Electricity price reprieve may be temporary, ‘only way is up’ Reputex says

Electricity users have been warned to prepare for future increases in electricity prices, as recent falls in prices may be quickly undone once the global economy begins to recover from Covid-19 related disruptions.

In a briefing note on recent electricity price movements, energy market analysts Reputex has described the market conditions created by Covid-19 as creating a ‘perfect storm’ for electricity prices, having triggered reductions in operational demand, lower gas and coal prices, while occurring during a period that has followed strong investment in new wind and solar projects.

However, the analyst firm has also warned that many of these factors will only be temporary, with an expectation that a post-Covid-19 recovery will see energy demand recover to normal levels, along with a recovery in global fossil fuel prices.

The analyst firmed suggested that ‘the only way is up’ for electricity prices, and that consumers should not expect that the currently low electricity prices represent a new normal in the energy market.

A fall in both wholesale and retail electricity prices has been welcomed by federal energy and emissions reduction minister Angus Taylor, who used the result to call for increased gas supply, but without acknowledging the role that record high production from renewable energy sources had played in pushing down electricity costs.

Average wholesale electricity prices across the National Electricity Market have fallen to between $33 to $59 per MWh, depending on the state and are up to 45 per cent below spot prices during the same period last year.

A collapse in global gas prices has helped push down wholesale electricity prices, as the cost of gas for electricity generation has fallen considerably. As gas generators often set the marginal price within the National Electricity Markets, falling gas costs have pushed spot prices down.

While local gas prices have fallen to some degree, the ACCC has argued that Australian consumers are not receiving the full benefit of a collapse in the global gas market, labelling the local industry ‘dysfunctional’, as it continues to see local users pay more for gas compared to export customers.

So the benefits of lower gas prices are likely to be only temporary unless more dramatic intervention in the market is undertaken, as gas producers will hope that gas prices return to their historically high levels, and analysis from Reputex suggests that gas prices will progressively recover over the next few years.

“After 2021, steadily rising gas prices (off a low base) are expected to begin to break the low price environment. We expect all states to see steadily rising gas prices, but with differing results based on gas’ relative influence on prices. In the northern regions, prices are forecast to rise slightly as black coal finds some relief from rising gas prices along with the withdrawal of Liddell,” Reputex said in a briefing paper on wholesale electricity prices.

Reputex suggests that the best antidote for higher gas and coal prices are stronger policies to support coordinated investment new wind, solar and storage projects.

Reputex said that parts of Australia attracting higher levels of investment in new wind and solar projects would see lower prices for longer, as the renewable energy sources are not subject to the same fuel price fluctuations experienced by coal and gas generators.

“Despite the impact of higher gas prices, the continued commissioning of renewable energy capacity, along with investment under the VRET and QRET and the installation of small-scale rooftop solar, is forecast to maintain some downward pressure on wholesale electricity prices,” Reputex said.

“We continue to forecast renewable energy generation will grow to almost 50 per cent of electricity in the NEM by 2030, despite the absence of a federal policy framework beyond the LRET. Even without further policy, renewable energy is calculated to make up of 75 per cent of generation by 2040.”

The latest Electricity Statement of Opportunities published by AEMO on Thursday has detailed how growing supplies of wind and solar will help underpin the reliable supply of electricity across the market, and that the market is unlikely to breach reliability standards over the next decade.