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Energy Market Update: Why Are Energy Prices So High?

Australia's national energy market has seen a surge in prices across electricity, gas and petrol due to a confluence of high commodity prices, domestic market caps, international relations and colder winter snaps boosting demand. AEMO (Australian Energy Market Operator) released a report stating that these challenges are 'unprecedented' and prices could remain inflated until 2025.

Why Are Energy Prices So High?

The energy crisis has been driven by a magnitude of factors- both domestic and international. Inflated global energy prices, especially for coal and Liquid Natural Gas (LNG) have impacted Australians with higher domestic gas and power prices on the east coast.

The war in Ukraine has also caused significant disruption to spot LNG, coal, oil, petrol and diesel prices as Russia accounts for 25% of global gas trade, 15% of global thermal coal trade and 10% of global oil trade. The challenge that is affecting many international markets is finding the supply to replace Russian commodities. There have been other factors causing prices to soar, including the reliability of coal power generation and a winter snap causing renewable energy to dwindle.

AEMO Executive General Manager- Reform Delivery, Violette Mouchaileh, said the quarter has been one of the most challenging periods, signifying the urgent need to transition to the cheapest form of reliable electricity.

"Wholesale energy price hikes and volatility were driven by multiple factors, including high international commodity prices, coal-fired generation outages, elevated levels of gas-fired generation, fuel supply issues, and many east coast cities experiencing their coldest start to June in decades" Ms Mouchaileh said.

How Much Have Energy Prices Increased?

AEMO's report said wholesale power prices soared to record-high levels in just three months to June 30. Average prices for the quarter were $264 per megawatt hour (MWh) in the National Electricity Market (NEM), which is an increase of a whopping 203% on the first three months of the year.

The cost is $177/MWh higher than the previous quarter and more than three times on Q2 2021's $85/MWh average. Wholesale gas prices averaged $28.40 per gigajoule (GJ) in east coast markets, compared to $8.20/GJ the same time one year ago, and almost triple the previous record of $10.74/GJ set in the September quarter last year.

These soaring prices have meant the administration of price caps in gas markets and the NEM, leading to the first suspension of trading in Australia's main grid since it was conceived in 1998.

Gas Shortfall Predicted

According to the Australian Competition and Consumer Commission (ACCC), a report predicts that eastern Australia faces a gas shortfall in 2023, which is expected to be 10 times larger than the shortfall one year ago. The shortfall of 56PJ next year is equivalent to roughly 10% of domestic demand the largest expected shortfall since 2017. This is most likely to impact the entire east coast and South Australia, with Queensland mostly spared.

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Sally Writes 31 Aug 2022