Market Madness Q2 recap

Recent months have been the most tumultuous in the history of Australia’s energy markets. International and domestic pressures combined to drive dramatic price increases in both the wholesale electricity and gas markets. The extent and persistence of high prices, which reached record levels in June and July, triggered protective price caps, market interventions and spot market suspensions.

The AER has published its Wholesale Markets Quarterly report for Q2 2022, which analyses how and why spot prices in both gas and electricity reached record highs during the second quarter of 2022, leading to implementation of market price cap and temporary shutdown of the entire market.

Expectations are for high prices to continue in coming years. High fuel costs are likely to continue as international coal and gas prices remain at historical highs. Generation closures, including the impending closure of Liddell power station in April 2023, and tight gas supply conditions, with a domestic gas supply shortfall projected for winter 2023, means that market conditions will remain challenging for some time.

Summary insights

The report offers these summary insights:

• Coal-fired generation was plagued by outages, wind and solar generation were lower than expected while demand was high due to cold winter conditions.
• Gas-powered generation, and some hydro, had to fill the gap, pushing up already elevated gas prices influenced by record international prices.
• Global factors, driven by war in Ukraine made fuel prices and fuel availability a major issue for coal and gas generators, while hydro power stations were managing water levels and environmental concerns.
• Gas supply was tight with less offers into the southern markets to preserve storage for winter.
• The need to cover high fuel costs, or to ration fuel or water levels, caused participants to offer their capacity at progressively higher prices.
• Record prices triggered protective price caps, multiple market interventions, and a never-before-seen market suspension of the entire National Electricity Market.

Fossil fuels are the issue

Two issues standout in this analysis, both related to fossil fuels: coal generation plant outages, and gas fuel price and availability.

Coal outages

The NEM still relies heavily on coal-fired generation, and over recent months, a high level of coal generator outages restricted available generation capacity, meaning that more expensive generation was required to meet demand more often.

Some of this higher outage rate is attributable to maintenance postponement due to COVID. However, the ageing coal generator fleet is only becoming less reliable, and coal generator outages are only expected to be more of a factor in future years.

Fuel availability issues?

Australia is the world's biggest exporter of gas, but the gas industry claims we have a local supply shortage.

And taking a step back to an overview of the entire energy economy, its very clear that exports of coal and gas massively dominate domestic consumption. Any 'local supply' issues are not due to lack of fuel.