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Have forward prices peaked?

Following the closure of Hazelwood Power Station in March 2017, forward prices quoted on the Australian Stock Exchange (ASX) increased across all regions and time periods. However more recently, forward prices were starting to soften until threat of industrial action at Loy Yang A and associated mine caused concern over energy security and availability of supply. The proposed industrial action was called off by the Fair Work Commission and the reduced prices have continued. The price changes are particularly pronounced in Victoria, though the northern states of New South Wales and Queensland have also been affected.

There has been issues at the Loy Yang A plant, with three of the four units being out at various stages last week. This has caused spot prices to increase in Victoria and continues to put upwards pressure on forward prices. Snowy Hydro’s Murray unit has increased its generation to cover the loss of the Loy Yang A units, however this has meant that storage of water at Snowy Hydro has reduced. To date, Snowy Hydro has been conserving water and once all the Loy Yang A units are back online it is expected that they will continue to try and conserve water.

Q3 and Q417 forward prices in Victoria have not reduced by as much as would otherwise be expected, and 2018 forward prices have increased.  This is due to the increased spot prices that we have been experiencing.

The last base load unit (Eraring unit 2, 660 MW coal) has returned to service in New South Wales. This helped to prevent the high spot prices in Victoria from affecting New South Wales and Queensland. The forward curve in New South Wales for Q3 and Q417 has reduced over the last week. The 2018 prices are less clear with some increases and some decreases. The overall trend appears to be lower prices however, the market is concerned over losing additional generation in Victoria. This is keeping forward prices higher than they otherwise would be in 2018. If there is further loss of base load generation, then forward prices could increase again. If base load generation comes back on and continues to run without further interruptions, the 2018 prices are likely to soften further.