January 2017
January 2017

On Tuesday 10 January, 2017 the Australian Financial Review published a story titled “Gas supply terms force buyers to go DIY on energy”.  Energetics’ John Bartlett was interviewed for the story, raising the issues that we’ve seen working with large industrial and commercial gas users who are struggling to secure 12 month supply contracts.

The opening paragraphs of the story are: “Onerous terms in increasingly hard-to-come-by offers of gas supply are forcing industrial east coast gas buyers to investigate setting up their own energy generation as they struggle to minimise risks around costs.

Sharp price rises for gas, combined with demanding take-or-pay provisions, are putting huge pressure on some manufacturers, while forward prices for electricity have also risen as plants have closed and as more LNG is shipped from Queensland, said John Bartlett, senior manager at Energetics, which sources more than $250 million in gas and $2 billion in electricity each year for large energy users.”  If you have a subscription to the AFR you can view the story via their website. 

The challenges facing large gas and electricity users

This is a summary of the issues we’re seeing in our daily interactions with our clients and with energy markets. 

  • Manufacturers are struggling to secure supply contracts for the next twelve months. Businesses are seeking 12 month contracts so that they can re-evaluate their options at the end of those contracts in the hope that competition will return to the market. 
  • What we are seeing from the retailers are minimum contract terms of 24 months, and in some cases a push for 36 months, which under current market conditions industrial customers have little choice but to accept. Add to this the ‘take or pay’ conditions which require them to pay for a minimum amount whether gas is consumed or not, and a consumer has their hands tied for two years with high gas bills.   So while there is no guarantee that gas prices will reduce in twelve months’ time, it is the lack of options for large industrial consumers in the current environment which is of concern.  
  • The gas supply problem is also increasingly affecting electricity markets in Australia, as the future price of electricity is more and more influenced by the future price and supply of gas.  The timing of the closure of coal fired power stations following the commencement of LNG exports has left a void in generation for gas fired generation to fill.
  • As electricity markets become more volatile, as seen in 2016, energy companies may well achieve a better financial return per gigajoule of gas in the volatile electricity market by dispatching gas fired generation into high electricity prices, than by competitively offering the lowest possible prices to what were once desirable, large industrial customers.
  • Across our business, more than a third of our client base is expressing interest in investigating on-site generation project options in order to minimise their exposure to the energy markets – both electricity and gas.

Options being explored by business

Direct alternatives to gas

Unlike electricity, there are limited cost effective options to displace natural gas directly, other than the use of waste to generate energy - biogas and biomass.  This is being evaluated by businesses with appropriate and reliable fuel sources, particularly in the agricultural and food manufacturing sector. Bioenergy can have the advantage of generating combinations of heat and power and provides an opportunity to reduce waste charges. Recent outcomes from the biomass workshops for the Department of Industry in NSW indicate high levels of interest but a very immature industry which will requires significant support to get started. 

Solar thermal is another alternative to displace natural gas and is typically focused on producing hot water. Technologies range from upsized household solar hot water systems through to concentrating parabola technologies.

It is worth noting however, that the uptake of bioenergy and solar thermal technologies across the renewable energy market is dwarfed by the relative popularity and scale of the solar PV market. 

Sourcing electricity from renewable energy

Energetics sees six main reasons businesses are investigating electricity sourced from renewable energy:

  1. Increased volatility in the wholesale electricity and gas markets
  2. High price of large-scale renewable energy certificates (LGCs). Businesses are typically purchasing as a pass through cost as part of their retail electricity services agreements. With Calendar Year 2019 LGCs trading at $88 per certificate currently, and high prices likely to be sustained with the shortfall in certificate generation expected to last several years, more C&I customers are contemplating different options for managing this liability, including self-sourcing and self-generation of renewable energy certificates.
  3. Drop in the cost of finance
  4. Technology costs are falling and the conversion efficiency is improving
  5. Increased pressure from investors seeking responsible management of carbon liabilities and reductions in emissions being pursued. 
  6. Strong marketing activity from solar manufacturers and solar installers.

For business there are two forms that renewable energy supply can take:

On-site/ behind-the-meter power generation

The interest is predominantly in solar PV systems without battery storage although we are seeing an increasing number of enquiries that include assessments of energy storage options.
Financing options, specifically PPAs (Power Purchase Agreements), are increasing the implementation of these technologies amongst our client base where capex budget may not be available for non-core investments such as renewable energy projects.

We have also seen a number of our clients in the mining and resource sector reviewing the contractual terms of their on-site energy supply agreements aiming to transfer more risks and efficiency guarantees to their suppliers.

Long term renewable energy supply contracts

Contracting for supply from an electricity retailer or a renewable energy project, these contracts (known as ‘synthetic’ Power Purchase Agreements) can provide a partial hedge against future electricity price escalations.  This is the type of deal Energetics has been facilitating for a number of clients including City of Melbourne.  Synthetic PPAs are becoming increasingly popular overseas - particularly in the United States.

We are also seeing strong interest in renewable energy buying groups because:

  • Individual organisations do not have a large enough electricity demand to commission an off-site renewable energy project
  • Collective purchasing power of groups can provide members with price benefits
  • Members share the procurement costs and also benefits such as time savings
  • Sharing the strategic value of access to specialist resources (especially as renewables buying groups are a new concept in the Australian market) which reduces the risk of the renewable energy solution / enhances value for money.

Typically these Synthetic PPAs see the purchase of either only LGCs (Large Scale Generation Certificates) or a bundled arrangement including the supply of electricity and green certificates. Under a bundled arrangement, the contracting party manages the mismatch between the renewable energy generation project(s)' generation profile and the customer's load requirements.

Over 2017 energy market volatility is expected to persist.  Whether contracting advice or assessing the potential of on site generation projects, Energetics can assess the risks and opportunities for your business.

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