While prices for commodity electricity have risen steadily since the 2014 long term lows, over the past two months the Energy Action Price Index – the only index of retail electricity prices for the National Electricity Market – has experienced its first meaningful decline in over three years, although we expect this to be a short term phenomenon.
The Energy Action Price Index represents the prices of actual retail contracts taken from the Australian Energy Exchange, and for all Eastern states, it tracks the price of a standard retail contract of 30 months starting from six months, and for South Australia, a standard 12 month contract starting from 2 months.
Long-term factors supporting steadily price increases
There has been a confluence of drivers placing upward pressure on energy prices. This has been led by the removal of almost 15% of coal fired generation from the NEM, and exacerbated by the slower than expected take-up of solar, the flow on of steep gas price rises, and demand levels plateauing despite and expected decrease.
Since May this year, we have seen a break in this continuous upward price trend for the first time since 2014, albeit modest in comparison to the extent of price increases over this period.
Despite a softening of around one to two cents per kWh, prices are still more than double those seen at the bottom of the market. As a result, we continue to see customers experiencing contract renewal shock sometimes at 60% premiums to when they last locked in their contract.
Potential factors impacting the price index
We consider that there may be a small number of factors accounting for the recent decline in prices, however we note that there has been no major changes in the marketplace over that time.
The current winter season has been relatively mild and this has produced healthy but not excessively high spot prices compared to those experienced earlier this year. This may be weighing on market expectations ahead of the summer months and associated outlook for market fundamentals.
Additionally, the Government’s announcement in late April to limit gas exports and introduction of the Australian Domestic Gas Security Mechanism on July 1, may be factoring into the pricing dynamic. This is generally positive from an ongoing supply certainty and pricing perspective in the future and may act to cut the fuel cost to gas fired generators.
We consider the small declines in the price index as a welcome event, and one that can provide moderate relief for those looking at contract renewal in the short term. However, the factors acting to buoy energy prices since 2014 remain firmly in place and while volatility remains and prices may vary, they will likely remain higher than in the past.