Energy spot prices plummet, but offer little relief

Spot gas and electricity prices eased in January. But management and boards will need to actively manage this critical input over the next decade as the global energy transition plays out. Here’s some tips for wrangling the best deals.

Just before Christmas energy advisory firm Energetics secured a fixed price gas contract below $20 per gigajoule for a client in the medical sector. 

It was a rare exception, says Energetics general manager of energy and carbon markets, Gilles Walgenwitz. 

So, what’s the secret to landing such neat terms when most customers signing 2023 gas contracts faced prices of $38-39 per gigajoule? 

“It was a hospital, so the retailer wanted to do the right thing,” Walgenwitz says. 

Very few customers can play the reputational risk card to knock down their energy bill. And while public debate revolves around the very largest energy users, there are thousands of medium-sized energy users - some of them quite large businesses but not consuming petajoules of gas or terawatt hours of electricity each year - who will never be able to strike a long-term arrangement with a wholesale supplier at acceptable rates to maintain profit margins like Brickworks has with Santos, or Qenos with Woodside.

Nevertheless, businesses are utilising a range of techniques to manage energy risk and exposure to the volatility of the market.

Many delayed signing 2023 gas contracts, hoping to gain a benefit from the Albanese government’s shock gas market intervention just days before Christmas which placed a $12 per gigajoule cap on wholesale prices.

The impact of the cap has not flowed through to retail gas prices yet. But their gamble paid off – sort of. 

A milder than expected European winter, a gas glut, and coal fleet assets coming back online removed a lot of pressure on the market, halving the spot price for gas.

Supplier strike

They are not out of the woods yet. Walgenwitz says retailers are refusing to offer fixed price contracts until they have greater clarity around the implication of the new legislation, including the penalty regime.

This leaves energy users with two options: take the spot price which has normalised at $11-$12 per gigajoule but could shoot up again in winter or take the default rate of around $39 per gigajoule.

Walgenwitz says many customers are striking short term contracts, locking in first and second quarter supply, or even the full 2023 calendar year, while leaving 2024 on the table to return to market once the full effect of the $12/GJ cap on wholesale prices flows through the system.

On the electricity front, businesses with a large portfolio are staggering contracts to avoid having their entire portfolio exposed to the market at the same time. They are recontracting NSW operations in 2023, followed by Queensland in 2024 and Victoria in 2025.

The alternative is to go long. A growing number of businesses are curating long-term hedging structures to reduce their exposure to market volatility and manage scope 2 carbon emissions at the same time.

Others, such as the local councils with different types of portfolios, are banding together to flatten their load, thus making them more attractive to retailers.

This type of syndicated buying group is complex, cautions Walgenwitz. It can be tricky to manage the trade-offs between the different aspirations of end users and designing a contract that is not too cumbersome for the retailer.

Despite having no immediate impact on gas prices, Walgenwitz says the government’s intervention has drastically reduced the price for future delivery of electricity over the last month as the market factors in the expected lowering of the wholesale price for gas power generators.

A forward contract for 2024 electricity supply in NSW has dropped from around $160 per megawatt hour, to roughly $124 since early December.

“The price for future delivery of electricity will benefit from the expected lowering of the wholesale price for gas power generators,” Walgenwitz says.

Still, the whole industry remains acutely concerned about the situation in 2025-26, with Eraring, the biggest power station in NSW, scheduled to close and Snowy 2.0 very clearly delayed.

This angst is reflected in the futures market. 

“In NSW especially, we are expensive – up around $125-$126 per megawatt hour for CY2025 delivery compared to $75-$77 in Victoria,” Walgenwitz says.

“We’ll lose some businesses”

Energy Users Association of Australia chief executive, Andrew Richards says there is no denying that high energy prices, like those experienced prior to Christmas, drove several businesses to the wall. Others will follow if gas and electricity prices aren’t controlled.

“To the extent that they are exporting into jurisdictions also facing these price shocks there is a level of competitive neutrality there,” Richards says. These businesses can pass on price hikes to consumers. 

But he says those making products for domestic consumption are competing with lower cost imports from countries better able to absorb energy increases, such as China. 

“It’s not that China isn’t experiencing the same pressures around global energy prices, they just have a government that says, ‘We want to compete’,” Richards says.

“We certainly will lose some businesses.” Australian Industry Group, head of climate, energy and environment Policy, Tennant Reed, says.

“Medium-sized businesses with less negotiating power and less resource for offshoring or making investments to reduce their own exposure, are more likely to close or scale back production, with slack in the markets they participate in being taken up by others,” he says.

“Creative destruction is part of a market economy, that always involves some pain, but there are plenty of businesses that have a perfectly viable future if they can get through the next two to three years.”

Return to low-cost energy

Richards points out that it’s not just about which businesses survive. Energy inputs also drive where multinationals make future investments based on cost, stability, and incentives.

He says governments, both state and federal, must do everything in their power to restore Australia’s traditional advantages of access to reliable, affordable energy. 

“At the moment we’ve clearly lost that key competitive advantage. We can’t compete on labour costs, but we could compete on lower cost inputs. We’ve lost that and we need to recover it, otherwise the manufacturing renaissance which the federal government was elected on, and which state governments talk about, won’t happen,” Richards says.

Reed agrees, stating there are often headwinds to reinvestment in production in Australia. 
“We’ve heard from plenty of businesses who are worried about what their investors will think about the energy cost increases, or what head office will think,” Reed says.

“It is a constant tug-of-war, particularly in processing industries outside of food, as to whether companies sustain operations and invest here or ramp up production in Vietnam, Thailand or other places,” he says.

Root causes

Breaking the market power of the three big LNG exporters is key to restoring Australians access to reliable, affordable energy, according to Richards.

“They control 90 per cent of [gas] supply on the east coast and they exercise market power on a regular basis,” he says.

“No one that I’m aware of has even given up market power. But if you’re not sensible in how you use power, you should expect governments to regulate. If the gas industry is looking for someone to blame [for market intervention], I’d suggest they buy a mirror because their behaviour has been nothing short of appalling over the last six years.”

Richards is confident that in the long-term Australia will once again enjoy affordable, cleaner energy. But throughout this chunky transition we’re stuck with higher prices.

“The destination of net zero is the right one, we just have to survive the journey,” he says.