The “substantially lower” wholesale electricity prices South Australia has achieved through its world-leading uptake of renewable energy are not being passed through to customers, a new report has confirmed.
A draft report from the SA Producticity Commission finds that despite the state’s solar and wind delivering some of Australia’s lowest wholesale spot prices, prices faced by the state’s consumers were around 20% higher than consumers in New South Wales.
And it warns that without the rapid implementation of market and policy reforms, the situation for consumers will only get worse as more and more renewable energy capacity is added.
The Commission was asked in November of 2021 to assess the competitive advantages South Australia was getting – or not getting – from its huge resource of small and large-scale solar and wind power.
In 2020/21 this level of wind and solar had reached a world leading 62% of the state’s electricity generation, and has since increased further, heading towards an unofficial target of net 100 per cent by the end of the decade.
The report finds that while the bountiful wind and solar has flipped the state’s wholesale spot prices from being among the highest in the national electricity market (NEM) to among the lowest, this is yet to flow through to electricity users.
The report shows that South Australian consumers have had the highest average wholesale price component of their electricity bills, at 11.31c/kWh, slightly above the 11.26 c/kWh paid by Victorian consumers and well above the 9.41 c/kWh paid in NSW.
“The state’s ability to take advantage of these natural advantages has been limited by problems in the local electricity market which reduced the pass through of these lower prices to consumers, and from several adverse policy changes,” the report says.
“This means that South Australia is not currently experiencing a competitive advantage due to renewable energy.”
Of course, critics of renewables will seize on this as evidence that the state’s grand renewables “experiment” – as it has been dubbed – has been a failure, and that the only cheap power is the sort derived from so-called “baseload” coal and gas generators.
This is not the case. The state’s history of volatile electricity prices dates back to well before the rise of renewables, for reasons historically linked to its gas power supply and its high transmission costs – two things that continue to affect market outcomes today.
This has changed with the arrival of renewable energy – a fact that is well supported in the report. The question is why the state’s now consistently lower wholesale spot prices are not being reflected in the wholesale price component of SA retail bills.
According to the Commission, there is “no consistent feedback from stakeholders” on why this is happening, but the general consenus is that some blame can be laid with “flaws in the NEM,” particularly on the demand side, as well as some policy decisions made on the run.
The report runs through a list of potential explanations for the price disconnect, including the impact of purchases outside the spot market, including hedging contracts and Power Purchase Agreements, and – perhaps most critically – problems on the demand-side.
“Drawing on our initial analysis and stakeholder feedback, it appears that South Australia’s grid would benefit from both an increased load during the day that can be readily curtailed, and increased competition in on-demand generation,” the report says.
“It is the case, however, that the quantity of electricity demanded within the South Australian
market is much more variable than that in New South Wales, with more frequent periods of
very low demand (compared to the average) and more frequent periods of very high demand.
“Each of these types of variation produce challenges for the grid.”
Addressing these challenges is obviously a vital task and the Commission has used the draft report to call on stakeholders to weigh in with potential approaches to removing the barriers to what should be South Australia’s renewable energy competitive advantage.
For its part, the Commission highlighted the absence of any state body “tasked with delivering lower prices for consumers.”
“[This] means that interventions to either reduce peak demand (through demand response
markets) or moderate the prices charged for peak power supply are not explored,” it said.
And the Commission has also warned that there is no time to lose in addressing the various market “flaws” that are stopping the benefits of renewables being passed through to consumers.
“Initial indications from the modelling are that plausible trajectories for additional renewable energy generation in South Australia are likely to worsen the current disconnect between average spot prices and the prices actually paid by electricity users,” it says.
“Without reforms such as additional competition in the on-demand generation market, or changes to the regulatory structure of the NEM, there is no reason to expect expanded renewable generation to deliver substantial reductions in South Australian retail prices.”
