My gas bill came in this week, and I nearly choked. Despite my best efforts, it barely budged.
In 2021, I had spent hundreds and hundreds of dollars on gas over winter. In 2022, I was determined to be smarter with my energy use.
I went around my house with gap filler. I sealed the windows and doors. I was frugal with my heater, using it only when absolutely necessary. I took quick showers.
In one sense, it worked very well. My gas use fell by 25 per cent. But my gas bill? It fell by less than 4 per cent because the price for gas has gone up so much.
My electricity bill is even worse.
In the past fortnight I used 80KwH, compared to 100 kwH for the same period last year. But I paid $28 this year instead of $18 last year! Arrgh!
Of course, the higher price for electricity doesn’t apply to my solar panels. The price I get for what they generate has gone down.
Thanks, energy companies. I’m getting screwed every which way. And, here’s the thing, when it comes to energy, we all are.
The best way to see what has happened to the electricity market is to look at futures pricing.
Back in March, everything looked calm and stable. The price of baseload electricity in every Australian state was expected to be about $100 for the following few years, as the yellow line on the next graph shows.
Who decides the price of energy?
A futures market is a place where big companies put in orders for electricity to be delivered later this year or in the next few years.
Big electricity companies use it to sell electricity they will generate in the future (and traders who’ve never even seen a power plant trade electricity futures for their own reasons).
It simply tells us what the expectation is for prices later.
These expectations are not perfect: they can’t predict a war in Ukraine, for example. However, because people have real money on the line, it gives us the best guess from insiders on where the market might be heading.
The lines on the graph above show orders for electricity in March (yellow), July (red), and October (dark red) this year. The horizontal axis is when they want to actually use the electricity. Prices differ depending on when electricity is delivered, and when people put their order in.
What the graph shows is that, after March, things suddenly changed. By July, people are paying far more for electricity orders.
In Queensland in July, the price people were offering for electricity to be delivered in late 2022 hit nearly $300 per megawatt. That was bad. But things were going to get worse.
Back then, the futures market still had an optimistic shape: people were willing to pay a lot for electricity in the near future. But they were expecting the price of electricity to fall back down to “normal” eventually.
The red line slopes down to near where the yellow line is by 2024 or so.
How naïve we were. Now it is October, and the most recent readings from the futures market (October’s dark red line) tell us to expect nothing but years of pain.
Prices will continue to be far higher than we thought. They will vary according to the season, but winter prices will be brutal for years, especially in South Australia and Victoria.
Gas giants’ giant profits
The situation in the gas market looks pretty similar. Prices are up massively, now and for the future.
What does this mean for gas companies? I will let Santos (one of the leading suppliers of gas in Australia) tell you.
This is a dot point from their third-quarter report, released on October 20:
- “Delivered record year-to-date sales revenue of US$5.9 billion, up 86 per cent, and record free cash flow of US$2.7 billion, up 194 per cent on the corresponding period.”
A rise of 194 per cent?! That means they tripled free cash flow (i.e. money coming in they don’t need to spend. You can think of it as profit.)
The war in Ukraine is disrupting the supply of energy, especially to Europe. That is lifting global prices, because energy is traded globally.
For example, an Australian coal company can sell coal here or put it on a boat and sell it in Europe. So the price of coal in Australia will even out – plus or minus a little bit – with the price in Europe.
This is how events that happen far away affect the price we pay for domestic energy.
It’s horrible. Except of course if you are an energy company whose ability to extract coal, oil and gas is not affected. Costs are rising a little bit, sure, we’re all getting hit by input price inflation. But the price of your output is rising far more. The gap between is pure profit.
Whether you sell coal or gas or oil, it’s been a lovely time to be in business.
For example, Mobil and Shell have seen their stock prices explode upwards.
They lost more than half their value when the pandemic began but they have since doubled in price, bringing them back to where they started, before pushing even higher.
Woodside, the Australian gas company, is doing very nicely.
Australian company Whitehaven Coal is doing even better though, doubling from the depth of the pandemic, then tripling again.
I don’t think it counts as sustainable investing but the profits from investing in Whitehaven would certainly help cover your electricity bill.