Australian energy - no longer a bargain

06 Sep 2011Archived News Climate Change Matters

In this article we provide some forecasts of likely future energy prices, the impacts on business and look into some of the underlying influences that will impact delivered energy costs over the next 10 years.

What are the main energy risks?

The key energy risks that we see in the outlook period are:

  • Energy prices are likely to rise, possibly substantially
  • Australian companies can no longer bank on cheap energy as a source of advantage
  • Increases in delivery and network costs will exacerbate wholesale price rises
  • Carbon is a step increase in your energy costs
  • Security of supply for gas and electricity on peak days may become a concern
  • Expect to see increased volatility (higher highs and lower lows)

What are the main energy opportunities?

There are also opportunities at a time of major change for well- informed and well-prepared companies.

  • Electricity market prices in NSW, Queensland and Victoria are at four year market lows
  • There are still opportunities to engineer long-term low cost gas agreements
  • Forward market contracting may be an option to extend your current agreements and provide price certainty
  • Understanding your carbon mitigation opportunities can reduce the cost increases
  • Onsite co-generation and renewable energy may become more viable at the new price levels.

Electricity ‘golden years’ are over

The past decade were ‘golden years’ for low electricity costs:

  • Privatised energy assets were run harder, faster and with higher output
  • Supply was plentiful. Demand was subdued by the Global Financial Crisis.
  • High debt levels created a ‘run for cash’ environment for some generators
  • Energy users enjoyed very low electricity prices for most of the decade

Most of these drivers have now gone. We don’t expect this behaviour, or the resultant low prices, to be seen again. 1

 

Permanent increases, not temporary changes

Most of the price drivers are structural changes that are therefore expected to continue into the future and result in long term higher energy prices. Over the coming years we will see additional fundamental influences that will increase energy prices further:

  • A carbon cost becomes part of our energy landscape, raising electricity, gas and liquid fuel costs
  • Gas and electricity costs will rise substantially due to fuel input cost changes
  • Global LNG prices, already an influence on the Australian west coast, become a major factor in east coast local gas and electricity prices
  • Network charges for gas and electricity will continue to increase as networks become more constrained
  • Price volatility (and risk) are likely to increase in the future.

Future electricity prices

Going forward we see a number of influences that are likely to lead to higher electricity prices.

  • Fuel costs for all generators are increasing.
  • Surplus generation capacity has been soaked up. We will need new generation in the future.
  • The generation mix is changing away from coal towards higher cost generation sources.
  • We expect step changes in fuel costs (gas and coal) in the coming years.
  • Carbon cost creates a step increase in 2012/13.
  • Expect higher prices: possibly much higher prices for electricity.

Energetics' expert forecasters foresee a range of future scenarios but all resulting in higher electricity prices. 2

Electricity commodity prices are set to increase

 

Interesting influences, often misunderstood

There are two interesting influences in our future price forecasts that are counter-intuitive.

Electricity demand has actually declined in the past two years. This has kept prices subdued in recent times, despite the fact that we have seen very little construction of new base load generation. The key question is whether this is an aberration due to the global financial crisis or a long term trend due to the decline of manufacturing in Australia.

Power demand has declined in the past two years

A $23 carbon price doesn't create major generation shift. A carbon price impacts the cost of electricity generation. However a $23 carbon price does not of itself create major shifts between power sources. There may be some changes in the way plants operate, however a $23 carbon price doesn’t alter the relative position of the various generation types. Changes to Australia's energy mix will be driven by other mechanisms such as the Renewable Energy Target, and measures outlined in the Securing a Clean Energy Future policy package.

Future gas prices (Australian East Coast)

We expect gas supply to increase significantly, but counter- intuitively, prices to also increase.

Supply will be boosted enormously by the new Coal Seam Methane projects coming on stream, however LNG globalises Australian gas and exposes us to international pricing. World gas prices are much higher than historic East Coast prices

The WA gas markets are a good proxy for what will happen in Queensland, NSW and Victoria. History tells us that the impact of export linkages will increase local gas prices. We expect much higher prices in the near future.

Gas pipeline capacity at peak times also becomes an increasing challenge for large customers. Our current gas pipelines are relatively full and there is little in the way of new pipelines under construction.

Gas prices are likely to rise substantially.

 

Underlying factors in energy price increases

  • Electricity prices have increased primarily due to additional investment to replace network infrastructure.
  • To recover costs associated with government environmental schemes, charges have been increasingly passed through to electricity bills.
  • Gas prices have increased as wholesale prices have risen.
  • Diesel prices have increased as world oil prices have risen.

Energetics experts can help

Energetics is Australia's leading energy and carbon consultancy. Our experts can help your team navigate through this new and challenging energy and carbon world.

If you would like to talk about any of the issues raised in this report, or discuss how Energetics experts can help your team, please contact your Energetics' account manager or one of the contacts listed below.

1 'Calculated average of base load power prices'. Source: d-Cypha web site.
2 Carbon price impact on energy prices (07/11)

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