National Energy Markets update

Energy briefing update - December 2021

If Dickens were summing up the July-September quarter in the National Electricity Market (NEM), he might have called it a tale of two electricity prices. It was a quarter in which the average price for the period belied the significant price reduction within those three months. According to the Q3 report from the Australian Energy Market Operator (AEMO), the highs of the previous quarter continued into July, peaking at an average of $111/MWh. By September, however, they had fallen by two thirds to $37/MWh.   

The volatility in NEM wholesale electricity prices was underpinned by three main factors. The weather played its common role, with milder temperatures towards the end of the quarter driving demand lower. However, this reduction in demand was amplified by more renewable sources coming online, and the impact of COVID-19 restrictions. Of note was the strong growth of variable renewable energy (VRE) generation in the grid, with an extra 828MW being added over the past year, taking the total grid-scale VRE output to almost 4GW. The proportion of the grid powered by renewables broke through previous highs, with a record 61.4 per cent of instantaneous renewable share of total NEM generation achieved in late September as well as a record 31.7 per cent for average renewable share across the quarter. The real-world demand effects of the increasing penetration of VRE is perhaps best exemplified by South Australia Power Networks (SAPN) reporting that solar-generated power surpassed demand on five periods over five weeks, a world-first for a grid of its size. Average prices were significantly lower in the southern NEM where renewables surpluses were common, compared with in NSW and Queensland, which were more impacted by lingering supply loss from the Callide explosion in May.

Despite the steep price declines from July to September, the average quarterly price still reflected the high volatility businesses need to prepare for. In fact, the overall spot price average for Q3 2021 was $66/MWh, more than 57 per cent higher than the Q3 2020 average of $42/MWh.

So what? Over time, the increasing amount of VRE in the system will drive down prices, but, in the near term, businesses should be prepared for price volatility and increasing network costs created by additional investments in poles and wires needed for expanding VRE generation capacity. 

Renewables in WA’s Wholesale Electricity Market mirrors those in the NEM

Analysis of Western Australia’s Wholesale Electricity Market (WEM) revealed similar trends to the NEM. The share of renewables in the grid continued to increase, largely displacing gas and distillate as a fuel source. Compared to the same quarter last year, wind generation was up 36 per cent, grid-scale solar by 89 per cent and distributed – i.e. on our rooftops – PV by 13 per cent. Renewable penetration in the grid reached historic highs, with a record 70 per cent instantaneous renewable generation set in early September and around 25 per cent of total generation coming from renewables across the quarter.

There was also an uptick in coal-fired generation, with more generation online than the corresponding period in 2020. The wholesale electricity price across the quarter – which averaged $48.69/MWh – was generally flat compared to Q3 2020, with higher demand offset by increased low-cost renewable output.

Gas price volatility ensues

Like wholesale electricity prices, gas prices started high and eased over the quarter, but for different reasons. High global gas prices in July, coupled with Esso’s Longford Gas Plant going offline between late June and mid-July, created a sharp price increase at the start of the quarter. In the first weeks of July, South Australia saw a record high spot gas price of $28.01/GJ, and Queensland and NSW experienced their second highest market prices ever, at $20.08/GJ and $27.56/GJ respectively. Victoria hit its third highest price at $58.44/GJ. By August, however, both issues had eased, with the market settling from the early highs to an average of $8.09/GJ in September.

Interestingly, for businesses keeping an eye on international developments impacting gas prices, the Australian market diverged from the global price over the quarter. While the international gas markets exert a strong influence on both price and demand for local gas – especially in Queensland – local conditions over the third quarter – including rising supply and storage, as well as lower domestic demand – combined to drive the price lower in Australia than might have been expected.

International gas prices remained extraordinarily high at the time of writing and the oil price, which still tends to influence gas contract pricing in Asia, has more than recovered the ground it lost in 2020. These factors suggest we should expect strong average gas prices in Australia. Given this, and the recent volatility and diversion from the trendline, businesses need more than ever to do what they can to lower their reliance on gas resources, rather than rely on future predictions of cost. To bookend this month’s update with a Scot – rather than an Englishman – business leaders know more than most that sometimes the best laid schemes o’ mice and men go oft awry …

So what?  Experts agree that gas market volatility could continue for some time; not all businesses have a clear path to switch from gas, but, for those that do, both energy efficiency and electrification can reduce exposure to this unpredictable market.

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