The World Health Organization announced that COVID-19 is a pandemic with far reaching impacts and implications across the Australian community and economy. Within the energy sector there are already several impacts and responses.
What are the key market impacts?
The impacts across the energy sector include changes in demand and wholesale prices as well as business and household energy affordability including the ability of many consumers to continue to pay their energy bills.
March 2020 exhibited historic lows and significant reductions in electricity demand, with some states recording between 6.3 and 11.1 per cent reductions in demand compared to March 2019. This is largely due to the reduced economic activity either through the closure of many businesses or others reducing their hours and / or production. The demand reduction is coupled with a change in consumption profile, with weekdays now exhibiting the profile of a typical weekend and weekends showing an unchanged profile just with reduced demand.
As a result of the reduced demand, there are some significant changes in wholesale market prices, with reductions in spot prices across all mainland states in the National Electricity Market (NEM). Wholesale contract prices also tend to be softening in particular in Victoria and South Australia. There are signs of lower demand for forward contracts but there are also some retailers providing discounts to wholesale contract prices for future years out to 2023. It is possible that contract prices may be approaching the bottom of the current price cycle as they are nearing the marginal cost of black coal fired generation. Although it remains uncertain whether the impact from Covid19 will extend the period of current price levels or result in further reductions.
What are the market and regulatory responses?
At an overarching level, The Council of Australian Governments Energy Council (COAG Energy Council) met in March 2020 and agreed that governments and industry will work together through the newly established Energy Coordination Mechanism. This mechanism will bring together senior executives from governments and industry to ensure the continued safe and reliable supply of energy to homes and businesses to best support the economy and community.
Also in March 2020, the Australian Energy Regulator (AER) released a Statement of Expectations of energy businesses, which sets out ten principles the AER expect businesses to adhere to the maximum extent possible. They are aimed to help people who are or will be affected by dramatic changes to their lives, businesses, income and working arrangements. Whilst the principles largely cover households and small business it is likely that many energy companies are considering or will be considering the impacts and responses for larger businesses.
Consistent with the AER’s expectations, in April 2020, energy networks across New South Wales, Victoria and South Australia announced a suite of measures to provide support to household and small business customers enduring hardship as a result of the COVID-19 pandemic. The key component of this is an electricity and gas network relief package which allows small business and household consumers who are experiencing hardship to defer the network component of their energy bill from 1 April 2020 to 30 June 2020.
We understand that some energy networks are considering the impact of COVID-19 on large business network charges in particular maximum demand related charges and are formulating a possible response to this over the coming weeks.
What does this mean for large businesses?
Energy represents a significant cost item for many large businesses. To manage the impact of COVID-19 on your energy bills and business we would recommend you consider the following actions:
- Review your most recent energy bill and the terms and conditions of your energy contract to ensure you understand the implications of key terms such as take or pay, minimum energy consumption thresholds, force majeure and network demand charges.
- Discuss any queries and concerns with us and your energy retailer including the ability to amend or waive take or pay and minimum energy consumption thresholds.
- Discuss with us and your energy retailer and in some cases your energy network the ability to amend or vary your maximum demand or network access charge to better reflect your maximum demand over the COVID-19 period and beyond.
- For those customers on progressive hedging or similar style contracts, now may be a good time to consider purchasing some additional volume given the reduction in forward contract prices.
- For those customers nearing the end of their contract term, it may be an opportunity to extend your contract (sometimes called ‘blend and extend’) and capture potential benefit of reduced forward and retail prices.
- Review your energy consumption to identify any opportunities for energy efficiency through for example switching off unnecessary appliances and machinery or amending shifts and work operations.
If you have any questions or need advice on other ways to better manage your energy costs and impacts due to COVID-19 please contact your Energy Action account manager.
Did you miss out on the our "Things to Consider About Your Energy Contract in Light of COVID-19" webinar with Andy Young? You can view the recording here.