Electricity Market Update (QLD)

There has been a lot of talk in the media recently about electricity prices and this will continue throughout 2017 and beyond. This electricity market update aims to provide you with information on the factors that influence electricity prices so you are more aware of the potential impacts on your future electricity costs.

Over the past few months the majority of customers have experienced annual electricity cost increases of between 10% and 40%.  The higher increases apply to customers who are coming off longer term (two or three year) contracts.

This has been driven by steep increases in the wholesale electricity market price, particularly from late October 2016.

The ASX Energy graph below shows the cost of a 1 MWh Base load contract for Calendar Year 2017, from Christmas 2015 for 12 months. Since Christmas 2016, the cost of the Calendar Year 2017 Base contract has risen even more rapidly. As of 29^th March 2017, the 1 MWh contract price was $128.66.

This equates to an increase over the past fifteen months of approximately 130%.

The graph below tracks the wholesale market cost of a 1 MWh 2018 Base load contract, increasing by 65% over the past twelve months.

Our two State Government owned generation companies, (Stanwell and CS Energy) control the majority of generating capacity in Queensland. They therefore have significant influence over both the half-hourly Pool Price as well as the forward contract market.

For the past 18 months there has been a steady increase in the forward market rates, accelerating rapidly in the last four months. This has been justified in several ways. Reasons include:

• Expected future export of electricity from QLD to NSW resulting from the increase in exports of electricity from NSW to both VIC and SA during periods of high demand, following coal-fired plant closures in those two states
• Increased cost of gas for generation in QLD given the flow of gas to the LNG export market
• Discussion surrounding the target of 50% generation from renewables in QLD by 2030 influences price levels in this forward contract market, even though the majority of existing generation in QLD is coal-fired
• The existing level of hedging by generators and energy retailers affects the demand and supply of hedge contracts in the forward market

At the end of the day, Queensland Treasury is the beneficiary of the greater profitability of the state-government owned generators as they receive higher dividend payments. Also, the Queensland Government transferred over $4,000,000,000 of State debt onto the Government Owned Corporations which requires servicing by these corporations, including the two generating corporations.

The high futures market prices is not the same issue as high prices in the electricity Pool connected to increased demand with the hot weather.  While the Pool Price influences the electricity futures market, there are other factors involved, but there seems to be confusion between the two reflected in comments by politicians and the media.

So what does this mean?

For customers with a contract expiring in 2017, and coming off a two or three year agreement (i.e. signed in 2014 or 2015), you could potentially see an increase of 25-40% in total annual electricity charges.

For customers with a contract expiring in 2017 coming off a one year agreement (i.e. signed in 2016), depending on when the contract was renegotiated, you could still see increases in the order of 10-15% or greater.

The actual increase is dependent on your consumption profile, the current contract rates in place and the rates at the time you choose to negotiate a new agreement.

For smaller customers on tariff arrangements, while it is unlikely to see any immediate impact, with the traditional tariff review that occurs at the end of June each year you could expect to see a 15-25% increase from July 2017.

When do you renegotiate?

We can’t give you a definitive answer to the best time to renegotiate as the market can change at any time.

What we do suggest is that you arrange the renegotiation of your agreement no later than 4-6 weeks before the expiry of the current agreement.

This article was contributed by Andrew McNair from Energy Options Australia.