Australians are already paying some of the world’s highest electricity prices, and it’s only set to get worse.
With power bills expected to soar for households throughout Australia, high wholesale electricity prices are the “new normal” and politicians need to be honest with voters about it, the Grattan Institute thinktank says.
It says federal and state governments must tell voters that government intervention to keep ageing legacy assets – such as old coal-fired power stations – working is a poor long-term solution and the problem can only be fixed with credible, bipartisan energy and climate change policy that encourages new investment.
The Grattan Institute has released a new paper, Mostly Working: Australia’s Wholesale Electricity Market, that has identified three underlying causes of higher energy prices in the National Electricity Market in recent years.
The National Electricity Market (Nem) is the network of transmission lines and cables spanning Australia’s eastern and south-eastern coast, delivering electricity to Queensland, New South Wales and the ACT, South Australia, Victoria, and across the Bass Strait to Tasmania.
The Grattan Institute says wholesale electricity prices rose across the Nem by 130% on average between 2015 and 2017, with household bills in some states increasing by up to 20% in 2017 alone.
It says that happened for three underlying reasons:
1. Two big, old, low-cost, coal-fired power stations closed (Northern in South Australia in 2016, and Hazelwood in Victoria in 2017), reducing supply and pushing prices up. This accounted for about 60% or $6bn of the increase in the value of electricity traded annually in the Nem between 2015 and 2017.
2. The cost of key inputs, especially gas but also black coal, rose just when the plants they fuel were needed more often, pushing prices up further. This accounted for nearly 40% of the increase in wholesale prices between 2015 and 2017.
3. Generators were “gaming” the system: using their power in concentrated markets to create artificial scarcity of supply and so force prices up. The Grattan Institute says gaming is completely legal within the current market rules and may add as much as $800m to the value of electricity traded in the Nem in some years. It says gaming has occurred in Queensland and South Australia, there are signs of it in Victoria since the closure of Hazelwood, and it could appear in NSW as supply tightens with the scheduled closure of the Liddell coal-fired power station in 2022.
The Grattan Institute says those events mean wholesale prices are unlikely to return to previous levels of around $50 per megawatt hour.
Families with a hefty mortgage are among those most vulnerable, with energy bills consuming a large portion of their household budgets.
Australian families are now seeking cheaper alternatives
Dean Spaccavento, the CEO of home energy management start-up Reposit Power, said people are looking to solar and battery storage to reduce their mounting bills.
“We’ve seen a massive boost to the solar battery industry as Australian families try to beat rising power costs.”
Tim Buckley, from the Institute for Energy Economics and Financial Analysis, told Guardian Australia wholesale electricity prices would come down in the long term if the current “energy policy failure” was resolved and new renewable energy and pumped hydro storage capacity were to be added to the system.
“But retail electricity prices in Australia are unlikely to come down materially any time soon,” Buckley said.
“Wholesale generation costs are 10-20% of the total retail price of electricity. The grid transmission and distribution [T&D] is 50% of the retail price total – so gold plating of T&D is the real reason retail electricity prices are at record highs, and likely to stay there.”