Future of Contract Markets and the Baseload Swap

It is no surprise, when I say the National Electricity Market (NEM) is going through a vast transition and transformation, with an ever-increasing penetration of renewable generation, in the form of both utility scale renewable generation and household installations.

The world as we know is also battling the global pandemic that is Coronavirus. This has had a significant impact on people and their livelihoods and health.  along with a significant impact on energy markets around the globe. To top it all off, energy markets have had to endure a supply price war recently, between OPEC’s unelected leader, Saudi Arabia and non-OPEC oil producer, Russia.

With a rapidly evolving and ever-changing energy landscape, what should our contract markets look like? Are the current products fit for purpose or offer value in an energy landscape like the NEM? As a generator, the days of capturing value and running flat out all hours of the day, are indeed starting to dwindle, with quick, nimble, and easily dispatchable fast-start generation likely to excel in the near to longer-term landscape. Take South Australia (SA) as a good example, as to the success of fast-start plant. On the 04/04/2020 at 12:00pm, the 5 minute spot price was down at -$1,000/MWh, which is where it stayed the majority of the morning, due to low demand and strong generation, trying to send megawatts into Victoria (VIC), maxing out the interconnector. Shortly after that, at 12:20pm, prices spiked to above $300/MWh for the next 30 to 40 minutes or so, with fast-start gas generation swooping in and capturing this short-term high price period.

If this type of generation is the key to success in this new look NEM that we operate in, where fast-start, short burst generation is taking its place to complement the intermittent renewable generation in wind and solar, utility or household, that continues to penetrate the market, why are our contract markets continuing to predominantly offer baseload swaps?

A baseload swap is a contract for energy, say 5 MW for $70/MWh, for a defined period, for a month, a quarter, a calendar, or financial year. The way a swap works is the $60/MWh becomes the strike price in which the seller of the swap pays the floating price (the price of the underlying wholesale product which is electricity in this instance) and the buyer pays the fixed $70/MWh.

Say you have contracted a baseload swap for 5 MW for the entire calendar year of 2020, this would mean that for every half hour (with electricity settling every half hour as per the underlying wholesale market settlement regime in the NEM), of the entire 2020 calendar year, the buyer will pay the seller $70/MWh, and the seller will pay the buyer the underlying wholesale or spot price. For example, say this morning the wholesale or spot price for electricity for the half hour ending period of 9:30am was $40/MWh; this would result in the buyer paying the seller $70/MWh for 5 MW, whilst the seller would pay the buyer $40/MWh for 5 MW, resulting in a $30/MWh contract for difference (CFD) payment going from the buyer to the seller.

However, think about this, the baseload swap is exactly that, baseload. So, a contract for calendar year 2020 means you are locked into that same position (unless you sell out of the position) 24 hrs, 365 days.

So, do baseload contracts offer appropriate value anymore, in a market which are short-lived upward volatility and recently longer periods of downward volatility?

Mid last month, Snowy Hydro struck a contract defined as a ‘super-peak’ swap, which will cover what has been defined as the “super peak” periods of the day, generally morning and evening peak usage when solar is ramping up or down. The trade was brokered through an over-the-counter (OTC) trading hub operated by Renewable Energy Hub, and it is believed, similar deals will be a gateway to funding and bringing into the market technology such as batteries and demand-response into the energy markets.

Snowy Hydro has been procuring renewable PPA’s for a while, through wind and solar generation, including the 90 MW it procured from the Sebastopol Solar Farm in NSW. They are looking to use the renewable generation and back it with their significant hydro fleet, to sell a new range of products to its customers.

With wholesale energy prices reducing significantly since September 2019, and the overabundance of generation in states such as QLD and SA, and with the rapid introduction of new technology, it is likely a significant number of customers will choose to take more wholesale/spot price exposure, rather than contracting ahead of time.,

This fuels the argument for the need to have more flexible and robust products, ones that are for particular trading intervals, perhaps in the day, day-ahead products, week-ahead products, or perhaps more products like Snowy’s ‘super peak’ product?

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.

What’s Oil got to do with it?

There is no doubt that energy markets and the energy industry itself are rapidly evolving and moving away from fossil fuels. The evolution of energy seems to be coming, and only coming faster given this tumultuous time the people and countries across the world have endured. Lets start with oil; Australian’s across the nation are very aware of the recent global oil price crash to new historic levels, particularly when it is reported in the news headlines that Australian’s are seeing almost 15-year lows at the petrol bowser. The impact of the recent oil price crash however does not stop at the bowser, it has and will continue to have significant impacts on energy markets across the globe including in Australia.

