Energy and Carbon Markets: what happened in 2010, what to expect in 2011

18 Dec 2010Archived News Climate Change Matters

This article looks back on what changed in Australian energy markets in 2010, considers the latest trends in energy prices and reviews what may be in store for 2011. Energetics would be happy to explain how these changes impact your business specifically.

A review of 2010

The start of the year was framed by what many deem the failure of climate change talks in Copenhagen and continued uncertainty regarding whether Australia would pass an emissions trading scheme. These had significant political ramifications as the year evolved: firstly triggering a change in Opposition leadership and then, following withdrawal of the Carbon Pollution Reduction Scheme (CPRS) legislation, also contributing to a change in the Labor Party leadership.

The election in August saw (eventually) a return of the Labor Party to power, but still no firm commitment to a carbon price, with a variety of committees tasked with establishing the optimal approach. Despite the Greens holding greater sway than previously, there is unlikely to be a reintroduction of the CPRS legislation until late 2011, and Energetics' view is that a carbon price (whether a trading scheme or tax) is unlikely to feature before 2013.

Across the Tasman, New Zealand has at least commenced a trading scheme, although with an initial fixed price and limited coverage.

The sale by the NSW government of the State-owned retailers and gentraders has dragged on for most of the year and is yet to reach a conclusion. It appears unlikely that all assets will be sold, and equally unlikely that it will attract new players to the Australian energy market. There are real concerns that further consolidation will reduce competition, and hence drive prices upwards.

In the meantime, network costs (which make up roughly half of delivered electricity costs) have continued to rise unabated. This year the increases in NSW, Tasmania, SA and Queensland were between 13 and 30% depending on the location and tariff. Network costs are regulated by the Australian Energy Regulator (having previously been managed by state-based regulators) and tariffs are revised on 1 July in all states except Victoria, where revisions occur on 1 January. Although network prices are regulated, in many areas there is a choice of tariffs that can be applied. Energetics can advise the optimal tariff arrangement for your business – opportunities exist particularly where there has been a change in usage or demand profile.

Late in the year, there were more political adjustments to the Renewable Energy Target, with a split into a Large-scale Renewable Energy Target (LRET) and a Small-scale Renewable Energy Scheme (SRES).

At one level this appeared harmless, until it became apparent that the small-scale scheme allowed creation of 15 years of certificates up front, with a multiplier of up to 5 allowed for early years of each installation. The effect is to multiply the nominal certificates by a factor of over 30, creating an initial glut of certificates which must now be paid for by energy consumers. The impact in 2011 will be very significant, adding between 3% and 5% to the cost of electricity for every user. Slight changes were made to the scheme in late November to adjust the multiplier, but this will have little effect.

But there is some good news in that the negotiable energy component of electricity bills is still drifting downwards in price. This is despite the fundamental long term trends indicating that prices will rise as demand picks up.

The graph below shows the recent price trends for NSW electricity for 2011/12, and other States are also showing similar falls.

One reason for the recent fall is a temporary drop in demand for electricity due to the broader economic issues. New generation capacity is still being added, but demand is not following suit, leading to a significant oversupply of generation and hence very low prices.

One of the outcomes of the low market prices is that sites in Queensland, which have historically enjoyed low prices on tariff arrangements, can now obtain even better prices by moving to a contract basis. Energetics would be happy to assist you to evaluate the options for your Queensland sites.

A look forward to 2011

With prices now at their lowest point since January 2007, businesses should consider re-contracting their electricity needs. Energetics is seeing many clients taking the opportunity to secure 3 or 4 year contracts at this time to provide forward budget certainty and to lock in the low contract rates that are available. Summer is expected to be warm in the Southern States but not in NSW or Queensland. This could cause some volatility in electricity markets, especially in South Australia.

Clients with the ability to manage their demand may be able to take advantage of this volatility and benefit from the high market prices. Energetics can assist businesses to realise this potential extra revenue.

Victorian network prices will change on 1 January 2011. Initially these were proposed to be minimal, but the Australian Energy Regulator relented and allowed some more significant increases. Even more alarming is that the network companies are challenging even these higher numbers with a view to securing further increases. Current expected increases are shown in the table below.

The increases shown are averages across a range of tariffs. In some cases specific sites could see a different increase. As mentioned above, Energetics can assist by reviewing your portfolio and indentifying the optimal network tariff arrangement for your business.

All States other than Victoria have network increases coming up on 1 July 2011 and some of these will again be as high as 20%, which equates to around a 10% impact on the delivered cost of electricity.
2011 should hopefully see some further clarity around an emissions trading scheme, which will be good news for consumers and generators alike, who can then begin planning for the future and make investments that are tailored to a carbon-constrained world.

How can Energetics help?

The energy market presents both opportunities and risks to your business. Energetics regularly provides market briefings for our clients and can identify opportunities for immediate cost savings. Energetics is available to deliver a short briefing for your business to help you develop a strategy to minimise your energy costs. 

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