First the good news

Two weeks ago the war-induced spike in global liquefied natural gas prices hadn't had much of an impact on either domestic gas prices or electricity futures prices.

If anything, expected autumn-winter price increases were more moderate or restrained than in recent years, according to ASX Energy National Electricity Market futures for the June and September quarters.

The fundamental reasons for that remain the same today: gas storages are chock-a-block full; gas generators set prices in the NEM spot market less frequently and at lower levels, thanks to an explosion in batteries; and domestic gas prices don't always move in lockstep with global LNG prices.

Batteries are pushing gas generation aside in NEM price-setting, as shown by the Grattan Institute chart below.

Caveat emptor

The caveat to this view has been that if the war is prolonged and LNG export facilities in the Persian Gulf are damaged, things could get a lot worse in domestic gas and the NEM.

Things have gotten markedly worse, and now we can see the impact of the crisis on NEM futures more clearly, though not on east coast domestic gas prices which suggests the NEM futures response reflects a general decline in confidence in stable energy prices.

The question on many people's minds now is what impact higher NEM futures prices might have on default retail and small business offers.

Draft Victorian Default Offer and Default Market Offer determinations (the DMO applies in NSW, Queensland and South Australia) have not factored in the current energy crisis in the wake of the Iran war.

A good place to look is NEM futures for the 2026-2027 financial year (FY2027), because this period neatly matches the VDO/DMO determination periods.

Prices for these futures for the four mainland NEM states (NSW, Victoria, Queensland and South Australia) are up between 11% and 16% since March 2 (the first ASX trading day after news first broke of the US-Israeli bombing of Iran), or $8-$16 per megawatt hour.

These recent increases will certainly give the Australian Energy Regulator and Victoria's Essential Services Commission some gristly food for thought when they come to finalise their DMO and VDO determinations.

It's worth bearing in mind, though, that FY2027 futures don't look that bad over a longer period.

As the next chart shows, even after the recent increases, prices of FY2027 futures are below their levels of last winter in three of the four states (Victoria — coming from a lower level — is the exception).

Keep calm and carry on

In other words, it's not time to panic. Still, wholesale prices (NEM spot prices) make up between 30% and 40% of retail electricity tariffs, so any material increases in FY2027 futures prices will have to be taken into account when the AER and ESC make their final DMO/VDO determinations.

Their draft determinations showed reductions of 3% and 5% for residential and small business customers in Victoria,10% (residential) and 12.8% (small business) in Queensland, 1.3% (residential) and 15.2% (small business) in SA, and 2.7% to 4.6% (residential) and 8.5% to 21% (small business) in NSW.

Coming after hefty double digit retail and small business bill hikes in 2023 and 2024, these reductions were unsurprisingly celebrated by energy ministers. Now the regulators will have to decide how much to roll back the "everyone's a winner" vibe of their drafts, and the ministers may have some hedging to do.

Of course there's a massive level of uncertainty in trying to predict the future course of any war prosecuted by such unorthodox protagonists, let alone its impact on energy prices on the other side of the world.

Nevertheless, one consumer advocate estimates that 15% to 25% of any increase in futures prices between draft and final determinations might flow through.

A best case outcome might be for an increase of $1.50-$3 per megawatt flowing through to the wholesale electricity cost used to calculate the DMO. The potential impact on the DMO itself would be small - in the order of 3c/kWh or less than 1%.

In a bad (but not worst) case, the wholesale electricity cost might increase $7.50-$15/MWh, forcing the regulators to choose between walking back some of the bill savings implicit in the draft determinations. They could even have to turn the savings into increases where they were small in the first place (such as for SA and Victorian residential customers).

The next chart — the LNG netback price published by the Australian Competition and Consumer Commission — is a reminder of how uncertain the outlook is. The LNG netback price is an implied domestic gas price (calculated by deducting the costs of LNG processing (liquefaction or freezing) and transport from the prices achieved by Queensland's gas exporters.

It shows a marked increase over the first two weeks of the war (The ACCC is due to update the series later today).

East coast domestic gas prices are yet to show the effects of the sharp increases in global LNG prices since the war began, but as the US and Israel threaten to attack Iran's gas production facilities if it doesn't meet their demands, some effects may yet flow through to the domestic market. If they do, that could flow through to electricity prices.

The point is we don't know — and we shouldn't panic.