Oil prices have been hit recently due to two major events; one being the global epidemic of COVID-19, resulting in a significant reduction in demand for oil across the globe. The International Energy Agency’s (IEA) April 2020 reports an expected drop in demand of global oil of 9.3 million barrels(mb)/day year on year for 2020, with April 2020 demand estimated to be lower than 2019’s demand by 29 mb/day. The second impact to oil markets has been the oil price and supply war between OPEC’s pseudo leader Saudia Arabia and non-OPEC nation, Russia, two of the largest global oil exporters. Saudi Arabia and Russia could not agree levels of supply, leading to Saudia Arabia flooding the market with oil and prices, both spot and futures, reaching new lows. The quarrel between the two global oil market power-houses and the impacts of the COVID-19 on demand for oil has led to the historical event where the West Texas Intermediate (WTI) oil price index fell into negative price territory, with May 2020 future prices settling at -USD$37.63/barrel on the 20/04/2020, after reaching a low of -USD$40.32/barrel earlier that day.

The major oil index, WTI, saw futures prices for June 2020 contracts settling at around USD$17/barrel on the 29/04/2020, whilst Brent Crude, another major oil index also felt the pain of slowing demand, with prices dropping below USD$20/barrel on the 27/04/2020. But the impact of tumbling oil prices reaches far and wide, particularly here in Australia. Australia has a booming natural gas industry and was the largest exporter of liquified natural gas (LNG) as of January 2020. A significant number of gas sales agreements are linked to the crude oil indices, with Australian gas companies feeling the hurt given the tumble in oil prices. Brent Crude oil futures for June 2020 contracts settled at around USD$24/barrel on the 29/04/2020. At these prices, the likes of Santos and Oil Search will be hurting given both flagged a cashflow breakeven oil price of ~USD$25-29/barrel, and USD$32-33/barrel, respectively. Demand for natural gas in international markets has also tumbled, and due to the linkage between oil prices and gas contracts, spot contract prices have shifted down, with June 2020 contracts settling at AUD$2.87/GJ (~USD$1.88/GJ) as of the 30/04/2020, again a far reach from prices seen in November 2019 of ~AUD$7.30/GJ (~USD$5/GJ).

Further impacts of the oil market crash on gas markets has been cheaper domestic gas prices for consumers. Queensland, the largest gas extractor and exporter on the east coast has seen prices in its short-term trading market (STTM) in Brisbane reach as low as AUD$2.31/GJ in March 2020, a significant drop from AUD$9-11/GJ we witnessed the same in 2019. Other energy commodities have also seen a decline off the back of the oil price tumble, including thermal coal. As stated above, with gas prices domestically and internationally falling away, thermal coal prices have come off due to energy users opting for cheaper fuel sources such as oil and gas. Spot thermal coal contracts for the May 2020 settled at USD$52.35/metric ton(mt) on 30/04/2020, far softer than spot prices a year ago at ~USD$90/mt.

This brings us to the all-important energy market and commodity, electricity, which with all the above combined has seen electricity prices fall off a cliff. The National Electricity Market (NEM) in the last few years has been on a renewable power growth spurt. Queensland for instance has the highest penetration of large scale solar generation of approximately ~2,400 MW and a significant penetration of rooftop solar reaching ~2,100 MW, combine them together and on a mild April day in 2020, you have almost 2 thirds of maximum demand. With renewable energy displacing thermal/fossil fuels, off the back of reducing pricing for the technology and subsidies in the form of renewable energy certificates (RECs), combined with both far cheaper gas prices allowing gas plant to bid in and capture price spikes due to their fast-start and intermittent operating capabilities, and reduced demand for electricity due to the impact of COVID-19 with business and industry operating skeletally, electricity prices continue to sit at prices not witnessed since 2016.

All the above has been caused by two events, both significant to the global economy, and the energy industry in their own rights. One thing is for sure, the events have helped push the electricity market on the East Coast of Australia into a new direction far quicker than it may have if the two COVID-19 and the oil price crash did not occur. We are seeing new market design concepts (ie. capacity markets, two-sided markets) and new contract market products (ie. super-peak swap) coming to light, that give way to new technologies and greater competition. The abundance of natural gas in Australia is affordable for households for heating and is finally being utilised as the ‘transition’ or bridging fuel it was always pegged as, to renewable energy in the wholesale market. One thing is for certain, change is afoot, and it definitely has me excited.

If you have any questions regarding this article or the electricity market in general, call Edge on 07 3905 9220 or 1800 334 336.

