We begin our Wholesale Market Review in the Power space by looking at Future Contract prices – specifically the Financial Year 2024 contracts, in Queensland, New South Wales and Victoria, going back to the start of July last year.
In our last review, after the record contract highs of last year, forward contract prices dropped sharply, following the announcement of Gas and Coal price caps by the federal government. The start of 2023 saw contract prices recover somewhat, before a rather benign Q1 saw contract prices trend downwards as we moved into March. All market eyes were on Q2 though, with the impending closure of Liddell power station in New South Wales.
The closure of Liddell in April motivated an earlier than usual start to the planned maintenance outage period, with units coming offline through March. Along with some late Q1 spot price volatility, this saw spot prices strengthen, and in turn contract prices rose, as the market re-assessed its views on a post-Liddell world. A strong start to Q2, and some unseasonable cold weather in May saw contract prices rise higher. Adding to the upward pressure on prices, particularly in Queensland, the end of May saw the announcement of a delay to the return to service of the Callide C units, into January 2024 for unit 3, and May 2024 for unit 4.
Financial Year 2024 contracts are now at similar levels to where they were in July last year, though a recent softening of spot price outcomes as the weather warmed and generation returned has had a downward impact on contract prices.
Spot price dynamics certainly had a big impact on contract prices these last few months.
Charted here is the 7-day rolling average spot prices in Queensland, New South Wales, Victoria and South Australia, from the start of 2023, up until the end of the first week of June.
Queensland and New South Wales prices have generally trended together, as have the Victoria and South Australian prices, and we see this in the outcomes through Q1. Interestingly, spot prices across all four mainland nodes were much more aligned through the first half of Quarter 2.
We can see the strong start to Q2, before a general increase in spot prices across the NEM through May, with cold weather driving higher demand and a slow return of generator availability.
This alignment of spot prices broke in late May, when increased wind generation down south coincided with a tight supply-demand balance across Qld and NSW and transmission constraints, leading to price volatility and high outcomes in Qld and NSW, but low prices in Vic and SA.
More recently, spot prices have also softened in Qld and NSW, returning to levels last seen in April.
Looking at the supply-demand balance across the NEM in a little more detail, the chart on the left here shows the 7-day rolling average of the Total, NEM-wide Demand, and available generator capacity.
Of note is the strong availability through the start of Q1, which began to drop in early March, trending downwards to the start of April. Demand did not begin to drift downwards until the start of April but stayed at these levels for most of the month, before steadily trending upwards from the start of May.
And we can see why from the chart on the right, which shows a comparison of May 2022 and 2023 daily Minimum and Maximum temperatures. The chart uses the average Minimum and Maximum temperatures for each day across the NEM capital cities. As we can see across May, temperatures were well below last year – in fact, according to the Bureau of Meteorology, Brisbane and Sydney experienced their coldest May in quite some years.
NEM availability was a bit behind, but began steadily ticking upwards in mid-May, as more generating units returned to service.
To summarise, outages and cold weather saw higher spot prices through Q2, which translated into a rise in future contract prices, back to levels last seen in July last year. The upward trend has slowed, with increasing generator availability contributing to a softening of spot prices through the first weeks of June.
Last time we discussed LGCs, we saw spot and forward contract prices rallying through the back half of 2022 as market participants anticipated a tightening supply-demand spread driven by increasing voluntary surrender volumes.
At the start of 2023 prices dropped significantly with supply alleviated by stronger creation levels and firm short-surrender volumes from liable entities. From March onwards, we have seen prices recover and steadily increase almost back to 2022 levels, indicating a tightening of the supply-demand spread.
The following chart breaks down the supply-demand balance for the 2022 target. In green, we can see the certificates were supplied from: 1) the surplus from the previous year 2) actual creation from renewable generation 3) and certificates that were not surrendered to the regulator to meet that year’s obligation.
While demand from entities liable to surrender under the Renewable Energy Target remained the largest, redemptions (certificates surrendered to make up for past short falls) and voluntary surrender from non-liable entities were notable drivers of demand.
