The 3 key factors influencing higher energy prices

Photo of powerlines

David Guiver, ERM Power’s Executive General Manager of Trading, explains that several key factors are likely to be influencing market increases and general energy price volatility. These are:

1. Predictions of a hot, dry summer ahead

Future weather forecasts can significantly influence energy markets because suppliers look at these predictions closely when hedging energy purchases on the futures market and setting prices.

When the forecast says we’re in for a hot, dry summer, this indicates that businesses and households will use more electricity (for instance, relying more heavily on air-conditioning) over the coming months equals more periods of increased energy demand.

“Times of high energy demand put pressure on supply, which contributes to peak pricing,” says David. Hot conditions can also reduce the efficiency of many industrial processes and can constrain the performance of electricity generators.

2. Concerns about the water supply for hydro generators

Another factor linked to the weather is that dry conditions can potentially mean the nation’s dams won’t receive sufficient rainfall, which in turn can affect energy production from hydro power sources. “What happens typically is that Australia’s important hydro energy generators produce electricity during peak times. The more water they have in storage, the more they are likely to generate,” David explains. High water storage levels are generally a positive thing for lowering energy prices.

“The market closely watches the hydro generators’ dispatch throughout the year and tries to predict their future generation activity,” David says.

“After initially predicting that the hydros would continue to generate high volumes of electricity, the market is now of the opinion that this won’t happen after observing how little snow melt ran off from the winter into the storage dams. A drier summer is forecast, which can also contribute to higher evaporation from the dams.

“We’ll have to wait until the snow melt next year to know for sure whether or not market predictions are accurate,” David tells us.

3. Potentially having to rely on expensive gas power to address hydro shortfalls

“If the hydros do generate less, this may mean the electricity supply gap has to be filled by the gas generators. With high gas prices across all of eastern Australia, gas generation is an expensive form of power.

The trading desk sees this factor as a big risk, which informs market sentiment and drives upward pressure on prices,” says David.

Another consideration: rapid changes and market volatility

“From what we have observed, the energy market continues to be volatile because conditions can change rapidly. This sparks a reaction among suppliers and consumers,” says David.

“We saw this happen in 2017 when the Hazelwood power station in Victoria closed at short notice. Now the concerns around hydro supply and predictions of a hot summer ahead may be having a similar effect.”

Giving the power back to customers

ERM’s Strategically Timed Electricity Procurement (STEP) platform gives larger customers more control to agree prices over the term of the contract, providing a mechanism to reduce timing risk.

“With STEP, you have the flexibility to purchase your energy in increments, so you avoid getting caught buying all your electricity at the top of the market,” explains David.

Instead of agreeing all prices up front, you can agree prices in parcels as small as 5% for each set period.

The platform now offers even more flexibility, with up to 20 transactions permitted per contract period.

STEP gives you the opportunity to monitor market prices for electricity and many environmental schemes and spread timing risk over a longer period.

In recent years, we have seen many customers put off re-contracting in the hope that prices will fall. Unfortunately, this strategy has been unsuccessful most of the time because we have been experiencing far more price rises than decreases.

Trying to strategically time your fixed-price energy purchase in one hit is like putting all your eggs in one basket. Our incremental pricing option, STEP, offers a far more flexible alternative.

ERM Power and the STEP platform = smarter business energy

Call 13 23 76, email [email protected] or contact your Account Manager to find out if your organisation is eligible and learn more about how STEP can help you manage timing risk and avoid being locked into a fixed price contract when energy prices are high.

STEP Online may not be suitable for all eligible customers and does not guarantee a better price outcome. You should seek independent advice about whether this pricing model is suitable for your business.