Electricity Futures Jump 25%

01 Apr 2007Archived News Climate Change Matters

Electricity prices in the National Electricity Market (NEM) have risen steeply since the beginning of the year. Many companies caught up in negotiations for July contract starts will be badly impacted, especially following the 25% jump in prices which has occurred in the last week. The following provides an overview of the current market situation and the underlying causes of the extreme price conditions.

 

Energetics is watching this situation daily and developing strategies to help energy users manage increasing energy costs from both contracting and demand management perspectives. More information will be provided in the near future about these developments, however if you require urgent assistance please contact your Energetics account manager.

1. Wholesale Contract Prices

Implied future base prices for FY 07/08 from February 2006 to mid-April 2007 are shown in Figure 1. The trend for increasing future contract prices has continued from the start of this year. March saw a sharp escalation in contract prices in all states, and a further jump of $18/MWh (25%) in NSW and Victoria and smaller increases in Qld (6%) and SA (21%) this week has taken electricity futures contracts to almost $80/MWh in all states except SA which is in the low $70’s.

Figure 1: Implied settlement base price for FY 2007/08. (Source: d-Cypha Trade)]]

2. Spot Prices

Spot prices in the NEM have continued to be high throughout autumn. Continued hot weather and high demands have caused price spikes and kept monthly average prices around $55 to $75/MWh across the NEM.

Figure 2 shows the average monthly spot price since July 2004 (Tasmanian prices are from March 2006, when Basslink became operational). Typically prices in the NEM follow a cyclical trend where there are high prices during the summer and winter months and lower prices during the spring and autumn months. So far in 2006/07, prices have not settled in the autumn months.

Figure 2: NEM average monthly spot price from July 2006. (Source: NEMMCO)

The price duration curves in Figure 3 show the proportion of time of each year from July to March (as these are the available months of data for 2006/07) that spot prices exceed a certain level. It can generally be observed in the NEM that spot prices are above $1,000/MWh for very short periods of time and for the majority of the time are below $35/MWh. However, in 2006/07 prices have been high during more time periods than in previous years. This has been most apparent in Victoria and NSW. This suggests that the higher prices observed so far in 2006/07 are not only due to increased price spike events but also due to a change in the underlying supply conditions in the NEM, which have been significantly affected by the drought.

Figure 3: Price Duration Curves of NEM Spot Prices. (Source: NEMMCO)

3. Current Market Conditions and Influences

The continued high spot and contract prices are largely being driven by concerns over current and future capacity shortages. The main issues are identified as follows:

Water Shortages

The current water shortages are impacting on the generation capacity available across the NEM. The drought impacts the availability of not only hydro-generated power, but also coal fired generation which is water dependent.

In Qld, the worst affected state, there are now compulsory restrictions on water consumption at Tarong and Swanbank power stations, which has necessitated a reduction in generation output. Tarong power station announced that from March 30 electricity output has been reduced to 30% of capacity. Current expectations are that Swanbank and Tarong North will reduce generation capacity until September 2007 with Tarong reducing capacity until around June 2008. However, the lifting of restrictions is dependent on sufficient water being available to recommence full output. The proposed recycled water corridor project, due to be fully completed in 2009, is scheduled to deliver water directly to several power stations in South Queensland to ease the effect of the drought on generation.

However, water shortages are now impacting on generation across much of the NEM (with generators in Victoria now beginning to cut output) so this will not be a national power generation solution for a lack of rain.

Water storage levels at Snowy and Tasmania hydro systems are still low and generation has been reduced as a result. This has increased the need for imported electricity through the state interconnectors, placing an extra burden on supply. Over the weekend speculation that Snowy Hydro would cease production in 18 months if significant rain is not received fuelled the most recent price spikes in NSW and Victoria.

This reduction in generation capacity coupled with high risks that the drought will continue are major contributing factors behind the continued increase in wholesale contract prices for FY 2007/08 and beyond.

New Generation and Future Carbon Trading Schemes

Rising demand for electricity means that by 2011 there is predicted to be insufficient generation capacity to meet forecast peak demand (under extreme weather conditions) for electricity in all areas of the NEM other than Tasmania and Snowy. To ensure that there is sufficient future generation capacity to meet demand there needs to be significant investment in additional capacity across the NEM.

However, it can be expected that there will be limited additional private investment in new base load generation capacity in the NEM until the uncertainty over future carbon trading mechanisms has been dealt with. The Federal Government, under pressure from environmental groups and many energy companies, has commissioned a taskforce to look at the feasibility of implementing an emissions trading scheme. This would significantly affect the costs and competitiveness of coal-fired generation leading to a lack of private investment in new coal baseload facilities until the issue of a carbon trading mechanism has been decided.

Retail Competition

The trend of mergers and acquisitions by existing retailers (most recently the Queensland Government’s sale of Sun Retail and Powerdirect to Origin Energy and AGL respectively) has led to an overall decline in the number of retailers operating in the market. This softening of competition places less downward pressure on market prices and restricts the number of offers received when going to market.

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