3 Impacts to Energy Contracts

01 Apr 2008Archived News Climate Change Matters

Energetics has more than 20 years experience in energy procurement and we have expert knowledge in the range of factors that influence energy pricing and supply availability within NSW electricity and gas markets. This newsletter is intended to provide insights into three dominant energy market issues impacting energy contracts in the short to medium term.



National Electricity Market Update

Since the extreme prices seen in the National Electricity Market in 2007, the market has fallen significantly over summer in NSW, Qld and Vic. The mild summer is largely to thank for this, with the lack of extreme temperatures giving little justification for any spot price spikes. At the same time rainfall in NSW and Qld has brought much needed water to black coal power stations.

The exception is SA where the summer has been hot and prices have risen significantly with long periods of VoLL (Value of Lost Load) pricing.

Over recent weeks prices begun to rise again as trading activity increased and we entered the period during which customers traditionally renegotiate their electricity contracts (March to June).
The price volatility of 2007 demonstrates the need for forward assessment and planning to minimise the effects of price fluctuations in electricity supply contracts. This volatility is clear in the graph below (Figure 1) showing wholesale electricity prices for FY08/09.

Wholesale electricity prices for NSW, Vic and Qld are now in the $45-50/MWh range, which is lower than many market commentators expected following the volatility in 2007.
The table below compares current market prices to the highest and lowest market prices recorded over the last 12 months for electricity contracts commencing 01/07/08. This shows that, with the exception of SA, pricing is currently at very good levels compared to what has been seen since March 2007.

NSW Electricity Privatisation

The Iemma Government continues to push ahead with plans to sell the state owned electricity retailers and lease the generators for the rest of their productive life. The current plan is to have the process complete within 18 months. NSW is the last of the mainland NEM states to go down the privatisation path, making the current public ownership of these assets something of an anachronism. There are a range of implications for NSW energy users.

There are twenty three licensed electricity retailers in NSW and only seven of those retailers service large energy users. The sale of Energy Australia, Integral Energy and Country Energy will leave only four major retailers in NSW if new entrants are not able to compete with current retailers during the sale process. Currently, electricity tenders attract five to six offers. If this is reduced to two or three responses per tender, the ability of end users to negotiate a satisfactory contract, especially around service levels or contract changes, will be severely reduced.

On the generation side, the finalisation of emission targets may see the private sector invest in significant baseload power. With the NSW Government planning long leases for generation assets – for twenty years, or through to the end of their productive life as generators - some vertical integration in the market can be anticipated. Macquarie Generation currently controls around 40% of baseload power in NSW, and their decision to increase or decrease production can have a major impact on spot market prices. Unless Macquarie’s assets, Bayswater and Liddell Power Stations, are sold separately this situation is set to continue. The situation is similar with Delta Electricity, which owns the Mount Piper, Wallerawang, Vales Point and Munmorah power stations and controls around 30% of the state’s electricity. Obviously the split of generators to various leaseholders may alter this mix – for better or worse.

It is this market power, not public ownership, which has deterred investors from developing new baseload power. In the Queensland market many of the older generators are owned by state corporations. The good news is that new baseload is being constructed by the private sector or in public/private sector partnerships. In NSW we may also see the development of similar public/ private projects which will ease current supply constraints.

Projected shortfalls in NSW natural gas supply over winter

Severe constraints in the NSW gas market mean that customers seeking offers for the supply of gas may not find a retailer willing to supply them over the coming winter. Where prices are being offered, they have been as high as $200/GJ.

There are a number of issues contributing to the gas shortage, but the main problem is the limited capacity in the transmission pipelines. The Eastern Gas Pipeline (EGP) is reportedly full until an upgrade is completed in October 2008, and the Moomba-Sydney Pipeline has been downgraded which means that less gas can be transported through the line.

Other factors influencing the high prices (or lack of capacity) of natural gas include:

  • Gas peaking plants provide an additional source of power at times when electricity prices are high, when it is more cost-effective to generate power from gas. The recent electricity market volatility kept the price of electricity up, and gas peaking plants were therefore operating for longer. Sustained price increases and volatility in electricity market will continue to create demand for gas-fired electricity, driving up prices for natural gas.
  • The supply constraints that came into effect in winter 2007 have raised concerns among retailers about the potential cost impact of similar restraints this winter.
  • The gas retailing businesses of NSW government owned suppliers EnergyAustralia and Country Energy are expected to be sold, with announcements as to the process and timing expected from the government later this year. As these suppliers prepare for sale, they will be highly risk adverse.
  • The international price for Liquefied Natural Gas (LNG) is considerably higher than Australian natural gas pricing. As the international demand for gas increases, there will be development of further LNG terminals such as the terminal in WA and the proposed terminal at Gladstone in QLD. If gas were to be diverted for sale into the international LNG market, the reduced availability of gas locally will increase pressure on domestic natural gas pricing. In the absence of government intervention or new gas supplies coming on line, this issue of supply for export vs. domestic markets is set to continue into the longer term.

In the medium term (i.e. after winter) it is hoped that the situation will ease. The factors reducing the pressure on gas prices and capacity constraints will be the upgrade of the Eastern Gas Pipeline, and an expected reduction in natural gas usage in electricity generation as electricity prices fall. In the longer term, the proposed Hunter Gas pipeline will bring a new supply of gas into Newcastle and the Hunter Valley from Queensland. If the pipeline proceeds, it will reduce the demand for natural gas that is currently being routed to Newcastle via Sydney. The earliest possible completion date for this pipeline would be late 2011.

Factoring this market information into your contract negotiations requires prior assessment and analysis of your organisation’s needs over the short, medium and long term.

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