Australian Energy & Environmental Market Update for July 2023

Australian Energy & Environmental Market Update July 2023 - summary edition

This month we cover energy and environmental market movements, key takeaways from recent industry events and AEMO’s latest Quarterly Energy Dynamics report.

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.

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Highlights for July 2023

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Australian electricity and gas pricing

• Spot markets saw lower volatility and softer spot prices in July. Prices continued to soften throughout the month of July, averaging $77.27/MWh in QLD, $84.15/MWh in NSW, $55.21/MWh In VIC, $23.32 in TAS and $76.76 in SA. This was largely due to milder temperatures and higher renewable penetration.
• The market cap price was not reached in any state while VIC, TAS and SA all saw >20% of negative price periods.
• July saw downward pressure of the Futures Market across all states with the monthly averages reducing by ~8.4% compared June.
• Gas prices across the Eastern half of Australia averaged $10.95/GJ in July, slightly declining from June. 

Carbon and environmental markets

• ACCU prices continued to soften in the first half of July and rallied toward the end of the month. Record ACCU creation levels (in June) coupled with supply from Fixed CAC (Carbon Abatement Contracts) has increased ACCU volumes in the market, while expected demand from Safeguard emitters has not yet materialised.
• LGCs prices rallied across the board with Cal23s increasing by $2.00 to $58.00/unit, reversing the trend observed in June. 
• STCs remained at $39.90/cert for the month, as the clearing house moves further into deficit, meaning liquidity remained low.
  

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In other news

• CORE Markets presented at the recent Carbon Market and Investor Forum in Singapore. Discussions included the role of Carbon Markets in alleviating some of the challenges faced by organisations to decarbonise and implications of recent changes to Safeguard Mechanisms on the ACCU market. 
• The CEC hosted the annual Australian Clean Energy Summit (ACES) in Sydney, where the common themes across the event were to extend the RET, gain social license for new projects, and improve the transmission roll out across the country. 
• AEMO released its Quarterly Energy Dynamics (QED) report, which highlighted that Q2 2023 saw the second highest Q2 average quarterly energy prices recorded for the NEM since 2005 at $108/MWh, although it was still down 59% from 12 months prior.
• The NSW government has come under criticism for long wait times for approval of projects. In response, the government has flagged changes to its planning processes for wind, solar and storage projects to accelerate the approval process.

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Feature 1

Carbon Market & Investor Forum, Safeguard Kick-off

Recent changes to the Safeguard Mechanism will require organisations to develop a robust decarbonisation roadmap and a carbon-offtake strategy.

CORE Markets presented at the recent Carbon Market and Investor Forum in Singapore. The forum highlighted the role carbon markets can play in the short-term as corporates overcome some of the technical and commercial challenges associated with decarbonisation.  

The forum also discussed the imminent changes to the Safeguard Mechanism and the recent consultations with DCCEEW to establish baselines for facilities in line with Australia’s climate targets and updated NDCs.

Proposed reforms to Safeguard has the following implications:  

• Organisations must prioritise investments into low-carbon technologies delivering physical emissions reductions.
• While some of these technologies are not yet mature or commercially viable, organisations must rely on carbon credits - Safeguard Mechanism Credits (SMCs) and ACCUs - to offset their emissions.
• The expectation is that ACCU demand will increase considering the changes to the Safeguard.

ACCU market has seen significant growth since 2020, resulting in a 7x increase in volumes of these units traded in the secondary markets.

As the ACCU market continues to mature, organisations taking action early may derive financially favourable outcomes as they progress towards their decarbonisation goals.

