It’s now been several months since the South Australian July energy price crisis – but its impact may continue for a long time to come. And SA businesses whose electricity contracts are nearing renewal are likely to be most at risk.
In July 2016, wholesale energy prices caused significant shock across the state, with the SA government scrambling to manage the fallout. Although the government did attempt to intervene, Energy Minister Mr Koutsantonis still made an effort to shift blame wherever he could.
Unfortunately, energy users entering fixed rate contracts now face the possibility of a more long-term crisis, with some analysts suggesting contract prices may increase by as much as 88%.
Why fixed rate customers should beware
The history of the wholesale market shows that prices reduce to more reasonable levels one to two months after a high price event. However, this predictable correction is not generally reflected where fixed rate contracts are concerned – which typically increase as a knee-jerk response.
And the SA July high price event is proving to be no exception.
In fact, SA has experienced some very low price periods in recent weeks – demonstrating that now is the time for businesses to seriously consider moving to the wholesale market.
If we look at energy prices on a single day – let’s take 16 August 2016 – prices varied from as low as -3c up to as much as 24c. Interestingly, the cost of energy was at its lowest during business hours and at its highest later at night (when most businesses are shut).
This demonstrates that businesses motivated to take the time to understand how the wholesale market operates will be able to take advantage of lower prices at opportune times.
The impact of wind and solar
The above data is also an excellent example of how the high take-up of wind and solar energy impacts the market. The price variability on 16 August appears to have coincided with the wind, which blew heavily during the day but not at night.
And here is the challenge with the unique SA energy market.
Although we are all used to user demand being the main driver of price, SA prices are being driven by solar and wind – almost irrespective of demand on some days.
But this is not necessarily a bad thing. It’s just not typical for the Australian market. And we are not yet equipped to use these price dynamics to our advantage.
Over the coming year, SA will likely experience more days of extreme variability (like we did on 16 August) since such a significant portion of the state’s energy production is in the hands of wind and solar generation.
What’s more, Victoria is heading in the same direction with a target of 25% renewable energy by 2020 and 40% by 2025.
So what does this mean for you?
The real question: how can your business find a way to take advantage of the good days and avoid the bad?
And the answer of course is to purchase wholesale, so that when more price crises occur (such as the one we’ve just seen), your business will be much less affected.
The alternative? Entering a fixed rate contract at a cost of around 19 c/kWh for peak.