AEMC sees power prices moderating, but takes pot-shot at renewables

The chief rule maker for Australia’s energy markets has released its latest appraisal of residential electricity price trends, and the news is both good, and bad.

In its fifth annual report prepared for the Council of Australian Governments’ (COAG) Energy Council, the Australian Energy Market Commission has declared that some relief is in sight for consumers in the next two years, with electricity prices around the country (with the notable exception of Queensland, WA and the Northern Territory) “mostly flat or falling”, after years of sharp and jarring rises.

“At a national average level, residential electricity prices have declined in 2014/15, and are expected to fall again in 2015/16 followed by a moderate rise in 2016/17,” the report says.

That’s the good news. The bad news is that the conclusions the AEMC comes to in its report – mostly based on analysis by Frontier Economics – seem to be informed by the same anti-renewables sentiment that has plagued Australian energy policy.

The report takes aim at the now removed carbon price and the Renewable Energy Target, for their adverse impact on prices. In the case of the RET, it says it has pushed down wholesale power prices, but says this will not last when coal-fired generators leave the market.

It seems to ignore the benefit of having renewables – compared to business as usual – which was underlined even by the Abbott government’s RET Review, and of having coal-fired power stations out of the system.

On the RET, while the AEMC acknowledges that its main function – to increase supply of new generation – tended to reduce overall wholesale spot market prices, it goes on to reason that the cost of meeting the RET to existing thermal generators is having the opposite effect.

“Falling energy consumption, along with growth in renewable energy capacity under the Large-scale Renewable Energy Target (LRET), has resulted in excess generation capacity in the NEM,” the report says.

“The contribution of these two factors has, and is expected to continue to, put downward pressure on wholesale energy purchase costs.

“This effect may not be sustainable in the medium term, as depressed wholesale prices will likely force unprofitable generators to exit the market and the consequent reduction in supply will eventually put upward pressure on wholesale electricity prices,” the report says.

“When this occurs, the cost of the LRET will become more apparent through consumers’ retail bills.” But it doesn’t account for how much lower the prices would be otherwise.

And while the report makes cursory mention of the “previously significant” cost to consumers of the proliferation of network poles and wires, AEMC Chairman John Pierce says this effect was now expected to moderate under new rules introduced by the Commission.

In its analysis of the Queensland market, the AEMC says the RET does not contribute as much to lowering wholesale price as elsewhere, because hardly any large-scale wind farms were built. But it ignores the impact of rooftop solar, now at more than 1.3GW on one in four homes in the state, and accounting for 17 per cent of household demand. Even the state’s biggest generator, Stanwell Corp, blamed solar for pushing down wholesale prices and removing its profits.

To put things in a little perspective, these graphs show the impact of environmental policies. In the top, they are the little shade of white. In the bottom graph, the cost of networks is going to rise 3c/kWh (despite, or even because of a fall in demand, according to the AEMC). This is three times the rise in the solar bonus scheme.

On South Australia, where wind and solar are combining to provide around 40 per cent of household energy needs, the report notes that wholesale energy costs are expected to fall by around 20 per cent, due to an oversupply of generation capacity – a result, it says “of falling energy consumption and growth in renewable generation under the Renewable Energy Target, most of which has occurred in South Australia.”

The report then goes on to turn this into a negative, however, again arguing that the medium-term impact of low wholesale energy prices – which has, apparently, offset the costs of the RET for South Australian consumers in the short-term – will be bad for consumers, forcing unprofitable generators exit the market.

“If this occurs,” the AEMC says, “the cost of meeting the Renewable Energy Target will become more apparent through South Australian consumers’ retail bills.”

The AEMC also publishes this graph as its main feature. It shows how shopping around can give you big discounts, but because it doesn’t break down the make-up of the retailers component, it doesn’t explain how those gains are almost entirely offset by the “retail headroom” that the local pricing regulator allows the retailers to charge to pay for that discount.

One energy minister that was crowing about his electricity prices was ACT Minister for the Environment, Simon Corbell, who said that electricity prices in the capital are set to fall a further 7 per cent in 2015/16 due to declining network prices, and the ACT enjoys average prices 30 per cent below the national average despite the territory’s move to large-scale renewables.

He said the report also shows that the cost of the ACT’s renewable energy and energy efficiency schemes are only 6% of total electricity charges in 2015/16. To the end of March 2014, the 24,000 households that participated in our Energy Efficiency Improvement Scheme are already saving around $318.

As this graph below shows, the ACT’s network costs are a small proportion of the total. In fact, at 6.2c/kWh, they are one-third of the costs of Queensland. It all comes down to the cost of delivery.