Leading your business through the energy market minefield

Futures pricing has increased in all states and all future years since April, primarily driven by a number of factors including:

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• Substantial reductions in wind and solar generation

• The Eraring Announcement

• The Coal Price Cap ending June 30th

• Transmission and Interconnector constraints

 

 

The substantial reduction in grid-scale wind and solar generation:

• The market is now so reliant on these fuel sources for grid stability and favourable pricing outcomes, that any unforeseen weather events are resulting in the ramp-up of Gas-Fired Generation (GPG), pumped hydro and Frequency Controlled Ancillary Services including battery storage. These 3 alternative generation sources are consistently ranking among the most expensive fuels on a cost-to-serve $/MWh basis, so while thankfully they are not required for much of the time, their underlying costs are continuing to be felt by the market.

 

 

The Eraring Announcement:

• During the last month, Origin has finally released their much-anticipated announcement regarding the delayed closure of the Eraring Power Station in NSW. While it provided some confirmation as to the future security of limited baseload supply in the NEM for at least another 2 years, it also fell well below what the market was expecting, and futures pricing has reacted accordingly in recent weeks.

• It had been anticipated that all 4 Eraring units would remain available, with full production capacity at the ready (14TWh), and that this may also signal an extension to the Coal Price Cap which was due to expire June 30th. Instead, Origin Energy announced that only 2 units would consistently remain online, with a profit/loss sharing arrangement with the NSW government on just 6TWh (less than half full capacity). There was also no mention of ensuring adequate supply during the most critical peak times, nor did it provide any comfort that bidding behaviour after the Coal Price Cap is due to expire on June 30th would result in more favourable market pricing outcomes.

• The market had already been pricing in 2 units remaining online and a potential extension to the Coal Price Cap. This announcement fell disappointingly short of market expectations and thus, has created more uncertainty and volatility with futures contracts across the NEM.

 

 

The Coal Price Cap Ending June 30th:

• The Coal Price Cap was implemented by the Federal Government during the Russia-Ukraine conflict, in conjunction with the NSW and QLD governments, to cap the price of coal sold to domestic generators at $125/MWh. This was due to expire June 30th, 2024, and there was some hope amidst the Eraring announcement that this price cap would be extended. As of July 1st, however, there will be no extension to this cap which will result in the end of subsidies for coal, increases to the underlying coal price and cap price as well as potentially more aggressive bidding behaviour by Origin as of July 1st (Q324) which the market is closely monitoring.

 

 

Transmission and Interconnector constraints:

• Network limitations have been experienced in recent weeks, with transmission interruptions between VIC-SA, VIC-NSW and SA-NSW. At times, this has rendered interstate flows to 0MW each way, resulting in the further ramp-up of state-specific alternative fuel sources and the inability to import/export energy between states. These events have often coincided with sharp falls in renewable generation, causing widespread and ongoing spot price volatility to manifest itself into consistently higher consumer pricing outcomes – particularly on the back of the aforementioned longer-term supply concerns.