The Driving Forces Behind Rising Contract Prices

Has your business been ‘shopping around’ for a new electricity contract? Is your current retailer trying to re-sign you for another three years at higher rates than what you’ve been paying?

If so, you’d be well aware that fixed rate contracts are climbing. Businesses everywhere are feeling the pain.

Generally speaking, retail contract prices rise when the market views increased risks going forward with wholesale electricity prices. And because the National Electricity Market (NEM) is interconnected, the entire market can be affected by rising prices in individual states (such as what’s been occurring in recent months in South Australia).

However, market history shows that wholesale prices reduce to more reasonable levels soon after high price periods. Unfortunately, this correction is not immediately reflected where fixed rate contracts are concerned – which typically increase as a knee-jerk response but are slow to reduce over time.

And that’s exactly why fixed rate offers are so high right now. Retailers are trying to compensate for recent wholesale market price hikes – and to protect themselves from future volatility which may not necessarily occur.

So why have wholesale prices been increasing in recent months?

Recent wholesale market volatility can be explained by the following three key drivers:

1. Non-firm generation such as wind and solar – especially in SA

Although these generation sources offer many advantages (including zero emissions and no fuel or resource cost) their supply is intermittent. This causes challenges in a grid market where customers require continuous supply.

2. Gas-fired generation

Australia has considerably cheap base-load coal generation. But gas-fired generation is playing a bigger and bigger role as the marginal or balancing source of generation.

With rising gas prices across the NEM, the flow-on effect to the electricity market has been significant. Accordingly, gas-fired power plants are facing higher input costs which they will seek to recover through higher electricity pricing.

3. Coal has long been the cheap form of base-load power in Australia – but for how much longer?

The questionable future of coal-fired generation plus the forthcoming closure of Hazelwood in Victoria (from 1 April 2017) has added a bullish sentiment to the retail contract market.

What does this mean for you?

Why lock your business into a high priced fixed rate contract when you can now purchase directly from the wholesale market?

In other words, why pay high prices every day of the year (for three years no less) – when you can now access the low prices at opportune times?

To read PG’s whitepaper, click here.

To learn more, contact PG Energy today
Call: 1300 08 06 08

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