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Australian Energy & Environmental Market Update - May 2024

Australian Energy & Environmental Market Update - May 2024

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 - May 2024

Australian Energy & Environmental Market Update May 2024 - summary edition

This month we cover energy and environmental market movements, AEMO's 2023 Electricity Statement of Opportunity update, Eraring's closure delay and the $22.7 billion Future Made in Australia package.

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

A comprehensive report with additional insights, charts and commentary from our industry analysts, is available to paid subscribers. Contact our team to find out more.

Highlights for May 2024

Australian electricity and gas pricing

  • May experienced periods of ‘dunkelfaute’. This refers to times with minimal or no renewable energy generation due to unfavourable conditions such as low wind and cloudy days. Low renewables coupled with unplanned thermal outages led to higher average spot prices in May compared to April. 
  • New South Wales experienced the most material increase in May compared to last month. The outages at Eraring and Vales Point led to spot prices in NSW exceeding $1000/MWh on 91 trading intervals and reaching the market cap($16,600/MWh) on the 8thof May.
  • Future prices across the NEM also rallied in May compared to April. This is reflective of increased average spot prices and volatility in May.
  • Additionally, decrease in renewable penetration, increase reliance on gas powered generation and coal outages in New South Wales all contributed to the trends in the future prices.
  • Gas monthly average prices increased by13% due to increased gas demand for electricity generation, driven by reduced renewable penetration in the NEM. Average gas prices across all hubs peaked at $17/GJ on the 22nd of May.

Renewables market

  • Renewable energy penetration across the NEM decreased from 35.7% in April 2024 to 31.6% in May, due to seasonal reductions in solar and prolonged low wind generation despite record-breaking wind output on May 30th.
  • Solar DWA prices continued to increase NEM-wide, except for Queensland. The solar asset performance varied widely, with Broken Hill at $111/MWh (21% capacity factor) and some assets below $20/MWh (<10%capacity factor).
  • Wind DWA prices continued to increase NEM-wide since Q4 2023. After a prolonged week of wind drought, all-time record-breaking wind generation was observed towards the end of May. Assets in Northern Queensland recorded capacity factors well above 40%.

Carbon and environmental markets

  • ACCU prices softened in May both for spot and forwards compared to April, potentially influenced by anticipated changes to some methodologies and potential increased supply from Carbon Abatement Contract exits. 
  • LGC spot and Cal24-Cal27 prices decreased by $0.5 to $1.75 per certificate most likely due to lower voluntary demand for these certificates.
  • STC spot prices remained stable at $39.90but briefly dipped by 5 cents towards the end of May. The average weekly certificate creation in May increased by 9.4%.

For a comprehensive update on the ACCU market, read our ACCU Monthly Market Report here.

Features

Feature 1

2023 AEMO's Electricity Statement of Opportunities update

  • On the 20 May 2024, AEMO released an update to the 2023 ESOO. The ESOO provides technical and market data over a10-year outlook period with the goal of informing the decision-making processes of major stakeholders.
  • Overall, the May update reinforced the existing outlook that urgent investment in capacity is needed across the NEM to prevent potential shortfalls. There was also a strong emphasis on the need for NEM-wide transmission improvements so that new generation and storage can service loads during potential reliability events.
  • The ESOO measures reliability using expected unserved energy (USE), defined as the percentage of unmet energy demand in a region for a given financial year. A reliability gap is defined as the USE exceeding the interim reliability measure at 0.0006% in the short term (FY25-FY28) and the reliability standard at 0.002% in the longer term (FY29-FY33).
  • Indicated by the dotted lines in the top figure (RHS) the central scenario forecast's reliability gaps across all NEM regions over the next 10 years, with NSW and VIC having notable short-term concerns.
  • In addition to delays in considered battery projects and transmission constraint re-evaluations, Eraring’s initial 2025 closure posed a reliability risk for 2025/26 in NSW – the extension has not been factored in.  
  • VIC has a growing reliability gap with its heavily constrained transmission lines and the progressive withdrawal of gas generators and Yallourn power station, which is due to retire in 2028/29.
  • When overlayed with “Federal and state scheme sensitivity”, which considers the potential impact of projects such as those funded by ARENA or the NSW Infrastructure Investment Objectives, the percentage of unserved energy decreases considerably, with NSW the only state to surpass the reliability standard of 0.002% in FY26.
  • Importantly, the ESOO only considers commissioning committed and anticipated projects in line with AEMO’s commitment criteria, indicating potential for the outlook to improve considerably with more investment.

