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Summer is coming: 5 factors that could drive short-term electricity prices higher

While electricity prices have declined since their peak in late 2017, over the last month they have started to drift back up. The Energy Action Pricing Index (EAPI) which monitors wholesale energy prices, has tracked increases across all states but in NSW in particular, a 10% increase has been seen since the beginning of Sept 2018. While there is potential for prices to gradually decline over the longer term, in the short term, the fundamentals of the electricity market and a range of external factors are placing upward pressure on prices, and this is likely to continue through the summer months.

As a result, Energy Action are advising clients with a requirement to renew energy contracts between now and the end of March 2019 to do so now to reduce exposure to potentially higher prices.

While the energy market is often influenced by multiple factors, here are five factors that may support an uplift in short term electricity prices:

  1. Rising cost of commodity electricity

    In addition to AEMO outlining concerns that that demand may outstrip supply this summer, prices for Q1 2019 and calendar year 2019 futures contracts have recently increased in New South Wales or and remained at elevated levels in other states. Energy Action believes this further reflects the concerns around generator availability over the coming summer.

    Current concerns relating to higher gas prices and the possibility of load shedding over the summer months can also support higher prices.

  2. The impact of weather conditions

    According to the World Meteorological Organisation, there is a 70% chance of a strong El Niño weather system developing during the remainder of 2018. These events are typically characterised by hotter, dryer conditions.

    In addition, despite recent rainfall, Snowy Hydro storage levels are far below seasonal norms at levels not seen since drought conditions experienced in the 2000s. This has the potential to limit available generation during peak demand periods over the summer.

  3. Renewables and spot price volatility

    Electricity spot prices continue to show a ‘duck curve’ pattern often speculated as the result of increasing renewable generation. As a result, spot prices can be as low as $20/MWh during the day and increase to $200/MWh in the early evening.

  4. Lack of competition in the gas market

    Despite an increased reliance on gas for electricity generation, currently there are retail gas offers from only four retailers. Should available gas volumes decrease over the current quarter, this may lead to retail competition falling even further and remove the competitive tension that could help keep prices lower.

  5. The contract ‘renewals cliff’
    Typically, thousands of Australian businesses seek to renew electricity contracts in the period leading up to December each year. This high concentration of renewals can place upward pressure on prices due to reduced competitive tension, particularly for those that leave contract renewal too close to the holiday period. To ensure you’re securing the best deals for expiring contracts, the most effective and simplest thing to do is to seek new electricity contracts before this period.