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Australian Energy & Environmental Market Update for August 2023

Australian Energy & Environmental Market Update for August 2023

The latest summary edition of our monthly Australian energy & environmental market update is now available. Keep reading for energy and carbon pricing movements, policy updates and other news.

Australian Energy & Environmental Market Update for August 2023

Australian Energy & Environmental Market Update August 2023 - summary edition

This month we cover energy and environmental market movements, AEMO’s release of its Electricity Statement of Opportunities, and the release of a discussion paper surrounding the previously submitted ACCU reform recommendations by the Department of Climate Change, Energy, Environment and Water.

Keep reading for an overview of key market developments and a discussion of the impact of these announcements. 

The full version of the update, with additional commentary from our industry analysts, is available to paid subscribers. Contact our team to find out more.

Highlights for August 2023

Australian electricity and gas pricing

  • Spot markets experienced higher prices and increased volatility in August compared to July for most NEM states except QLD. Across the month, Spot Prices and volatility were on average higher than in July, with prices softening in the last week of August.
  • Monthly average Spot prices were $93.31 in NSW, $64.66 in VIC, $37.65 in TAS, $67.63 in QLD and $160.63/MWh in SA.
  • Even though the Spot prices and volatility were higher in August than in July for most states, the Futures remained relatively unchanged from July in most states, except VIC (4% increase).
  • Gas prices across the Eastern half of Australia averaged $10.95/GJ in July, slightly declining from June.

Carbon and environmental markets

  • ACCU Spot prices remained relatively flat across August with ACCUs trading between $30 - $32. All vintages experienced strengthening in pricing, with method types with higher co-benefits continuing to demand premiums.
  • LGC prices weakened across the month of August, with Cal26 LGCs the only vintage to witness a price increase.
  • STC prices witnessed nil movement, maintaining its stance just below the $40 price cap.

In other news

  • AEMO published its Electricity Statement of Opportunities, highlighting urgent and sustained investment is necessary in new sources of electricity, and the transmission needed to connect it to consumers, there are significant risks to reliability.
  • Snowy Hydro continues to be plagued by unexpected escalating construction and drilling costs, with an additional $3 Billion required from the Federal Government.
  • The Department of Climate Change, Energy, Environment and Water has released the discussion paper surrounding the previously submitted ACCU reform recommendations, seeking consultation from the public.

Feature 1

Electricity Statement of Opportunities (ESOO) 2023

Without urgent and sustained investment in new sources of electricity, and the transmission needed to connect it to consumers, there are significant risks to reliability.

AEMO’s Electricity Statement of Opportunities (ESOO) provides technical and market data for the National Electricity Market (NEM) over a 10-year period to inform the planning and decision-making for market participants, new investors, and jurisdictional bodies.

62% of Australia’s coal fleet is set to close before 2033, presenting the largest transformations of the NEM since its inception. At present only ~20% of coal assets have been retired.

The forecasts made in the February 2023 update, have since been revised and suggest an increase in risk of reliable power supply. These risks are higher than the current standard.

Considering currently active and planned projects as outlined in the ESOO's central scenario, there are projections indicating that reliability concerns may surpass the relevant reliability benchmarks in the following regions:

  • Victoria starting this summer,
  • New South Wales by 2025-26,
  • South Australia this summer, and again from 2028-29,
  • Queensland beginning in 2029-30.

The forthcoming summer season carries a heightened risk compared to recent years, largely due to anticipated hotter and drier conditions, which are expected to result in increased electricity demand. While the industry is preparing to manage this heightened demand, there remains some residual elevated risk.

Improving energy reliability can be achieved through actionable transmission projects and coordinating residential rooftop solar, batteries and electric vehicles alongside government assisted energy programs. If they are delivered to schedule the NEM could meet the reliability standard for the 10-year forecast.

Feature 2

Snowy Hydro Expected $3 Billion Cost Blow Out

Snowy Hydro continues to be plagued by unexpected escalating construction and drilling costs, with an additional $3 Billion required from the Federal Government.