Renewable Generation Off-Takers On The Rise

By Stacey Vacher, Edge Managing Director

We are seeing a significant increase in large users exploring renewable generation off-take opportunities. This includes behind the meter build-own-operate or power purchase agreements (PPAs), and offsite commercial arrangements otherwise referred to as corporate PPAs, synthetic PPAs, or simply contracts for difference (CFDs). The reasons are mixed. Some are looking to meet future corporate emissions targets.  Others are aiming to achieve lower energy costs. Some are looking to further diversify procurement strategies. All are fearful of missing out on the next big opportunity.

Edge are actively involved in taking large electricity users through the process of assessing, and where feasible, entering into arrangements with renewable generation. We provide a range of services covering everything from practical energy market expertise and advice through to strategy development and implementation and even transaction support. This is particularly helpful where the renewable generation forms part of a new or existing electricity sales agreement as negotiating terms can otherwise be difficult. Large mining, transport, agricultural and manufacturing clients are amongst those leading the way. Elsewhere in the market, we have all seen the announcements from users such as Sunmetals, Telstra, Onesteel, Sunshine Coast Council, Universities and smaller aggregated buying groups (to name a few).  The list is growing rapidly.

Looking beyond the consulting jargon, the diverging spectrum of price forecasting curves, and the race for the next Renew Economy or AFR headline, are these deals really the right thing for your business? Absolutely, they can be. But they may also not be. It is critical that you understand the current electricity market including renewable generation, and the potential financial benefits and costs these opportunities can bring to your business.  Edge can work with you to identify and understand these critical components to ensure you take the right direction when considering renewable generation in your portfolio. It is important to consider how adding renewable generation will affect your current position including your electricity contract.

You’re shown the aggregate market price of electricity and LGCs today and a comparable renewable generation blended off-take price.  Depending on the region and generation project, you’re looking at $130 to $150/MWh on the market against $60 to $70/MWh for renewable generation. The savings appear staggering. But some things may be too good to be true and the devil certainly is in the detail.


These opportunities are long term propositions, typically seven to twelve years though can be as long as twenty years or as short as three years. A lot can happen in this time and only one thing is for certain, things will change.  Supply and demand profiles will change. Project and market pricing will change.  Governments and their priorities and policies will change.  Depending on your corporation’s view on being quarantined (for better or worse) from these changes, you may lean towards all longer term, a blend of longer and shorter term, or no longer term contracting.

Project Risk

Renewable project developers are everywhere. Long haul business class cabins are filled with them. Virtual office spaces have never had it so good.  But not all have the experience in developing projects in Australia, therefore lacking experience with NEM based network service providers (NSPs), Australian government and council bodies, EPC contractors, and the like. Go to any NSP public forum and you’ll see first-hand the challenges that face NSPs around renewable project connections. Be it sheer volumes of enquiries, network or timing constraints, project risk is rife. An off-take start date can quite literally make the difference between a business case supporting the opportunity or not.  Partnering with a credible counterparty and / or managing project risk is critical.

Price Forecasting

The harsh reality is, we spent 2017 being privy to too much price forecasting that existed simply to suit the narrative. You can make generation opportunity in or out of the money with a suitable forecast curve.   Price forecasting plays a significant role in assessing the optimal renewable generation project and the potential value and risk that sits within in it.  Projecting future spot prices is a quantitative minefield. There are a few well known modelling tools utilised by equally well-known consultants to generate spot price forecasts in the NEM.  Edge also generates in house spot price forecasting. Whomever you utilise to produce future price curves, challenge the inputs and demand shape on the outputs. With significant volumes of renewable generation set to enter the NEM and aging fossil fuel plant preparing to exit, we are moving into a new dynamic in the NEM.  The characteristics of the supply curve are changing considerably. As storage technology advances, the behaviour of intermittent generation too will advance.  As users are forced to explore demand side management (DSM) opportunities, the demand profile will also change.  Five-minute trading intervals will change supply and demand behaviour. To adequately assess any renewable generation or off-take opportunity it’s about the expected spot outcome and the sensitivity around this result, measured in each trading interval. Having a high and low case based around randomly selected forced outages doesn’t even begin to address the uncertainty in the electricity market. Even if a project is priced firm to a flat mega-watt (MW) profile, understanding the potential impact to the shape the merits of the firm pricing against other procurement strategies.

Regulatory Risk

Either we are getting older and more in tune with the volatile nature of politics, or politics has taken regulatory racket ball to the whole next level. Investment in new generation in the NEM has previously stalled due to policy uncertainty.  The more recent run of high electricity prices is testament to this. Just when the market does what markets are supposed to do and responds to price drivers with new entrants and technological advancements, our policy makers inject more uncertainty in the form of a National Energy Guarantee (NEG). The end game of the NEG is noble. To promote that we meet our international emissions commitments, whilst ensuring our electricity is reliable, secure, and of course affordable.  Achieving this whilst not forcing any politician to back down from previously stated principals. The practical application of the proposed design however is a very long way from readiness, and in its current form is alarmingly at risk of causing segregation and market power that can only result in higher energy prices.  Meanwhile the Government has cast a dark cloud over the application of the Renewable Energy Act, and specifically the ability for renewable energy projects to receive certificates if they are commissioned after the target date of 2020.  It’s a risk that not even all the developers are aware of.  As an off-taker you must make it your priority to be across it and manage it.

