National Energy Markets and Policy update

Energy briefing update - March 2021

Browse the latest in energy markets and policy updates below:

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Record low demand for electricity has implications for business energy prices

2020 was an unusual year in Australia’s energy market, but sometimes the more things change, the more they stay the same.

Early in the pandemic some experts expected the economic impact of COVID-19 to drive deep reductions in electricity use, as has occurred in previous recessions. By contrast, in 2020 our changed work patterns shifted where energy was used, rather than how much of it was used. Industrial electricity use was flat, and commercial electricity use significantly down – approximately 10 – 20 per cent. However, residential usage increased to almost compensate for the shortfall in commercial demand.

While the recession didn’t materially impact electricity use, the most recent data released by the Australian Energy Market Operator (AEMO) shows a continuation of an underlying, long term downward trend in electricity demand from the grid. This movement is largely driven by ever-increasing rooftop solar installations, which lowers household and business demand on the electricity grid.

Reduction in demand on the east coast grid and increased renewable energy output resulted in increased competition among generators, and in Victoria and South Australia this saw prices reach record lows for recent years. However, Queensland and New South Wales saw prices increase due to a range of state-based factors, such as planned and unplanned outages of coal-fired generation and constraints on electricity imports from other states.

Source: AEMO Quarterly Energy Dynamics Q4 2020 workbook, Average spot electricity prices by mainland NEM region — *Source: AEMO Quarterly Energy Dynamics Q4 2020* **workbook***, Average spot electricity prices by mainland NEM region*

These shifts are to the spot price in the wholesale electricity market, to which very few businesses are directly exposed. However, trends in the wholesale price of electricity flow through to the prices offered in businesses’ new retail contracts.

So what? Lower demand, coupled with increasing amounts of renewable energy in the market, means prices are unlikely to rise in the near term. Depending on your electricity contract and your location, these lower prices may or may not yet be reflected in your electricity bill. However, they may put you in a strong position when next contracting for electricity – see page 29 of the latest version of the briefing for Australian businesses to learn about optimising your energy procurement.

In the news: will less coal generation reduce reliability?
The announcement that Victoria’s Yallourn Power Station – an ageing coal fired generator – will close in 2028, rather than 2032 as was previously planned, has sparked debate over the implications for reliability of electricity supply. What does the retirement of coal generators mean for businesses that rely on secure supply?

Australia’s electricity system is incredibly reliable, with a standard to ensure that the grid can meet consumer demand for at least 99.998 per cent of the time. Recent summers have seen extreme weather events causing disruptions to supply, mainly related to sudden breakdowns in the distribution network, meaning the poles and wires that deliver electricity to your business.

Safeguards – like the Reliability and Emergency Reserve Trader (RERT) – are in place today to minimise the 0.3 per cent of blackouts that do occur because of inadequate system-wide supply. And with the exception of the recent severe weather in NSW and other parts of the country, the mild weather of recent months has actually reduced reliability issues as supply and demand has been more evenly matched.

The exit of coal-fired generation shouldn’t result in reduced reliability, as it appears to be. The availability of cheap renewable generation, an ageing fossil fuel power plant fleet, and state governments’ emissions reductions plans means that the energy market and its regulators are expecting and planning for future power plant closures, like that at Yallourn. Importantly, beyond the new generation that is planned and the transmission lines to connect it up, strategic investments into storage – batteries, pumped hydro and thermal opportunities – and solutions such as demand response will help the market operator manage Australia’s electricity system and maintain reliability as it transitions to renewable energy.

Managing the exit of old generation and the entry of new resources should also prevent a repeat of the large and sudden electricity price increases that accompanied the sudden exit of the Hazelwood power plant in 2017. However, it is plausible that prices will wobble down and up as the cycle of new entrants and old retirements goes on.

East coast gas prices on the rise

2020 saw gas prices hit a long-term low due to falling international prices caused, in part, by the Saudi Arabia-Russia oil price war of early 2020 and COVID-19-related demand reductions around the world; depressed export demand also resulted in better availability of gas in the domestic market. However, gas prices have been slightly up in recent months, as international prices have rebounded, and the market adjusts to a slight increase in domestic demand in Australia.

The underlying fundamentals of Australia’s east coast gas market have not been altered by COVID-19, and most experts expect gas prices to return to pre-pandemic levels of $8 to $10 a gigajoule as the global recovery gathers pace. And international factors could send prices even higher; in January, a cold winter and short supply saw Japanese spot gas import prices soar from around $10 a gigajoule to more than AUD$25 a gigajoule.

Source: AEMO Quarterly Energy Dynamics Q4 2020 workbook, Electricity and gas prices diverge (Average spot electricity and gas prices – South Australia) — *Source: AEMO Quarterly Energy Dynamics Q4 2020* **workbook***, Electricity and gas prices diverge (Average spot electricity and gas prices – South Australia)*

So what? A repeat of the extreme peak price events of 2017, when a shortage of contractable gas sent local price offers above export parity, is unlikely due to the Federal Government’s mechanism to limit gas exports in the event of a shortage. However, businesses should prepare for a return to gas prices of at least $8 to 10 a gigajoule for the foreseeable future.

To learn more about what drives gas prices, check out page 9 of the latest version of the briefing for Australian businesses.

Federal policy developments
The Federal Government has released a Future Fuels Strategy: Discussion Paper which proposes practical actions to enable businesses to commercially deploy low emissions road transport technologies at scale. You can have your say until this Friday 2 April 2021 – learn more here.

The Clean Energy Regulator has announced and a new reporting regime called Corporate Emissions Reduction Transparency (CERT) intended to improve the credibility and transparency of corporate emissions reductions commitments.

So, what’s next?
A proactive approach to energy strategy will ensure that your business successfully navigates an increasingly dynamic energy landscape. Given this, what you do next is critical. We suggest:

Seek a briefing from an internal or external energy expert about your energy strategy and management – especially on how you can optimise procurement;
Ensure your business is across current energy specific financing options ; and
Explore the sector spotlights and other resources available at energybriefing.org.au and share them with your team.

Click here to return to the first 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 Department of Industry, Planning and Environment.

To learn more visit energybriefing.org.au.