When it comes to the sale of energy in Australia, there exists an unfortunate but often unavoidable lag in payments between the retail energy market and wholesale energy suppliers, who, in turn, pay the Australian Energy Market Operator (AEMO) for the energy that is provided to them. The AEMO will then deliver payment to those entities that actually generate the electricity.
This mismatch in timing between retail and wholesale players in the energy market means that, in many cases, a significant window passes before retailers can deliver payment to the wholesalers. This is because it can take a fair amount of time for the retailer to recover payment for the energy used by retail energy consumers, which are typically households and businesses.
This can accumulate to form a significant amount of money, posing a liquidity risk to the entire energy supply chain ‒ particularly when there is a lot of market volatility. The very high market price cap makes it possible for these large sums to accumulate.
The Solution
The National Energy Market (NEM) has therefore instituted provisions to mitigate this liquidity risk and make it more manageable for players in the energy space to keep the electricity flowing.
Under these provisions, the cumulative price is subject to a cumulative price threshold, which is subject to the market price cap of $300/MWh as of June 12, 2022.
The cumulative price is determined by a rolling total of the trading price in a given region over a period of seven days. These trading prices are determined over five-minute intervals.
When the cumulative price amount breaches the cumulative price threshold set by the NEM, the AEMO then is forced to take action and implement administered pricing to put a limit on the energy dispatch price.
The Impact
These price caps put significant pressure on electricity-generating entities, which are responding to commodity prices determined by global markets outside of their control. Since these commodities are necessary inputs for electricity generation, if they rise to untenable heights owing to global crises (such as the Russia-Ukraine conflict), generation becomes very expensive. These prices are then passed on down the supply chain.
However, owing to the price cap, some of these generators are forced to withdraw generation capacity from the market because the price capping poses a significant liquidity problem for them and risks putting them out of business.
The latest breaching of the cumulative price threshold occurred on June 12 in Queensland, New South Wales and South Australia, causing what some have called an energy crisis.
It is hoped that this can be avoided in future.
Hamilton Knight is a boutique asset management fund with significant investments in the energy space. Contact Rod Mackay, CEO, to find out more about investing with us.
