Higher energy prices are here to stay – here’s what we can do about it

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The best thing our political leaders can do to keep a lid on electricity prices is to help create stable, bipartisan energy and climate-change policy.

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Australia’s energy prices have doubled since 2015. Photo by José Alejandro Cuffia/ Unsplash, CC BY-SA

The good news is that after two years of big rises, wholesale electricity prices have fallen somewhat since mid-2017. The bad news is that prices are still much higher than they have been for most of the past 20 years. And the worse news is that we had better get used to these high prices.

A new Grattan Institute report, Mostly working: Australia’s wholesale electricity market, shows wholesale prices jumped from less than A$50 per megawatt hour (MWh) in 2015 to around A$100 per MWh in 2017.

But it finds that most of this increase is the market working as it should. And it urges politicians to tell consumers a harsh truth: high electricity prices, well above A$50 per MWh, are here to stay.

The best thing our political leaders can do to keep a lid on electricity prices is to help create stable, bipartisan energy and climate-change policy. This will encourage new investment so Australian households can get low-cost, high-reliability, and low-emissions electricity.

Why prices went up

For most of the past 10 years, Australia’s National Electricity Market (NEM) was oversupplied and powered by low-cost fuels in old power stations. Then things suddenly changed.

Big, coal-fired power stations were closed – Northern in South Australia in 2016, followed by Hazelwood in Victoria in 2017. So supply was reduced, pushing prices up. At the same time, gas and coal prices rose rapidly, increasing running costs for electricity generators, which pushed up prices even further.

Our report shows about 60% of the wholesale price rises were caused by the
fundamental changes in supply. The NEM now needs new investment, particularly because more old generation assets, such as the Liddell power station, will be turned off in coming years as they reach the end of their working life.

But the electricity produced by new generators of any type, including coal, is expected to cost more than the electricity produced by the old legacy assets.

Up to 40% of the wholesale prices rises of recent years were caused by the higher
input costs for generators. Coal and gas are two of the main inputs to electricity produced in the NEM (which covers Queensland, NSW and the ACT, Victoria, South Australia and Tasmania). Coal prices nearly doubled between 2015 and 2017; gas prices more than doubled.

As a result, wholesale electricity prices increased so generators in the NEM could cover their costs of generating electricity. The direct cost of higher fuels to generators is up to A$4 billion a year.

Higher fuel costs for one generator can increase revenue for all generators, because all generators get paid the same spot price.

If the generator that is setting the price at a given time needs a higher price to cover their costs, all other generators that produced electricity at that time also get a higher price, even if their costs have not risen. This encourages new investment in cheaper generation and is the market working as it should.

But a small amount – about 2% – of the wholesale price rises of recent years was caused by generators “gaming” the system. And that is certainly not the market working for consumers.

Big generators can game the system by using their market power to create artificial supply scarcity, which forces short-term price spikes. It is not illegal. Currently it is within the market rules for generators to bid up the price of their electricity until just 67 seconds before it is needed.

By then it is often way too late for other generators to respond with lower prices. It’s a bit like Uber surge pricing but with no warning. Ultimately, the consumer cops the bill.

So what can be done?

Our report has three main suggestions.

First, politicians should be honest with the electorate, and explain why prices are unlikely to fall to the levels seen in 2015. Historic oversupply in the NEM is disappearing, gas prices are unlikely to fall back to where they were in the past, and new-build generation, including coal, is expected to need revenue well above A$50 per MWh to be viable.

Second, governments should finally provide Australia with stable energy and climate-change policy to make the transition to new generation technologies as smooth as possible. This would also reduce risk for new investment, which lowers financing costs and electricity prices.

The ConversationThird, the Australian Electricity Market Commission should change the rules to eliminate, or at least limit, “gaming” by electricity generators.

Lucy Percival, Associate, Grattan Institute

This article was originally published on The Conversation. Read the original article.

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20 Comments
  1. John Saint-Smith 8 months ago

    Are there really voters out there who still believe our politicians predictions about anything? Surely we’ve learned that ‘reducing the cost of electricity’ is ‘true’ even if the reduction is less than 10% after a 100% increase. It’s like ‘on target to meet our Paris obligation’ to reduce overall emissions by 26% has morphed into ‘ only decreasing electricity emissions per capita by 26%’ by renting emissions offsets with carbon farming and ‘avoided forest clearing. That is a vastly different proposition.

    We’re well on the way to meeting our obligations, but in no way are we likely to save the planet. What a farce!

  2. Energy Governator 8 months ago

    The dominant driver of increased electricity costs over the past decade has been increases in network charges – not wholesale prices or retail margins. The AER has tried to get tough with this, but have been thwarted by court decisions in favour of networks. And those prices are now locked in for years.
    If the Commonwealth government or COAG Energy Council were serious about reducing electricity bills (in the future), they would be revising (down) the network revenue determinations policies and laws.

    • Ian 8 months ago

      Totally agree. There is a vast discrepancy between wholesale electricity price be it on average 5c/kWh or 10c/kWh as stated in the article, and the retail prices of 27c/kWh plus a fixed fee of a dollar a day. Does Lucy think we’re bloody stupid?

      • Greg Hudson 8 months ago

        She may not think we are stupid, but I certainly think SHE is !

