National Energy Markets update

Energy briefing update - August 2021

The use of grid supplied electricity and wholesale electricity prices have both been in decline for several years. That changed from April to June this year, with higher-than-average use of electricity, as well as increased electricity prices. The latest data from the Australian Energy Market Operator (AEMO) shows a record increase for recent years in use of electricity from the east-coast grid. This spike was driven by higher-than-average heating requirements due to the cool winter weather – especially in Queensland and New South Wales – as well as a ramp up in commercial activity as a result of loosening COVID-19 restrictions.

Increased use of electricity, combined with outages of coal-fired generation, especially the explosion at Queensland’s Callide power plant, meant more gas-powered generation was used on the grid. This increased reliance on gas for electricity generation coincided with rising gas prices – more on that below – and drove electricity prices sharply upwards after some years in decline. While prices averaged $95 per megawatt hour (MWh) compared to $37/MWh in the previous quarter, Queensland and New South Wales saw much higher averages with Queensland’s prices soaring to $128/MWh, that state’s highest second quarter average on record.

So what? Falling demand and the entrance of new renewable generation into the system has helped drive down wholesale electricity prices in recent years. However, this last quarter is a reminder that reduced demand and increased renewable generation are not the only factors to impact electricity prices. While the long-term trend should lower prices, a range of issues need to be carefully managed to maintain this trajectory, such as the exit of ageing coal fired generators; ensuring availability of batteries, pumped hydro and demand response; and distributed energy resources (DER) that support flexibility of electricity use.

But shifts to wholesale prices in the National Electricity Market (NEM) don’t immediately flow through to businesses’ electricity bills. Many businesses buy their electricity under fixed price contracts, which are generally influenced by longer-term price trends. However, this sharp increase in wholesale electricity prices is a reminder that businesses that deploy smart energy management reduce their exposure to more sustained price shocks in the future.

The second quarter of 2021 saw gas prices in the east coast markets continue to increase for the third consecutive quarter. At $8.20 per gigajoule (GJ), the average price roughly doubled year-on-year, driven by higher international and domestic demand as commercial activity ramped up across the globe. Prices soared further in July as major population centres in the northern hemisphere experienced unusually high summer temperatures.  

While acute price spikes will come and go, broader increases may be ahead as oil prices – a major influence on gas prices in the eastern states – are expected to rise further with global economic growth, rising vaccination rates and easing COVID-19 restrictions.

So what? Local gas prices are now hovering around what experts regard as an expected range – $8-10 per gigajoule. Where they go next is hard to predict; further increases in international oil and gas prices would flow through to Australian east coast gas prices, however the COVID-19 pandemic is a recipe for ongoing volatility. In the longer term, if Japan and other current major gas importers meet their new 2030 objectives for slashing emissions and reducing gas use, this may upset current gas market dynamics.

As with managing increased electricity prices, there are strategic advantages for businesses who invest in pre-emptive energy management to reduce the impact of rising gas prices.

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