South Australia’s energy price hikes: Blame inflated bills, not renewables

The campaign against renewable energy is in full swing, and particularly so in South Australia. First it was the fear of blackouts and the end of a modern economy, all the fault of wind energy. Now it is soaring electricity costs, with the same culprit.

A typical example came in the Australian Financial Review last week, Electric shock: SA business fears being stuck with high costs for years, which documented how some businesses were paying nearly double the amount for electricity than they had been paying last year. And it was all the fault of renewables.

Apart from wondering how, the AFR might also have wondered why. There is no doubt that fixed contracts set by the retailers have jumped sharply. But why are businesses agreeing to pay them? They are costing those businesses up to 50 per cent more than readily available alternatives.

Michael Williams, from the energy consultancy firm Altus Energy Strategies, is wondering the same thing. In an analysis posted here, Williams points out that companies who did not lock into retail contracts are saving significant amounts of money.

It seems pretty clear that this is a case of a small number of energy retailers using their market power to boost prices beyond where they need to be, just like generators are alleged to do on occasions both in South Australia and Queensland. It is a common complaint in Australia, and one that reflects the market power of a small number of incumbents.

The nominal reason for the big rise in fixed contracts is the imminent closure of the Northern brown coal power generator in Port Augusta, and the assumption that wholesale prices will surge as the local grid depends more on gas and the interconnector to fill in the gaps of wind and solar, which will provide around half the state’s needs.

But Williams questions the market’s pricing. He notes that this is not the first time Northern has withdrawn from service. When it did so before, power prices jumped – but only by around half the 90 per cent price hike indicated in the current futures market.

The rise in wholesale prices when Northern was taken out of service was from around $45/MWh to $70/MWh, broadly equivalent to the now defunct carbon price. The futures market, and retail offerings, are now pricing this at more than $90/MWh.

“A lot of businesses have locked in fixed prices of 9c/kWh. These people have been taken to the cleaners. They’re paying twice what the actual energy price is,” Williams says.

The best alternative, Williams suggests, is to operate what is known as a market pool price pass-through. Williams says this reflects the actual cost of generation, has greater transparency and also usually leads to businesses taking greater interest in their energy consumption, and finding greater efficiencies.

Williams initiated such a program when he was looking after energy consumption at the major cement producer Adelaide Brighton, where he says the company consistently saved $5 million a year, a saving of more than 25 per cent. Ironically, the AFR’s story was based on an interview with Austral Bricks, a major rival, which takes the flat retail offering.

Williams says quite a few businesses with significant energy consumption are exposed to pool pricing – and they have consistently done very well out of it.

This graph shows that only on three days of the first two months of the year – during a hot summer, as well – did the daily average price exceed the flat retail price ($91/MWh) charged by retailers.

“On a very high proportion of the days the average price was at or below 50 per cent of the fixed retail price,” he says.

This resulted in the following pricing pattern:

• Over the first two months of 2016 the average SA spot price was $45.55/MWh (or 4.6 c/kWh)
• The average spot price during peak periods was $64.95/MWh (or 6.5 c/kWh).
• The average spot price during off-peak periods was $33.84/MWh (or 3.4 c/kWh).

Based on this data, a business with, say a flat load of 1MW of average demand, and using pool-pricing pass throughs, would have saved $65,000 – or nearly one-half – on the fixed price offered by retailers. If it used demand management during the one “scary” spike above $5,000/MWh, then the saving would have been $76,000.

Williams says the flat prices have been set so far because the retailers have looked at the worst case scenario and used it as basis for retail pricing.

“The message here is that you have to take action yourself to solve your problems, not wait for somebody else to solve them for you,” Williams says. And as RenewEconomy has noted before, the electricity market is complex, and energy retailer profit from their defacto maxim of “confusion is profit”. But business customers should do better.

There is another point to be made – when prices surge, it is not wind and solar that are pushing them up, but the use of gas and diesel, as Tasmania is finding out to its huge cost at the moment.

And South Australia has a history of surging electricity prices – in fact, prices were more volatile before the introduction of renewables than they are now. Quite what happens now is the subject of much speculation, both on and off the market.

Some suggest a ramping up of the efficient Pelican Point gas generator could moderate prices, others suggest that because the market power will be in the hands of just a few gas fired generators, then the potential for higher prices is greatly increased,

The second point to be made addresses the contention that renewables forced the exit of coal-fired generation. As Williams points out, if a coal-fired generator can not make money when the pool price averages more than $50/MWh, then it probably shouldn’t be in business. Within a couple of months, the Northern power station won’t be.

Williams also suggests businesses should invest in solar – both in rooftop on their premises, and in larger arrays of around 1MW. At a pool price of more than $50/MWh, and strong prices for renewable energy certificates, the payback for such plants could be as low as three years.