Looking forward to the current compliance year, the Clean Energy Regulator (CER) noted in its most recent update that Q1 saw record creation, largely due to an increase in solar generation, and stated it expected “LGC supply to be 45 to 48 million in 2023 which would be a 7-14% increase year on year”. However, with the redemptions required to make up for past short surrenders, the regulator has stated that it expects there to be an effective 15.5 million LGC deficit over the next few years.
Further to the CERs update, voluntary surrender demand is expected to grow further still.
This chart shows the growth in volumes from non-RET based surrenders of which voluntary demand makes up a significant portion. We can see in yellow how voluntary demand has been increasing since 2019, becoming a significant volume and impacting the supply-demand balance.
Non-RET LGC cancellations increased by 71% in Q1 2023 compared to 2022 from 1.2 million to 2.1 million LGCs. The strong increase was driven by voluntary cancellations which reached a new quarterly record of 1.2 million LGCs cancelled.
In short, given the expected deficit in supply driven by short-surrender redemptions and increasing voluntary surrender demand from non-liable entities, unless creation volumes pick-up or further short-surrenders occur, the LGC demand-supply balance is expected by market participants to be tight in the near-term, which has led to spot and forward LGC contracts to trade at higher prices.
There have been three periods this year where excess supply and reduced demand caused a reduction in spot prices.
The first period was during the first three weeks of January, coinciding with mild power demand.
The next period was throughout March, which also coincided with mild power demand. Record high inventory at the Iona storage facility reduced the ability to store market gas, contributing to depressed prices.
The final period occurred in the second week of June, coinciding with unseasonably warm temperatures in Victoria for winter.
A period which saw the opposite dynamic of low supply, high demand, and higher spot prices, occurred in May. This year was one of the coldest Mays on record, which caused increased gas demand for heating in the southern states, and increased demand from gas generators. This coincided with over a month of unplanned maintenance at Longford, which saw prices spike to $30/GJ in Sydney. Despite this higher priced period, May spot prices in Victoria averaged $18.20/GJ.
We’ll now look at rolling calendar year 2023 average spot prices to date. Despite the spot market volatility, the year-to-date average price for the Victorian DWGM is only $12.85/GJ, the cheapest market this year to date. Victoria has averaged $0.40/GJ less than Brisbane, $0.70/GJ less than Sydney, and $1.25/GJ less than Adelaide.
Last year, inventory peaked in the middle of April at 23.4 PJ, before being withdrawn at the fastest rate over the trailing six years to a low point of 9.4PJ in mid-July.
This year, Iona reached a record 25.3 PJ maximum inventory in mid-April, above the facility nameplate, and saw mild drawdown through a cold May, before refilling to 24.5PJ into the third week of June.
At the same time last year, inventory was at a record low 16.8PJ for mid-June. This year, a staggering 7.7PJ additional gas is in storage at the same time of year.
With this much gas in storage, Iona can draw down at over 200TJ/d every single day until the end of winter, a healthy inventory buffer and welcome change on last year for the market operator and gas users.
Calendar year 2024 domestic forward prices commenced the year at between $17 and $19 a GJ, with the ACCC LNG Netback price at well over $30.
Forward domestic prices traded within about a dollar range across the first six months of the year, and forward trading continues to be affected by reduced liquidity, which is hoped to improve after the announcement of the Mandatory Gas Code of Conduct.
Meanwhile, the ACCC LNG netback price fell rapidly to below $20 a GJ in March, before climbing again in April to a few dollars premium to domestic prices, before ending the half year at a small discount to the domestic market.
In winter last year, the expected price for the ACCC LNG Netback price for Calendar Year 2023 reached over $80/GJ for a short period, driven by the European energy crisis and concerns over a shortage of gas in Europe for the year ahead. The ACCC LNG Netback price for the balance of 2023 is currently expected to be around $14/GJ, a significant reduction to expectations year on year.
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