We begin our Wholesale Market Review with a look at spot market outcomes through winter, some key drivers for price outcomes, and the impact on forward contract prices.
We observed higher spot prices in May driven by a combination of high demand from unseasonable cool weather and lower plant availability following the retirement of Liddell. Milder weather and returning generation capacity saw spot prices weaken as we moved into June. In this chart of the 7-day rolling average spot prices, it’s clear that this downward trend continued through the rest of winter, and into the start of October. Averages across all mainland states have pushed below $50/MWh. South Australia and Victoria, in particular, have seen very low-price outcomes corresponding to periods of high- renewables output in these wind-rich states.
As always, the changing dynamics of supply and demand are fundamental drivers of spot price outcomes. These charts show the rolling 7-day averages of daily average availability and demand across the NEM, along with the daily Maximum and Minimums of both. Clearly a combination of generally higher available capacity and lower demand has contributed to lower spot price outcomes. While availability decreased in the back end of Q3 as we entered the shoulder outage period, this was more than compensated for by the lower demands driven by a mild end to winter, and warm spring. Of note are the periods of high maximum availability, and quite low minimum demands. Both are indicators of high renewable output – the low demand periods driven by the ever-increasing penetration of roof-top solar, and the higher proportion of solar hours in Q3. In fact, Q3 saw over 400 GWh of additional solar output compared to Q2 – and this excludes roof top output.
This has had an increasing impact on the distribution of spot prices over the day, and how different times of the day are contributing to the overall outcomes. These charts show the average spot price in each half-hour throughout the day, for each of the last 11 years. Here we are starting with Q2 and Q3 in Queensland. The impact of solar is clear with prices through the middle of the day substantially lower.
It’s a similar picture in NSW. However, in both states, prices on average remain high in comparison to earlier years due to elevated overnight prices. This is predominantly driven by higher fuel costs for the coal-fired generators, which generally dominate the energy mix at these times.
Similarly, higher fuel prices for gas-fired peaking generation, has put upward pressure on the high-priced morning and evening peak periods, as fast-response generation is needed where increasing demand is competing with the solar ramp up and down in these volatile periods of the day.
Victoria has a similar profile; however, a higher proportion of wind generation can help to put pressure on overnight prices, leading to lower overall outcomes.
As the impact of renewable generation increases, we continue to see a larger spread, and more volatile price outcomes across the day.
So, how is this impacting the forward contract markets? Let’s look at the Calendar year 2024 futures contract prices.
Contract prices softened after the highs of May, following the weakening spot prices, and dropped sharply in July as spot prices continued to outturn lower. They did bounce back and stabilize through the rest of Q3, as the market continued to be mindful of the strengthening El Nino and Positive Indian Ocean Dipole – both of which correspond to hotter and drier summers. The weight of ongoing lower and lower spot prices finally saw contract prices take another sharp fall as Q3 moved in to Q4 and the market reassessed its views on forward prices.
Further out in the curve, price dynamics are dominated by views on impacts of a prolonged El Nino, and the uncertainty around generation capacity, in particular, the return of Callide C in Queensland, and the planned closure of Eraring in New South Wales.
The market for Victorian Energy Efficiency Certificates (VEECs), New South Wales Energy Savings Certificates (ESCs), and the Small-scale Technology Certificates (STCs) have seen some interesting changes over the past year. Let’s start with VEECs and ESCs.
In previous Wholesale Energy Market Updates, we talked about how the increases and decreases in price for VEECs and ESCs were in step with each other. This has been due to the many similarities in schemes structures, creation mechanisms and popularity of activities. However, the schemes have had several adjustments which have led to changes in the types and volumes of certificate creation seen this year.
VEEC creation has been very low year-on-year, as high creation mechanisms rolled off or were retired, and potential high-volume replacement mechanisms have continued to lag. As such, spot prices have increased by $10 since November last year, and have remained high, in the mid-80s, throughout the year.
