Higher wholesale electricity prices are the “new normal” and unlikely to return to previous levels of around $50 per megawatt hour, according to a new report from the Grattan Institute.
The ‘Mostly working: Australia’s wholesale electricity market’ report says governments must provide stable energy and climate change policies to encourage investment in low emissions power like solar energy.
The findings come as state and federal ministers prepare to debate the proposed National Energy Guarantee (NEG) in August. According to the report, the NEG could provide the policy stability needed for a healthy energy market.
However, keeping ageing coal-fired power stations open is not the solution. The report opposes the recent push from members of the Coalition to keep the NSW Liddell power station in operation.
Direct government intervention will “spook” investors, it says. The report also raises a red flag about the Federal Government being sole shareholders in the Snowy Hydro energy scheme.
Why higher wholesale electricity prices are here to stay
Wholesale electricity prices arose across Australia’s National Energy Market (NEM) by 130 per cent between 2015 and 2017.
The value of electricity traded in the NEM more than doubled from $8 to $18 billion. In 2017 alone, household bills also increased up to 20 per cent.
The report gives three drivers for the upward trend in wholesale electricity prices:
- The closure of two large and ageing coal fired power stations. South Australia’s Northern closed in 2016 while Victoria’s Hazelwood closed in 2017.
- Prices of key inputs like gas and black coal rose just as more generation was required to balance closures.
- Energy generators ‘gaming’ the system by creating artificial scarcity of supply in concentrated markets.
Recommended action to reduce gaming and price rises
According to the report, gaming of the system by electricity generators can be stopped with new regulations. Gaming occurs in Queensland and South Australia and has also appeared in Victoria since the closure of the Hazelwood coal-fired power station. It happens when generators take advantage of the electricity price bidding system to artificially force prices up.
The report recommends anti-gaming regulations and endorsement of the NEG. This would therefore provide credible bipartisan energy and climate change policy.
Clear investment incentives would then exist during times of low energy supply and rising prices. Australian households and businesses would subsequently get reliable low-cost, low-emissions electricity.
If the report is correct, homes and businesses that look to solar installations and battery energy storage will beat high wholesale electricity prices by generating their own.
