Domestic energy prices set to stabilise

Domestic energy – political gridlock but forward pricing is easing


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Sharp domestic energy price rises may not be as dramatic and sustained as originally expected.

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Justin Still

Justin Still

The sharp increase in domestic electricity and gas prices has received plenty of press coverage recently. Power prices rose dramatically through to mid-2017 as a result of factors including a changing generation mix (more renewables, fewer thermal plants), increasing gas costs for gas-fired power generators, weather events, transmission constraints, and in Queensland increased demand as well as generation concentration. In addition, the market price of renewable energy certificates rose dramatically. 

Listed companies with power generation activities benefiting from these price trends include AGL Energy, Origin Energy and Infigen Energy. Gas and electricity markets are closely linked with gas prices rising strongly due to strong demand from LNG producers in Gladstone. Unfortunately, there is limited exposure to the rising gas price thematic available on the Australian Stock market, with our key pick being Senex Energy. 

Higher energy prices most negatively affect companies that have energy-intensive operations. These include industrial manufacturers such as Orora, Brickworks, DuluxGroup, Orica, Incitec Pivot, and Pact Group. Cochlear and CSL in the Healthcare space will also feel the pinch given their strong manufacturing presence in Australia. Mining companies using grid-sourced power will be impacted, as will data centre operators. Australia’s largest retailers, Woolworths and Wesfarmers, will not escape the higher cost of keeping the lights on and refrigerators running every day. Companies may look to mitigate the impact through cost saving strategies such as energy efficiency initiatives. Governments have responded to the higher energy costs through various policy initiatives. 

The recently completed Finkel Review, which was an independent review into the future security of the national electricity market, provided 50 recommendations to the Commonwealth aimed at delivering reliability, security, lower emissions and rewards for consumers. The South Australian Government’s plan included utility scale battery storage and new generation. However, the Queensland Government’s policy initiatives released on June 5 has had the most immediate impact. This included directing one of the two State-owned generation corporations to work to reduce wholesale power prices through its bidding behaviour. Both Queensland and NSW forward contract prices showed immediate decline. Pricing of renewable certificates has also begun to decline as the supply of large scale generation certificates from new projects has been on the increase. 

These price movements suggest that the sharp price rises that we have seen may not be as dramatic and sustained as originally expected, which is great news for consumers, businesses and the Australian economy in general.

  • Justin Still, Investment Adviser (Authorised Representative: 000279726), Morgans Financial Limited | ABN 49 010 669 726 | AFSL 235410 
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