Electricity hedging: the risk management tool Australia can’t afford to ignore

Australia’s electricity market is in the midst of an historic transition to renewable generation, and with it comes unprecedented volatility. In 2020, the gap between the highest and lowest electricity prices over a four-hour period on the east coast averaged about $32. By 2022, that gap had surged to $244, according to Rystad Energy. Prices are increasingly driven by the intermittent nature of renewable generation, weather, supply constraints, and the accelerating retirement of coal-fired plants all against a backdrop of increasing demand and electrification. This combination of factors is expected to cause increasing volatility in wholesale electricity prices.

For corporate Australia, this isn’t just an operational headache; it’s a strategic risk that can hit earnings, impair assets, and even trigger defaults if it materialises.

The numbers tell the story. Underlying electricity consumption in the National Electricity Market (NEM) is forecast by the Australian Energy Market Operator (AEMO) to rise at a 2.6% compound annual growth rate (CAGR) over the next five years and 3.2% over the next decade, up from just 1% CAGR in the past decade. AEMO expects data centres alone to account for 25–30% of this growth in the next five years, with their energy demand rising by 25% CAGR to reach 12 TWh by 2029–30 – about 6% of total NEM consumption. Electrification and electric vehicle adoption are expected to each contribute another 15–20% of demand growth over the same period.

Yet, grid demand growth - underlying consumption growth less any generation behind-the-meter from households and businesses - will be more subdued, as Australia leads the world in rooftop solar uptake, at nearly 40% of Australian households. Rooftop solar now accounts for 13% of NEM generation, according to AEMO, up from virtually nil a decade ago. The rapid uptake of behind-the-meter batteries is further shifting demand patterns, making the grid’s role more complex and less predictable.

The energy trilemma

The “energy trilemma” – delivering a low-emission system that is also affordable and reliable – has become more acute. CBA’s own Trilemma Index shows that from 2019–20 to 2024–25, the NEM managed to decrease its carbon intensity by ~18%, but residential electricity prices lifted ~25% and reliability notices (LORs) surged ~480% in the same period. These LORs, which signal risks to supply, have become a regular feature, reflecting the system’s growing vulnerability to supply and price shocks.

Wholesale electricity prices have become increasingly sensitive to gas prices, especially during morning and evening peaks. We estimate east-coast gas prices will rise from $A13–14/GJ today to $A18–21/GJ by the end of the decade, further raising the risk of electricity price spikes.  For some major industrial consumers, we see $A18–20/GJ as the “red line” that could force them to exit the market, a scenario already playing out with recent closures in manufacturing. 

Transmission and approvals are major bottlenecks. AEMO data shows only a fifth of the 5,000 km of new transmission needed by 2030 has been installed. Delays or cost blowouts in these projects could further erode grid reliability and electricity affordability.

The volatility has drawn a crowd of global hedge funds to Australia’s electricity market. Marquee names including Citadel, Jane Street, Millennium and Danske have flocked to test their luck in a market where soaring temperatures and violent storms can play havoc with electricity prices.

In this environment, traditional procurement strategies that involve locking in fixed-price retail contracts and hoping for the best may no longer suffice. The market’s complexity and unpredictability call for more active, sophisticated risk management. Electricity hedging, once a niche tool for energy traders, is fast becoming mainstream for corporates seeking to regain control over their exposure.

A more active derivatives market

The latest NEM review recommends developing a more active derivatives market to support the transition to a greener grid. Financial instruments – such as futures and swaps – provide transparency, flexibility, and resilience. They allow businesses to separate physical supply from financial risk, a distinction that matters when volatility spikes.

As electricity hedging becomes mainstream, Commonwealth Bank is seeking to become a trusted counterparty for Australian corporates. We are building a client-centric business focused on supporting organisations with effective tools that help to manage risk, reduce costs, and seeking to achieve better outcomes through increased competition. By prioritising long-term relationships and a deep understanding of both the market and our clients’ strategic objectives, CBA’s entry into electricity derivatives reflects our dedication to supporting businesses for the long haul.

Electricity price risk is no longer a back-office issue; it’s a boardroom priority. If you’re a corporate leader navigating Australia’s energy transition, now is the time to engage. Hedging is about taking steps to enable your business to thrive in a market defined by volatility, not being undone by it. The tools exist. The expertise exists. Corporates need to identify who to partner with, to turn risk into a source of strength.