Focus on efficiency in a rising energy market

07 Nov 2016 by Peter

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If you’ve been trying to renew your electricity contract recently, the chances are it wasn’t a particularly happy experience. After a couple of years where prices have stayed fairly steady, since the middle of calendar 2016 the cat has been released amongst the pigeons that constitute Australia’s wholesale electricity market. Recent weeks have seen significant increases in forward energy prices and, not surprisingly, this has real implications for businesses looking to manage down energy costs.

The chart below shows the latest prices being paid on the wholesale market for FY18 and FY19 electricity. Since the start of calendar year 2016, prices for electricity to be consumed in FY18 have increased 28% in QLD, 37% in NSW and a whopping 56% in VIC, with most of these increases coming from mid-year. In SA prices have increased a further 20% from an already very high base.

fy18-fy19-wholesale-prices

Figure 1 FY18 and FY19 future electricity prices by State. Source: ASX Energy and Greensense

I’m no expert in Australia’s energy markets, and the purpose of this post is certainly not to analyse the figures or the factors driving those prices up – there’s plenty of discussion around that in the mainstream media – but more to illustrate that electricity bills, or at least the retail energy component of them, are likely to be rising for the foreseeable future.

How does a rising wholesale price affect businesses? Your business buys electricity from retailers who price the energy component of their electricity contracts based on a view of the future wholesale price of electricity, over the term of your contract. Higher wholesale prices always mean higher retail prices, irrespective of who you buy from and irrespective of your “buying power”.

It’s worth remembering that there’s more to the typical business energy bill then just the energy component that we’re talking about here – there are also green certificates (also increasing by the way) and network charges that together will make up a good chunk – but for most businesses the retail energy will make up between 30% and 40% of the bill.

Whilst shrewd procurement of electricity will continue to be important, this insight from the wholesale market tells us that no matter how good a negotiator you are, you’re likely going to be paying more for energy over the next couple of years. This will inevitably bring additional focus on energy efficiency and will reward businesses who have taken steps to ensure their operations are as lean as they can be. The good news is that in many cases energy saving opportunities abound within our buildings and, if you’re a glass-is-half-full type, then increasing energy costs simply improve the business case for action.

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