National Energy Markets update
Energy briefing update - June 2021
Browse the latest in energy markets updates below:
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Strategic opportunities emerge with low and negative electricity prices
The downward trend in the use of grid supplied electricity is continuing; Q1 2021 saw use of electricity from the grid at its lowest for almost 20 years. This record low demand on the grid – largely driven by ever-increasing rooftop solar installations – drove wholesale electricity prices down to their lowest quarterly level in almost 10 years. The latest data from the Australian Energy Market Operator (AEMO) shows wholesale electricity price reductions across the eastern states with Victoria dropping almost 70% year on year.
Source: AEMO Quarterly Energy Dynamics Q1 2021 workbook, Average wholesale electricity price by region (Q1s)
Q1 2021 also saw a rough doubling of the occurrence of so called zero and negative prices, especially in South Australia and Victoria. Negative price periods typically occur in the middle of the day when solar generation is at its peak and hence supply is higher and demand lower. In these circumstances prices can go negative when some generators are willing to pay to keep generating – for instance, if they are an inflexible coal generator that might suffer wear and tear, and miss later demand peaks, if they ramp down. Negative prices are a market signal that can encourage generators to reduce supply, and energy users to increase demand.
The growth and falling cost of energy storage also provides options to shift energy or demand and smooth out prices. With increasing renewables and the downward trend in the electricity demand visible to the wholesale market, these dynamics will be increasingly common. They contribute to the growing expectation that older coal generators will retire early.
Source: AEMO Quarterly Energy Dynamics Q1 2021 workbook, Negative spot prices in South Australia and Victoria
So what? Low and negative prices in the wholesale market don’t immediately flow through to business electricity bills. The majority of businesses buy their electricity under fixed price contracts and only a longer-term price trend will flow on to businesses’ retail contracts. However, for customers who have exposed themselves to the spot price in the wholesale electricity market and manage their electricity use in response to price changes, negative pricing effectively means being paid to use electricity. This presents a strategic opportunity for businesses that have the ability to shift their electricity use and take advantage of low and negative pricing incidents. To learn more about how businesses can leverage this opportunity, check out this explainer of Wholesale Demand Response.
East coast gas prices back to pre-pandemic levels
Gas prices increased in all east coast markets except in Victoria in the first quarter of 2021. The latest data from the Australian Energy Market Operator (AEMO) shows prices between $5.5-6.4per gigajoule, confirming the trend from the previous quarter and effectively reverting to pre-pandemic levels.
The price increases were driven by an extended and colder Northern Hemisphere winter on the one hand and a broader recovery in the international oil and gas markets on the other. While the northern winter is over, further increases may be ahead as oil prices - a major influence on gas prices in the eastern states – are now above pre-pandemic level and are expected to rise further with the global rollout of COVID-19 vaccinations and borders opening around the globe.
Source: AEMO Quarterly Energy Dynamics Q1 2021 workbook, Gas prices increase outside of Victoria from Q4 2020
So what? While further increases in international oil and gas prices are expected to have implications for Australian east coast gas prices, the ongoing COVID-19 pandemic is likely to result in ongoing volatility. Even so, the fundamentals of the gas market have not changed and businesses should prepare for a return to gas prices of at least $8 to 10 per 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.
In the news – investment in gas generation
The debate over the future of gas fired electricity generation in Australia has flared up following the Commonwealth Government’s confirmation that it will spend up to $600m to build the new Kurri Kurri gas-peaking plant in New South Wales’ Hunter Valley. The Government has indicated this investment is in response to the impending closure of the Liddell coal fired power station, and will ‘keep the lights on’ and keep power prices low.
The controversy is not really about whether gas-peaking plants have a role in the National Electricity Market (NEM) – most experts believe they do. As the national energy market (the NEM) transitions away from fossil fuels towards renewable energy, much effort is being expended to rapidly develop options that can ‘back up’ variable renewable energy. Gas peaking plants that are already in the system are useful because they can sit idle the vast majority of the time when renewable generation is plentiful, and rapidly ramp up generation to address occasional supply shortfalls.
The debate centres around whether we need new gas peakers in general, and this one in particular. Building a new gas peaker is a big investment, and not the only option for backing up renewables – demand response, grid scale batteries, and pumped hydro storage are all in the race. Some new gas peakers may make sense – for example, Energy Australia’s recent announcement of a 300MW gas peaking plant in the Illawarra has been relatively uncontroversial.
The advice from the Government’s expert panel on Liddell’s closure, as well as bodies such as Australia’s Energy Security Board, was that the Kurri Kurri plant is unnecessary. However, the Government disagrees, kicking off the latest stoush in Australia’s long running energy debate.
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 second 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.