Australia’s National Energy Market (NEM) is experiencing significant changes, driven by the growth of renewable energy, evolving regulations, and ongoing price volatility. These shifts are reshaping how businesses manage their energy needs. For large enterprises and multi-site operations, staying ahead of these changes is essential to controlling costs and achieving sustainability goals. As renewable energy adoption accelerates and new market mechanisms come into play, businesses need to rethink their procurement strategies to remain competitive.
By embracing renewable energy, leveraging smart energy management systems, and adapting to regulatory reforms within the NEM, companies can turn today’s challenges into opportunities for long-term cost savings and resilience. This is the future of energy procurement—where proactive planning leads to operational success.
Renewable Energy Growth and Its Impact on Pricing
Renewable energy’s share of the NEM continues to expand, with significant contributions from wind and solar. As of 2023, renewables accounted for more than 35% of the total energy generation in the NEM. This growth is being propelled by increasing investments in renewable energy projects, government incentives, and corporate demand for cleaner energy. However, this transition also brings variability in energy supply, influencing pricing and procurement strategies.
In South Australia, renewable energy now represents over 60% of the state’s energy generation. This significant reliance on wind and solar has led to periods of negative wholesale pricing during times of excess renewable output. For businesses, this presents both challenges and opportunities. Those that have embraced Power Purchase Agreements (PPAs) for renewable energy have secured more predictable, lower-cost energy, reducing their exposure to price volatility.
For instance, 2024 has seen a surge in renewable energy PPAs. Notable deals have included a record 2.6 TWh signed by Rio Tinto, and a significant transaction involving BM Alliance Coal securing renewable supply for their mining operations by 2027. However, market tightness, particularly in Victoria and New South Wales, has reduced the number of new deals compared to previous years.
Our Advice
For businesses seeking to optimise their procurement strategies, long-term renewable energy contracts such as PPAs are an important tool. These agreements not only help mitigate exposure to price fluctuations but also support sustainability targets. Organisations with 2030 goals should start planning now, as demand for renewables is expected to increase, while supply in the near term remains tight. Companies should explore securing contracts that lock in competitive pricing, ensuring they stay ahead of market challenges and sustainability pressures.
Volatile Wholesale Energy Prices
Wholesale energy prices in the National Energy Market (NEM) are subject to significant volatility, driven by various factors such as supply-demand imbalances, coal plant outages, and weather events. These factors have created substantial price fluctuations in recent years, and 2022 remains a key example. The confluence of coal-fired power outages, supply disruptions, and early winter conditions saw wholesale prices soar above $300/MWh, triggering a market-wide response to stabilise supply.
In June 2022, sustained high prices resulted in an administered price cap of $300/MWh across several NEM regions, including Queensland, Victoria, and NSW. The market’s reliance on gas-fired generation, as coal supplies dwindled and demand spiked, pushed prices to unprecedented levels. Heavy rain in NSW and Queensland further exacerbated coal shortages, while international gas and coal prices surged due to geopolitical tensions like the war in Ukraine.
While 2024 hasn’t seen a crisis of the same scale, the underlying volatility remains. For businesses operating in the NEM, proactive energy management and flexible procurement strategies are essential. Participation in demand response programs continues to offer a critical solution for large energy consumers, allowing them to adjust consumption during peak pricing periods and mitigate exposure to sudden cost surges.
Our Advice
Businesses should closely monitor market conditions and remain agile in their energy procurement strategies. Tools like demand response mechanisms and long-term contracts that hedge against volatility can help mitigate risks and provide cost stability in an unpredictable market. Staying informed and exploring options like fixed-price contracts, renewables integration, and energy efficiency upgrades will be vital in navigating ongoing market challenges.
Shifts in Regulatory Policies and Market Reforms
Australia’s energy market reforms are reshaping how businesses interact with the NEM. In 2023, significant changes were introduced, including the capacity mechanism to secure energy supply during peak periods and policies designed to phase out coal-fired plants in favour of greener alternatives. These changes are transforming energy pricing structures and compliance requirements, directly affecting procurement strategies.
One notable development is the Wholesale Demand Response Mechanism (WDRM), introduced by AEMO. This mechanism allows large energy users to reduce their demand during high-cost periods and bid these reductions into the wholesale market. Businesses participating in WDRM can benefit by lowering their exposure to volatile energy prices while generating revenue through market payments for their reduced demand.