Shape Risk and Firming

Renewable generation is intermittent.  The question remains; what happens when the sun isn’t shining, or the wind isn’t blowing?  Storage solutions are on the rise, but the dispatch limitations and costs still make it very challenging to get the business case across the line.  Clients who are looking to integrate renewable generation in their portfolio must be aware of the risks associated with shape risk.  This includes managing their shape with the overall shape of their hedge portfolio (tenure, type, etc.) and spot risk.  How can one best introduce intermittent generation (or intermittent offtake) into a portfolio, and what is the most efficient and effective means to manage this risk.  Firming products are one of the most sought-after products in the NEM today. Physical solutions have their role in mitigating some shape risk and include DSM, onsite generation, and storage solutions. Financial solutions also stand to play a significant role, including both traditional electricity derivatives and weather derivatives.  Securing firming products is undeniably challenging.  Hydro and gas generators have five-minute settlement to consider.  Furthermore, gas generators need to clear long-term fuel supply hurdles.  Coal generators may not be so eager to firm a product that will ultimately stand as the perfect competitor to their own offtake. Edge work closely with clients to understand shape risk and firming solutions.  We actively engage with the wholesale market to seek and deliver solutions that work best for each individual client.


Settlement of third party PPAs need not be complicated.  In fact, it need not be independent of your electricity invoices.  Edge has negotiated PPAs that settle directly between the project and off-taker. We have also negotiated settlement services with retailers to ensure consumers benefit from longer term renewable generation whilst still only receiving monthly invoices form their retailers.  Understanding the cash flow implications and adequately addressing credit counterparty risk is all critical but certainly manageable.


There are accounting implications as to how these arrangements are structured.  Whilst we are across these due to our involvement in large offtake deals, we are not an accounting firm.  We would strongly recommend that any consumer exploring these opportunities ensures their accounting advisors are across implications such as implied lease agreements, impacts to the balance sheet, and / or derivative accounting.

Whatever stage your organisation is at in considering Renewable Energy as a part of your electricity portfolio, Edge can help. If you would like to learn more about Edge, please visit edge2020.com.au or alternatively you can call one of our team directly on 07 3905 9220 or on 1800 EDGE ENERGY.

EDGE LIVE now displays invoice reconciliation & accruals outcomes

James Webster, Edge Software Development Manager

In addition to Snapshot functionality which provides you with information relating to your current and forecast spend and consumption, you can now access your Invoice Reconciliation and Accrual outcomes instantly within Edge Live.

Your Edge Portfolio Manager undertakes your Invoice Reconciliation services the same business day that your final invoice is issued by your Retailer.  From here, the payment advice and outcomes are published instantly on Edge Live. You will receive an email notification that the reconciliation outcome is available, with links through to the Invoice Reconciliation Report.  Providing you with details of the invoice outcome, broken down to the detailed levels of energy, network, markets and other costs.

Figure 1 Invoice reconciliation outcome in detail.

Viewing the results is easier and more efficient than ever before.  View them in Edge Live directly from your web browser rather than having to open excel and find the information relevant to you.  Though if you need to, the data can be exported to excel easily with the click of a button within Edge Live.

You will be provided with the invoice reconciliation outcomes, advice on whether to pay or not to pay and any additional personalised comments from your Portfolio Manager relating to your portfolio and individual sites.

Figure 2 Invoice reconciliation notification at an invoice level.

Your monthly Accruals reporting is also available via the online portal. Again, providing an easy and efficient way to advise your finance teams what the expected electricity spend of your portfolio will be as you near the end of each month.

And don’t forget about the existing Dashboard module.  Filter by site and drill-down on specific time-frames of your electricity portfolio so that you can get a clearer view of consumption and costs.

Your Portfolio Manager will be in touch soon to discuss these new features with you, and ensure you have access to Edge Live as well as answer any questions you may have.

We have some exciting features planned for the remainder of 2018. If you have any feedback or suggestions on how Edge Live can be of more value to your business please do not hesitate to let us know, and we will do our best to incorporate this into our Edge Live development roadmap.

To learn more about Edge Live functionality click here, or speak with your Edge Portfolio Manager.