Energy Market Update

01 Dec 2007Archived News Climate Change Matters

At Energetics we spend a large amount of time immersed in the detail of electricity markets, gas markets, and carbon markets. Because we assist some of Australia's largest companies with their energy procurement, we understand what significant changes in these markets can mean for your business. The aim of this newsletter is to highlight some of the key energy market events and challenges over the past few months and for the future in 2008.

 

 

The key energy market issues affecting business today include:

  • Electricity prices have increased significantly in the past 12 months;
  • Energy offer validity terms have reduced substantially, meaning your business may need a new and faster process for evaluating and accepting energy offers;
  • Gas plant maintenance at Moomba over Christmas may impact gas supply;
  • Proposals for new LNG and Gas to liquids plants are expected to affect Australian gas prices;
  • Energy usage data and information will become increasingly important for your organisation;
  • The transition from old low prices to new and much higher prices may be eased by using a stepped approach if this is appropriate for your organisation; and
  • The state government has removed the regulated business electricity tariffs in Victoria, removing that last ‘safety net’ for business prices.

Large Electricity Price Increases

2007 has seen very large increases in electricity prices for business customers. The graph below shows the price of a 1 year electricity contract (2008) on the Sydney Futures Exchange over the past 12 months.
It shows the significant variability and increase in the cost of electricity over this period. It also shows that the timing of the renewal of your energy contract can have a large impact on cost.

Figure 1: Electricity prices have increased significantly in the past 12 months

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The graph below translates these electricity market changes into the power cost for a 1 year electricity contract for a large user. A customer who purchased a 1 year contract (covering 2008) in early 2007 would have paid around $4m for the energy component. The same contract in late June 07 would have cost around $8m for the same electricity. In 1 week (2 July to 9 July) the energy cost would have varied by around $1m.

Figure 2: Annual power cost for a large user

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Large price swings and short offer validities

Procuring energy in this type of environment requires a different approach to the process used for other products. Where previously business customers could expect an energy supply offer to remain valid for 14 days, normal offer validity is now 1 or 2 days. This requires a different procurement approach, and will require your company to think and plan differently for your next energy procurement assignment.

Moomba Christmas shutdown

If your company is a large gas user in NSW or South Australia, you should be aware that there is a major shutdown and maintenance program planned at Moomba over Christmas. A number of industry participants are concerned that this may leave the gas supply system short and potentially impact on electricity supply over the hot summer period.

Plans for new LNG and Gas to liquids plants affecting Australian gas prices

Over the past 20 years, Australian industry has benefited from low cost gas supply. As Moomba gas continues to decline and new coal seam gas sources find alternative higher price markets, the impact on Australian business may be quite significant. Coal seam methane has stepped up over recent years to fill the gap left by declining gas supply at Moomba. Intense competition from a number of new producers has kept prices low and enabled Australian gas prices to continue to be some of the cheapest in the world.

Recent growth in LNG and a number of new proposals for LNG or ‘Gas to Liquids’ plants in Australia have the potential to significantly increase local gas prices over coming years. If your business relies heavily on competitively priced gas, now may be a good time to review your long term purchasing strategy and make sure your company is well positioned for these future industry changes.

Energy usage data

Access to detailed energy data, and useful energy reports is critical for business. Previously this information was a nice addition to the energy procurement wish list. From 2008 this information will be crucial for meeting a range of reporting requirements and will be very important in understanding your business greenhouse emissions.

This is an area where energy retailers can vary quite substantially. When you are next procuring energy for your business we suggest that this is one area that you pay particular attention to, as ready access to this information may save significant time in the long run.

Stepped approach can ease transition from old low prices to new higher prices

In a period of large price increases for electricity contract renewals, businesses are sometimes more comfortable with a number of smaller price steps over time rather than a single large increase. If you have contracts with 6 months or 12 months to run, you may like to consider the opportunity to trade the next few months of low price for a more orderly stepped increase over time. Your business division may be better able to pass through to clients a series of orderly energy price increases rather than one large jump. Some accounting teams and budgeting processes are also more comfortable with this type of change.

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