Our Advice
To optimise energy procurement in 2024, engage early with the Capacity Mechanism to secure reliable supply during peak periods, preventing cost surges. Align procurement with Renewable Energy Zones (REZs) for better access to affordable renewable energy, especially in areas with fewer project delays. Leverage demand-side flexibility programs like virtual power plants (VPPs) to reduce reliance on traditional energy sources and generate revenue through grid services. Lastly, factor in evolving compliance costs tied to carbon pricing and renewable energy targets by building flexibility into contracts, protecting against sudden regulatory cost increases.
Sustainability Pressures Driving Energy Choices
Sustainability is increasingly becoming a corporate priority, with many businesses setting internal goals for carbon neutrality or renewable energy procurement. This trend is reinforced by shareholder expectations, customer demand, and government policies. For large enterprises, the way energy is sourced has become a critical component of corporate responsibility.
Sustainability Goals in Action
Coles Group is making substantial strides towards achieving its goal of sourcing 100% renewable electricity by the end of FY25. As of FY23, Coles has procured 45% of its grid electricity consumption from renewable sources, supported by long-term Power Purchase Agreements (PPAs) and Large-Scale Generation Certificate (LGC) arrangements. These include partnerships with CleanCo in Queensland and the Lal Lal Wind Farms in Victoria, which are set to run through 2030. Coles has also continued to expand its on-site solar installations, with 88 stores equipped with solar panels, generating 12,720 MWh of renewable energy.
Coles’ renewable energy agreements are part of its broader sustainability strategy, helping to reduce both its carbon footprint and exposure to fluctuating wholesale energy prices. By locking in long-term renewable energy contracts, Coles is better positioned to stabilise operational costs while advancing its environmental commitments.
Our Advice
For businesses seeking to meet sustainability goals, securing long-term renewable energy contracts is essential. Power Purchase Agreements (PPAs) provide price stability and reduce carbon footprints, protecting against energy market volatility. In light of increasing stakeholder and regulatory pressures, acting now to integrate renewable sources will not only stabilise costs but also enhance your company’s reputation for environmental responsibility. Prioritising these investments ensures your business remains competitive as sustainability becomes a non-negotiable corporate obligation.
Adoption of Smart Energy Management Systems
With energy prices projected to remain high and regulatory frameworks becoming more complex, businesses are increasingly adopting Energy Management Systems (EMS) to streamline their energy use and drive operational efficiencies. The Australian Energy Management market is expected to reach AUD$207.28 million in 2024, with an annual growth rate of 10.96% through to 2028. This reflects the growing demand for systems that offer real-time data and optimisation capabilities, particularly in sectors with multi-site operations and high energy consumption.
Companies using EMS are able to monitor energy performance across multiple locations, make data-driven adjustments, and participate in demand response programs. This is especially important as energy prices fluctuate and businesses aim to meet sustainability targets. With smart EMS technologies, companies can better integrate renewable energy sources like solar and wind into their energy mix, further reducing costs and carbon footprints.
Our Advice
Given the strong growth in the energy management market, investing in smart EMS is a strategic move for businesses seeking long-term cost reductions and sustainability improvements. Beyond simply monitoring usage, these systems provide the insights needed to align procurement strategies with energy market trends, especially as the market becomes more digitised and competitive. Businesses that integrate these systems early will be in a better position to handle rising energy costs and meet stricter regulatory requirements, while also taking advantage of real-time data and participation in demand-side programs.
Strategic Energy Procurement for Future Resilience
As Australia’s energy market continues to evolve, businesses that stay ahead of trends—whether through securing renewable energy contracts, leveraging demand response programs, or adopting smart energy management systems—will be better positioned to manage costs and meet sustainability targets. The ability to anticipate and adapt to regulatory changes, price fluctuations, and technological advancements is critical for future resilience.
At Choice Energy, we specialise in helping businesses optimise their energy procurement through these customised solutions. To ensure your business can benefit from these strategies, we offer a quick, free energy audit. By analysing your current energy usage and identifying cost-saving opportunities, we help you take the first step towards a procurement plan that fits your needs.
Simply upload your energy bills, and our experts will recommend the best approach to reduce costs and improve efficiency. Get started today and begin your journey towards smarter energy management.