Feature 2

Eraring closure delayed by 2 years 

  • Eraring is a 2,880 MW coal-fired power plant –the largest in Australia, located near Lake Macquarie in NSW and owned by Origin Energy.
  • In February 2022, Origin announced that it would bring forward the closure of Eraring by seven years to August 2025 in response to the unsustainable economics of coal generation in an increasingly renewables dominated grid.
  • This month, NSW Government and Origin Energy announced an agreement to keep Eraring open until August 2027.
  • Under the agreement with NSW Government, Origin:

    - Can opt into an underwriting arrangement that is capped at $225 million annually when claiming up to 80% of operational losses – this includes sharing up to $40million in annual profits earned from Eraring.

    - Must ensure Eraring generates at least 6 TWh each year, the equivalent annual output of two of Eraring’s four generating units, but enough to address the forecasted reliability gap.

Feature 3

$22.7 billion of funding towards net-zero

The Future Made in Australia package was announced as part of the 2024-25 federal budget. The package aims to incentivise the transition to net-zero in order to maximize economic and industrial benefits in clean energy, natural resources, STEM capabilities, and work force education.

The biggest incentives were announced for hydrogen, critical minerals, and solar and battery supply chains:

  • $3.2 billion over the next decade through ARENA to support commercialization of critical technologies like green metals, batteries, and low carbon liquid fuels.
  • $2/kg tax incentive for renewable hydrogen produced between 2027-28 to 2039-40 for up to ten years per project.
  • An additional $1.3 billion towards the Hydrogen Head-start Program to support early-movers in the hydrogen industry.
  • 10% tax incentive for critical minerals that are processed and refined between 2027-28 to 2039-40 for up to ten years per project.
  • $1.5 billion to strengthen clean energy manufacturing - $1 billion for Solar Sunshot and $523.2 million for the Battery Breakthrough Initiatives.

The Federal Government is also allocating $170.6 million to streamline decision-making surrounding environmental, energy, planning, social license, and foreign investment approvals – this is especially important in regions that have a large pipeline of critical renewable energy projects. 

What this month’s developments mean for Australian business

Energy market

The month of May experienced periods of ‘dunkelfaute.’ This refers to times of minimal or no renewable energy generation due to unfavourable conditions such as low wind and cloudy days. It is not unusual for this time of the year.

The dunkelfaute coupled with unplanned outage events at thermal power stations created a perfect storm for rising spot energy prices. Future prices also rallied by more than 20% from the lows seen in February of this year.

The volatility in both spot and future prices will have significant impact for any energy users on progressive or short-term contracts. These energy buyers will need to keep a very close eye on the market in the coming weeks.

The market dynamics we’ve seen in April and May illustrate the market effect of sustained reductions in renewable energy generation. Thereby highlighting the need to understand and proactively manage firming exposure in power purchase agreements (PPAs).

However, organisations on long-term renewable energy contracts / PPAs are often sheltered from this volatility. It is therefore important to set up your strategy carefully.

Additionally, in this month’s full report includes capacity factor and capture price features of renewable assets which shows that some assets such as the Kennedy Energy Park wind farm and Mt. Emerald wind farm achieved capacity factors in excess of 0.5. This shows the importance of selecting the right asset when looking at PPAs

Carbon market

Volumes traded in the Australian carbon market fell in May for the first time this year, with a 13% decrease compared to April’s reported volumes. This played a part in the softening of the spot ACCU price.

If you have exposure to the spot ACCU market, this may be a time to consider engaging the market. Our market experts can help advise on the best path forward.

Do you need help navigating renewable energy and carbon markets?

The events outlined in this month's update highlight the evolving nature of carbon, environmental and energy markets and the complexity of the net zero transition.

To discuss your unique requirements, get in touch with our team today to see how we can help.

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