  3. Kevfromspace 8 months ago

    It’s time for the NSW Government with its >$3b budget surplus to write down NSW network assets, bringing down the bills of NSW residents. Don Harwin talks a big talk but offers nothing of substance to the consumer.

    • Joe 8 months ago

      I think the Don has his heart in the right place if you go on what he says. Actioning by him is almost impossible with Premier Gladys sitting in the Big Chair…she who says that “we shouldn’t transition too quickly into Renewables”.

      • Kevfromspace 8 months ago

        Probably true Joe. Funny how, on the federal level it’s the Nationals dragging the government down on climate ambition and trying to slow the halt of renewable energy, and at the NSW state level it’s the exact opposite. Truth is stranger than fiction…

  4. solarguy 8 months ago

    Lucy, prices have been going up in NSW since 2003. Bigger increases have been since 2009 to the present of approx, 100%. These increases have been gold plating of network costs.

  5. Syd Walker 8 months ago

    “Higher fuel costs for one generator can increase revenue for all generators, because all generators get paid the same spot price.

    “If the generator that is setting the price at a given time needs a higher price to cover their costs, all other generators that produced electricity at that time also get a higher price, even if their costs have not risen. This encourages new investment in cheaper generation and is the market working as it should.”

    My apologies, but I cannot understand the argument in these two paragraphs. In what way is this “the market working as it should”? It seems quite the opposite to me.. why should all consumers get slugged for an increase in one suppliers costs?! And why is this arrangement necessary to encourage new investment in cheaper energy? Surely the prospect of winning competitive bids is sufficient incentive?

    • Chris Fraser 8 months ago

      In the Merit Order Effect, it is the last MW that AEMO calls for (which is the most expensive MW) and which Generator sets the price that everyone in the stack gets paid. Generators generally bid as low as they can. If they do not bid low, there is a risk that a Generator’s energy won’t be required by AEMO (ie wasted energy is produced from a spinning generator). This creates the competitive effect towards cheaper energy.

      • JackD 8 months ago

        Yeah maybe, but if a given consumption period requires say, 200MW to be available to achieve supply-demand balance, and if the generators can only muster up 199MW, then there is a price hike for that last 1MW (caused by generators staying quiet in their bidding processes) which results in a high price paid for that last MW. Yep, everyone (generators that is) wins, as that (usually much) higher price for the last MW is applied as the sell price for the other 199MW. One may look at the SA market and ask if that is what was happening there. Limited suppliers (generators) means that its easy (for any number of reasons) to not have sufficient generation available to bid in and supply the market. This environment reduces competitive effect and distorts the operation of the supply-demand balance.

        The analogy is sort of like being at the only petrol station on the Nullabor, where you really need 60 litres for the drive to the next one and being told you can only buy 55 litres at the advertised usual price. But hey they will sell you the last 5 litres which you badly need, for 20 x the unit price you paid for the other 55.

        Whatever you call this bidding behaviour, it’s allowed under the current Electricity Rules. Its a fine market based theory that should encourage lower pricing bids but the reality is something else, depending on which market is being looked at.

        And this is where high quality, high capacity networks can play a part, in allowing energy to be shifted from places of abundance, to places of scarcity. As we move away from centralised generation and over to distributed generation, networks will be needed to interconnect the disbursed generation with the load. It then also allows more generators to connect into the market.

        Or better still, set yourself up with sufficient solar and battery storage so you can avoid the high electricity prices altogether.

  6. MaxG 8 months ago

    Don’t you love it?! “Politicians should be honest” … really…. ROFL. The best thing I’ve heard in the long time.

    • Joe 8 months ago

      The honest pollie is the one that doesn’t open their mouth.

  7. Greg Hudson 8 months ago

    Lucy?… Grattan Institute? Are these two yet another FF lobby group? It sure sounds like it. e.g. :
    “But the electricity produced by new generators of any type, including coal, is expected to cost more than the electricity produced by the old legacy assets.”
    1. It is unlikely that there will ever be ‘new’ coal generators.
    2. Most likely new gen will be Wind, PV, Solar thermal or Hydro.
    3. There is no such thing as an honest polly.

  8. Mike Dill 8 months ago

    Go Solar!

  9. phred01 8 months ago

    simple solution for consumer if u have the real estate go off grid using solar wind & battery. the incumbents will get the message quickly

  10. Lamby 8 months ago

    The most obvious thing that needs to happen is to reserve gas on the East Coast.

    https://www.macrobusiness.com.au/2018/07/grattan-report-as-broken-as-energy-market/

  11. juxx0r 8 months ago

    Hello Lucy, to refute the titular assertion i proffer this:

    Grid prices are 30c/kWh and going up

    Solar is 5c/kWh and coming down
    Wind is 5c/kWh and coming down
    Battery storage is 20c/kWh and coming down.
    Diesel generator is 20c/kWh
    Gas generator is 18c/kWh

    Why the hell would you think that higher energy prices are here to stay?

    Lower energy prices are already here.

    Why dont you do us all a favour and do a piece on how the grid has failed us?

    • MaxG 8 months ago

      I can’t see lower energy prices for the consumer. Even if the odd retailer reduces the kWh unit price, you have already been pillaged with a supply charge. Raising prices, as it has happened the last 20 years, and the reducing the price in one year, is still an overall price increase.
      Renewables have come done, but profit taking remains; it is easy to do because consumers already pay a high price. Why reduce it unless forced to do so?

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