ESC creation, on the other hand, has been very high as hot water heat pump creation activity boomed. Because this activity was eligible for ESCs, STCs and – depending on if the client was a household or business – Peak Reduction Certificates (PRCs), this enabled heat pumps to effectively be offered for free to consumers. With ESC creation being, on average, 20-30% higher than the previous year, spot prices traded below $30 for the first time in a couple of years and reached a low of approximately $25. However, in September, the NSW regulator flagged changes to the hot-water heat pump activity which tightens certificate creation.
The proposed changes included: a mandatory co–payment for both households and businesses, and lower ESC certificate creation factors per heat pump unit installed. If, at the end of the year, the regulator decides to go ahead with these changes, a three-month adjustment period may apply before they go into effect. As such, spot ESC prices bounced to a high of $29 – pricing in a high likelihood of these changes being implemented – before coming back down to $27 – as plenty of creation continued to flow through to the market.
Finally, the Small-Scale Technology Certificate (STC) clearing house reached surplus for the first time in two years in August and September this year. The surplus remained above 300,000 during this period, which enabled spot STC prices to finally trade in the market well below the $40 Clearing-House price. As you can see, spot prices briefly dipped to the multi-year low of $39.80 in September – a truly notable event for STC participants.
This section will be reviewing the market dynamics which played out this winter. This year, a combination of reduced demand, consistent supply from Queensland, and reliable southern production all contributed to a well-supplied market and relatively soft spot prices.
A combination of milder weather and consumers using less energy at the same historical temperatures drove reduced gas demand. There was a much less pronounced winter peak across both domestic retail load and gas generation segments this year than in the past six years. Typically, 450 to 480PJ of gas is consumed domestically in this market, however this year we are on track to consume nearly 10% below that range.
This year, Longford stepped up through peak winter, and flexibly and reliably supported the market as the swing supplier. The reduced production below facility capacity observed through winter this year was driven by commercial decisions, rather than supply constraints.
Moving forward, the facility will be increasingly less likely to provide as much capacity or flexibility to the market as it has over the last two years, with 68 wells and three gas plants reducing to 36 wells and 2 gas plants next winter, as reflected in Longford’s medium term capacity outlook through 2024.
Queensland supply flowed south consistently this winter, acting as firm supply into the market. This chart shows cumulative annual north to south pipeline flows for this year and last, compared to the trailing six-year range. This year over 40 PJ of gas, or over ten LNG cargoes, has flowed south from Queensland to supply the southern markets. This huge amount of additional supply to the market meant that Iona and Longford had to do a lot less heavy lifting this year when compared to last.
Last year, Iona entered winter with nearly 23PJ of gas stored, ending winter at the bottom of the trailing 6-year range, strong withdrawals supporting high gas generation. This year, participants entered the peak demand season with even more gas in storage, however only about 5PJ net has been withdrawn this year, ending the season well above the last six-year inventory range. Iona inventory is a good litmus test of the severity of the winter demand season, and how well-prepared participants were, 2022 and 2023 representing starkly different outcomes.
We’ll now take a look at Victorian domestic market spot price outcomes, shown in blue, compared with forward market monthly contract prices in yellow, with flat calendar averages in red. These forward prices are independently published, representing estimated wholesale gas commodity prices. It’s important to understand that wholesale gas commodity prices don’t include other elements of retail gas prices, such as transportation, storage, and shaping costs.
Despite the bearish events of the recent spot market, and now a seemingly well supplied storage inventory and market, it’s important to take a longer-term view of market fundamentals and remind ourselves of just how finely balanced the market is, with many occasions of spot price volatility and sustained high prices over the last two and a half years. These periods have been caused by all manner of domestic market fundamentals, including unreliable coal generation, low renewable generation, gas market physical constraints, unreliability of Longford, weather events, and high international commodity prices.
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28 June 2023
In the June 2023 Wholesale Energy Market Update, our Trading team discuss electricity futures contract prices, supply and demand of LGCS and the storage levels of the Iona Gas Storage Facility, amongst other market news.
13 October 2023
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10 September 2023
