Power price surge slugs big users

The Australian Energy Regulator is investigating after wholesale electricity tariffs rose above $5000 per megawatt hour.

While many large users hedge their exposure to such extreme electricity price swings, two large energy users in Sydney told The Weekend Australian they were struggling to handle the massive volatility

Soaring wholesale electricity spot prices have sparked warnings of factory shutdowns as big power users struggle with extreme volatility amid a growing number of outages and high fuel costs.

Wholesale electricity prices in NSW and Queensland surged above $5000 per megawatt hour at 6pm on Wednesday and Thursday, automatically triggering an investigation by the Australian Energy Regulator into the cause of the high prices. The extreme prices follow a steep rise in the baseload contact for the second quarter of 2022, nearly tripling so far this year, while spot gas prices are also on a tear.

While many large users hedge their exposure to such extreme price swings, two large energy users in Sydney told The Weekend Australian they were struggling to handle the massive volatility during evening trading when demand soars.

Sell & Parker, a scrap metal buyer in Banksmeadow that supplies to BlueScope Steel, said it had to curtail production over the last three days due to huge price volatility for its electricity supplies.

“Prices are jumping up 45-fold in a matter of minutes and we are being forced to shut down production,” Sell & Parker director Morgan Parker said. “It just kills you to run at those sort of prices.”

The company shuts off its metal shredder, one of only three in the state, during high price events and said it was being handicapped in comparison to international competitors operating in the same business.

While the AER notes that big energy users can manage their exposure to wholesale price spikes by entering hedge contracts that lock in firm power prices, Sell & Parker said it had a benchmark price with its supplier which changes depending on its consumption relative to market rates.

A series of coal outages spanning Victoria, NSW and Queensland have contributed to big jumps in power prices with electricity stations including AGL Energy’s Loy Yang A, NSW’s Vales Point and Queensland’s Callide all running below capacity.

A spike in coal and gas prices, exacerbated by tight global markets following Russia’s invasion of Ukraine, have also contributed to price pressures.

“April wholesale electricity was the highest ever for April across the NEM, smashing the previous April records – of 2017 after the Hazelwood closure – by 72 per cent for NSW and 125 per cent for Queensland,” Schneider Electric director of energy markets, Lisa Zembrodt, wrote in a post to Twitter on Thursday.

“May is likely to be the highest ever, too, as coal-fires outages and high coal prices continue, and generators bid high.”

Dylan McConnell, a research fellow with the University of Melbourne’s Climate and Energy College, said the amount of coal capacity offline was one factor pushing prices skywards but he also said in general that many large users have the ability to protect their businesses against sudden spikes.

Big users “could have hedged that volatility risk with cap contracts, but they made the choice not to,” Mr McConnell said. “It’s kind of like not buying insurance, then complaining when a fire ruins your house. They have basically been benefiting from not paying insurance.”

Still, Sydney gas wholesaler Weston Energy said the costs of energy had re-emerged as a serious problem for manufacturers reliant on electricity and gas to run their businesses. Weston managing director Garbis Simonian said he had raised the issue with deputy prime minister Barnaby Joyce and was concerned about the prospects for heavy industry if prices remain elevated during the winter period. “We’re still in May and not even in winter and people are having to shut down production in Sydney. That eventually means people are going to start losing their jobs unless we get a handle on this,” he said.

Power prices surged two-thirds higher in the first quarter amid rising fuel costs, coal outages and increased demand in the latest sign of inflationary pressures hitting economy, the Australian Energy Market Operator said on April 29.