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Feature 2

ACES Takeaways

On July 18-19, the Clean Energy Council (CEC) hosted their major event for the year, the Australian Clean Energy Summit (ACES) at the ICC in Sydney. This event is a terrific opportunity for the industry to come together and share insights on the state of the market, and how best to transition the grid away from thermal assets and towards clean energy. Some of the takeaways from the summit were:  

• ‍Extend the Renewable Energy Target (RET): As the current RET scheme ends in 2030, there has been a lot of speculation as to whether the government will end this scheme and implement a new one (such as a Guarantee of Origin scheme, which tracks energy on an hourly basis) or keep the current scheme. There was a clear consensus at the summit for the desire for the government to extend the RET to 2040. The RET is a well understood and effective policy mechanism, and extending it would provide policy certainty for projects approaching financial close, and further improve the investment case for renewable energy.  ‍
• Projects need transmission: The first half of 2023 saw 0.4 GW of new large scale renewable energy projects committed – well below the targeted 5GW per annum figure required to meet 2030 targets. This has raised alarm bells across the industry, and one of the major causes of this has been the delays to transmission projects. Many of the greenfield projects proposed in Renewable Energy Zones (REZs) can’t take on the risk of being stranded due to transmission infrastructure delays, which adds another constraint to the build out of wind and solar.  ‍
• Social License: Industry representatives repeatedly stressed the bipartisan benefits of obtaining social license for both the NEM and local communities. The skill of community consultation is critical to bringing local communities with these projects, and not having them resist the changes required to meet the government’s 2030 target of 82% Renewables.  

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Additional commentary is available in the full version of the update. Contact our team to find out more.

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FEATURE 3

AEMO QED

AEMO has recently released the Q2 2023 Quarterly Energy Dynamics (QED) with the purpose to provide energy market participants and governments with information on the market dynamics, trends and outcomes between 1^st Apr – 30^th Jun 2023.  

NEM Summary

• Q2 2023 saw the second highest Q2 average quarterly energy prices recorded for the NEM since 2005 at $108/MWh, a sharp 31% increase compared to Q1 2023 whilst remining 59% lower than the highest average energy price saw in Q2 2022 at $264/MWh
• Total generation across the NEM increase by 0.6% from Q2 2022 with continued increase in variable renewable generation to increase average outputs to offset decreases in gas-fired and black coal-fired generation
• FCAS costs were relatively subdued in Q2 2023 with a 54% cost decrease to Q2 2022.

Wholesale Gas Market

• Like the NEM, quarterly average prices in Q2 2023 at $14.21/GJ, an increase compared to Q1 2023 but approximately half that of Q2 2022.
• Gas demand across the east coast decreased by 5% (AEMO Market Demand + Gas-Fired Generation Decreased by 21 PJ whilst LNG production increased by 5PJ) compared to Q2 2022 and production decreased by 2% (8PJ).  ‍

WEM Market

• The WEM saw its highest quarterly average pricing of all time, at $113/MWh (67% increase form Q2 2022). This price increase was due to a reduction in quantity of energy made available in the Balancing Market and significant changes to fuel mix (27% increase in average gas-fired generation capacity)

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What this month’s developments mean for Australian business

Australian energy markets experienced lower price volatility in July. The milder weather contributed to lower demand and this, combined with higher renewable energy penetration, led to lower energy prices.

As we head into spring it is reasonable to expect this trend to continue, at least until the high temperatures of summer return.

However, as with any major change, the transition to renewable energy will continue to have its moments of turbulence. As such, we can expect that varying levels of market volatility will be with us for the foreseeable future.

Forward-looking organisations are prioritising process improvements to maximise energy efficiency and taking a strategic approach to renewable energy sourcing. Once set, this strategy should be reviewed on a regular basis to ensure it continues to deliver optimal commercial and climate outcomes as the landscape continues to evolve.  

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The Australian carbon market saw further softening of ACCU generic spot prices in July before rebounding later in the month. This is due to several factors including higher supply volumes in June and the fact that some entities captured under the Safeguard Mechanism are yet to enter the market.  

It is worth noting however that the ACCU market has grown nearly 7-fold, in terms of the units traded on the secondary markets, since 2020. There is also a growing number of businesses who are exploring long-term carbon offtake agreements directly with project owners, as a means of managing financial and supply risk.

These key trends are expected to continue as more compliance and voluntary demand enters the market.

While emissions reduction must be prioritised, organisations are encouraged to think ahead and start developing their carbon procurement strategy in parallel to running their emissions reduction initiatives.

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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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