Snowy Hydro anticipates a requirement of an additional $3 billion in capital infusion from the federal government. This is deemed necessary to uphold its vital investment-grade credit rating, primarily due to the escalating construction costs and unexpected drilling problems associated with its Snowy 2.0 pumped hydro project, which have reached $12 billion.

The extra capital injection is expected to be a temporary measure but essential for the government-owned generator to maintain necessary creditworthiness required for active participation in the wholesale electricity market.

The project, considered pivotal by the energy market operator for supporting the east coast grid's shift towards low-carbon energy sources, is now expected to become operational by end of 2028. This represents a significant delay compared to the project’s initial startup date.

Standard & Poor's, the credit rating agency, issued a warning in December 2022, stating Snowy would require "extraordinary government support" to uphold its BBB+ rating during a period characterised by high inflation. The peak construction phase of Snowy 2.0 has been plagued by escalating costs during the pandemic and persistent construction challenges.

In response, Climate Change and Energy Minister Chris Bowen affirmed the federal government's commitment to the project and highlighted potential measures to assist Snowy, such as injecting equity or suspending dividends. Mr. Bowen emphasised the availability of various options that the government and Snowy can explore together to ensure the company's capitalisation and the preservation of its crucial credit rating.

FEATURE 3

ACCU Review Discussion Paper Released

The Department of Climate Change, Energy, Environment and Water has released the discussion paper surrounding the previously submitted ACCU reform recommendations, seeking consultation from the public.

On the 25th August 2023, the Federal Government unveiled the ACCU Review Discussion Paper for public consultation. The release of the discussion paper follows the release of the Independent Review of Australian Carbon Credit Units and the Implementation Plan for the ACCU Review, outlining the timing and approach to implementing each recommendation

This discussion paper focuses on the seeking public views on recommendations regarding:

  • New ACCU Scheme Principles
  • Information publication requirements
  • Defining the ongoing role of the Commonwealth Government as a purchaser of ACCUs
  • Delivering a new process for method development
  • Identifying Integrity Committee functions
  • Establishing appropriate consent requirements for Native Title consent to projects

As part of the consultation process, the Department of Climate Change, Energy, the Environment, and Water (DCCEEW) plans to organise a series of workshops across the country and online sessions addressing specific topics.

On a related note, the DCCEEW also released data indicating that Australia's greenhouse gas emissions for the year ending in March 2023 stood at 465.9 million metric tonnes of CO2 equivalent (tCO2e), reflecting a minimal 0.1% increase (300,000 tCO2e) compared to the preceding 12 months. These emissions for the period ending in March 2023 were 24.4% lower than the levels recorded in June 2005, which serves as the baseline year for Australia's 2030 target under the Paris Agreement.

What this month’s developments mean for Australian business

Australian energy markets: The ESOO has highlighted the complex transition currently underway in the NEM and the expected system tightness towards the second half of this decade. This tightness, coupled with cost blow outs and potential delays in the development of Snowy Hydro 2.0, indicates pricing is likely to be quite volatile for the remainder of the 2020s.

To help manage financial risk and to meet renewable energy targets, businesses are encouraged to take a strategic view on their energy sourcing requirements. The CORE Markets team is seeing many organisations set out their strategies to 2035, taking positions through relevant contract structures such as PPAs, hedges and strips.  

Australian carbon market: The Australian carbon market experienced some volatility again in August, though was generally trading higher than July. In what’s been a consistent trend for some time, ACCUs generated by projects providing additional co-benefits attracted varying premiums on the Generic ACCU price.

The CORE Markets advisory and transactions teams are experiencing a growth in interest in the ACCU market, mainly from Safeguard Mechanism participants. This is expected to flow through to a greater number of primary market transactions in the coming months.

Forward-looking organisation, particularly from hard-abate sectors, are encouraged to develop their carbon procurement strategy in parallel to investing in emissions reduction. Doing so will assist in minimising potential financial and quality supply risk.

Do you need help navigating the changing landscape?

The events outlined in this months update highlight the evolving nature of carbon and energy markets and the complexity of the net zero transition.

To discuss your unique requirements, get in touch with our team today for a no obligation discussion on how we can help.

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Australian Energy & Environmental Market Update for August 2023

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September 11, 2023

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