prices in eastern states – particularly Victoria and NSW – on short term-trading markets are running away, and temporary price caps were imposed in these markets in late May and early June. In these markets, wholesale gas prices were capped at $40 per gigajoule – four times more than the previous prices that were considered ‘high’ following the tripling of gas prices beginning in 2017.
The impacts of high prices are causing some energy market participants to become distressed. Gas retailer Weston Energy collapsed in late May, forcing the Australian Energy Regulator to assign Weston’s customers to ‘retailers of last resort’ in each market region. Electricity retailer ReAmped told its own customers to seek alternate suppliers, as they expected to have to pass on substantial price increases.
Regulators have increased default price offers for households and small businesses, with small businesses in NSW, Queensland and South Australia to see price increases of between 0.2 and 13.5 per cent above inflation, and Victorian small businesses paying an extra five per cent. However, many experts believe that the rapid increases to wholesale energy prices will mean that default offers will need to be increased again soon.
Why is this occurring?
Several factors are contributing to these changed market dynamics:
Global energy prices
Firstly – as described in our previous quarterly update – global prices for coal, oil and gas have soared on the back of the war in Ukraine and disruptions to global energy flows. As these commodities are traded internationally from Australia’s east coast, high global prices for coal, oil and gas influence domestic prices of these commodities.
Coal from Newcastle is still trading above USD$400/tonne – compared to prices of below USD$150/tonne over the last 15 years. In contrast to the last update, Australian domestic gas prices have now converged with international gas prices, with export parity pricing – excluding the costs of transport and liquefaction – sitting at around AUD$40 per GJ in April and May. While oil prices remain slightly lower than the all-time high experienced in 2008, prices remain extremely high and persisting at over USD$110/barrel.
However, if it seems that petrol prices seem higher than ever before, your memory isn’t failing you. While global oil prices were higher in 2008, the exchange rate between Australian and US dollars – the currency of international oil trades – is much less favourable today. In mid-2008, the Australian dollar was sitting close to parity with the US dollar, which made oil products appear much cheaper than they are today.
2. Supply constraints
There has been a considerable amount of coal generation not available to the market over the past few months. About 30 per cent of black coal capacity and 12 per cent of brown coal capacity in the National Electricity Market was not available during some weeks in May.
3. High gas prices mean high electricity prices
In the National Electricity Market, gas is typically the most expensive generation available, and gas generation often acts as the price-setting factor for electricity – particularly in southern states. As gas is currently very expensive and supply-demand balances in the electricity market are very tight, high gas prices have pushed electricity prices in southern states, while higher coal prices have more of an influence in NSW and QLD.
The bad news is that this situation is likely to continue for some time. Futures options for electricity remain very high well into next year, with ASX-traded baseload futures trading above $200 per megawatt-hour into Q1 2023. While generator outages should end in the coming months, high generation fuel costs are likely to persist for much longer.
So what can businesses do about it?
As high prices look like being a feature of energy markets for some time, it is possible that shopping around may not necessarily find you a better deal. However, the good news is that employing energy management – especially energy efficiency – will help your business reduce energy costs, drive up energy productivity, and take the next step on your journey towards net zero.
Businesses in Victoria, NSW, South Australia or the ACT may be able to take advantage of energy efficiency upgrades through the energy savings schemes, which may help reduce energy bills. And businesses across the country can leverage the Australian Government’s temporary full expensing tax depreciation incentive. Learn more here.
Western Australia
In good news for those in the West, the energy price crisis currently gripping the eastern states is not affecting the WA gas and electricity markets. Electricity pricing in WA’s Wholesale Electricity Market has remained comparatively stable, in the range of $40-80/MWh over the last few months, and wholesale gas in WA remains around $5.50/GJ.
However, WA petrol and diesel prices reflect the same international prices as in the eastern states, with wholesale petrol prices in Perth essentially the same as those in Melbourne and Sydney.
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.
So, what’s next?
To learn more about the tools available for businesses to improve their energy management strategies, check out the latest version of the briefing for Australian businesses.Businesses can leverage current, time-limited government tax incentives to build the business case for energy upgrades by instantly writing off any depreciating asset installed ready for use by 30 June 2023. Read our recently updated tax incentives guide to learn more. Businesses in the farms, manufacturing and office sectors can further leverage sector spotlights that consider the sector-specific issues and guide businesses on their energy management journey.
Click here to return to the sixth edition of the energy briefing update.
About Navigating a dynamic energy landscape
There is an enormous amount of information on energy in the public domain, yet it can be hard for business leaders to extract what matters for their businesses.
Navigating a dynamic energy landscape: a briefing for Australian businesses is an executive-level briefing designed to cut through the noise and help businesses confidently navigate Australia’s dynamic energy landscape.
The sector spotlights and other resources that accompany the briefing exist to support this aim.
This initiative is delivered by the Energy Efficiency Council with the support of industry and the NSW Office of Energy and Climate Change.