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Down, down, prices are down… but is it sustainable?

Following a comparatively mild Q1, electricity prices have fallen significantly in Q2. While a drop in price is expected as we move from peak demand conditions in Q1 to the shoulder Q2, the surprising element is the level to which prices have fallen. Average quarterly prices in Q2 2020 were between $33-43/MWh – a significant outlier for recent quarters. Compared to Q2 2020, prices are 47-58% lower on average. COVID-19 possibly plays some role in this trend however, more likely is a change in market dynamics and market outcomes in H1 2020 that are influencing the ongoing expectations of lower prices in the future.

Over the first half of 2020, the electricity futures curve has trended downwards with quarterly products now trading at as low as $40/MWh (from around $60/MWh at the start of the year). This bearish sentiment is likely a revision of price expectation going forward as demand appears lower than expected and the increased penetration of renewable energy into the supply mix – both grid-scale and behind-the meter. The question remains – will prices remain at this level and if so for how long?

Increased renewable generation, particularly coincident solar generation, is likely to result in lower prices most notably in the middle of the day. This ongoing trend will continue as more renewables enter the supply mix and push out more expensive thermal offers. However, the trajectory of prices is dependent on peak time pricing. Peak periods are still likely to require additional supply through peaking assets (gas and hydro) to meet this extra demand. As mentioned in Issue 36, $4-5/GJ gas seems to be back for the time being which loosely translates to an SRMC for a gas unit of about $45-60/MWh. At these prices, assuming gas plants have some flexibility to take gas spot prices, the trend seen in Q2 could reasonably continue beyond this year. However, if gas prices were to rise to previous levels then this trend could unwind and lead to higher peak prices thereby raising the average.

Current ASX quarterly prices are trading around $45/MWh over FY 2021 except for Q1 2021 which is trading higher at around $93/MWh in Victoria and South Australia (slightly lower in NSW and QLD for Q1 2021). This translates to an FY average of around $54-58/MWh ($40/MWh for QLD). Our Benchmark Power Curve is projecting slightly higher prices around $60/MWh, however this is driven by higher peak period prices. While lower average prices are a good outcome for consumers, it can create challenges for the financial feasibility of assets. Particularly as average prices may not necessarily reflect actual captured prices for different technologies/ assets (e.g. coal vs solar and wind).

The case for storage is clear – intra-day price variability is likely to be sufficient to warrant healthy spreads and value stacking opportunities. However, for other investments (especially solar), there is potential that low captured prices can make the investment hurdle a little harder to pass; especially when considered alongside other risk factors like MLF variability and curtailment/ constraints.

We will be providing regular updates (our most recent update being a few weeks ago) on these trends and what they mean for the NEM in our Benchmark Power Curve service. To find out more about this service, the 30-min forecast price data/ how you can subscribe, please contact enquiries@cornwall-insight.com.au