What's happening to residential electricity prices – and why

The release of the Australian Energy Market Commission’s latest report on electricity price trends in Australia delivers two key messages.
The first is that the “sudden” retirement of brown coal-fired generation capacity from the system will cause a minor and temporary jump in household electricity bills in various states, somewhere between 4 and 10 per cent, as predicted in Victorian government modelling.
The second message, although not clearly stated by the AEMC, is that there can be no more stuffing around with large-scale renewables policy.
Why? Because it’s more than likely that if the LRET had not been stalled by policy uncertainty, and the lack of contracts being written by major utilities, then these price rises would not have occurred to anyway near the same extent.
As it is, when those new projects are factored in to forward years, the effects are clear – the wholesale prices are coming down. Little surprise, then, that both the South Australian and ACT energy ministers were highlighting this in their response to the findings.
First, let’s look at what the report says:
The AEMC’s seventh annual effort based on analysis by Frontier Economics, forecasts that in Victoria, South Australia and Tasmania, the retirement of both the Northern (SA) and Hazelwood (Vic) coal power stations will result in wholesale electricity costs increasing between 2015/16 and 2017/18, before decreasing in 2018/19 due to new wind generation driven by the LRET and flat demand.
The Frontier analysis foresees wholesale electricity costs from 2015/16 to 2018/19 charting a rise from $55/MWh to $75/MWh in Victoria, up 35 per cent; $76/MWh to $104/MWh in South Australia, up 37 per cent; and $59/MWh to $79/MWh in Tasmania, an increase of 35 per cent.

Above is a chart from the report, which shows “the large effect of Hazelwood’s closure,” by comparing the estimated wholesale electricity purchase costs in each NEM region with a scenario where Hazelwood does not retire.
How will this affect the average consumer? The AEMC report says the “significant” effect on wholesale costs results in higher retail prices and bills.
“Figure 8 shows that electricity bills are expected to be between $30 and $200 higher in 2018/19 across NEM jurisdictions compared to a scenario where Hazelwood did not retire, or 2 to 10 per cent higher.

“Wholesale electricity costs are a key driver in customer bills. These costs are increasingly connected with the mechanisms used to achieve emissions policy objectives – that is, how the energy sector will contribute to the emissions reduction target set by the government as part of the Paris commitment,” explains AEMC chairman John Pierce.
However, the report also notes that a range of factors will drive wholesale electricity costs over the longer term, just as a range of factors have, and will continue to, influence the costs passed on to consumers in their power bills.
These factors, says Pierce, include the addition of renewable generation, and the cost of adapting the ageing grid to a new low-carbon generation mix.
It also includes the price for gas through gas-fired power stations: “Any future increase in the price of gas will result in higher input costs for generators, flowing through to higher costs in the wholesale electricity market,” said Pierce. “The report says gas prices are expected to remain flat but this is a volatile sector.”
And then there are the network costs, which – as we have pointed out on many occasions – make up around half of a residential electricity bill, and are expected to increase slightly across most jurisdictions – several distribution companies are right now duking it out with the pricing regulator over this very thing.
And finally, the way these trends affect an individual consumer, adds Pierce, will depend on how that consumer uses electricity. “This is particularly relevant as the consumption profiles of consumers become increasingly diverse,” Pierce says.
Now, let’s put all this in some perspective. While some news outlets and Victoria’s state opposition energy spokesperson are jumping on the occasion of this report to accuse the Andrews government of lying to consumers about the impact of Hazelwood’s closure, it is a good time to remind ourselves of a couple of key points.
The first point is that Frontier’s conclusions on the wholesale electricity price impact on residential bills are, in fact, right in line with what was calculated for the Victorian government by Carbon and Energy Markets’ Bruce Mountain – as we reported here. So, no real surprise there.
Another point Mountain notes is that it is impossible to say “unequivocally” exactly what the wholesale market is signalling. Add to this the fact that wholesale prices make up less than one-third of consumer bills, and it becomes clear how very unclear the business of modelling – and attributing – residential power price impacts is.

The third point worth noting is that the November decision by Hazelwood’s French owner, Engie, to close the plant by March 31, 2017, was no surprise. Or at least it shouldn’t have been.
As Tristan Edis wrote at the time, Engie’s decision – flagged by the company back in May – was a directive out of the company’s Paris head office, based on the global shift to low carbon generation, the global climate effort, and basic market economics.
“Engie didn’t want (this) high emitting power station, and no one else wanted to buy (it),” Edis wrote. “In spite of what Australian politicians might like to pretend, they don’t have super powers that enable them to hold back time and developments occurring internationally. Instead we need to accept and anticipate change.”
And that’s what the RET’s for. In the Frontier analysis, the AEMC report and many news stories covering them, Australia’s Large-scale Renewable Energy Target is named as one of the key upward pressures on wholesale electricity prices, as well as the end cost to consumers. But only for the short term.
What few people are saying out loud is that if Australia’s federal renewable energy policy levers were functioning as they should, then this would most likely have already corrected itself to become downward pressure on power prices.
“If we look internationally where coal is closing and wind and solar is basically taking its place, we see declining wholesale prices,” said Mountain in a phone interview on Wednesday; “we’re seeing that all throughout EU, but we’re not seeing it here.”
“This (coal closure) was foreseeable. Why are we not seeing this transformation (in Australia) sooner, as wind and solar takes the place of fossil fuel?”
It’s a good question. And it goes to why industry leaders, such as AGL Energy’s Andy Vesey have repeatedly called on governments, state and federal, to pull whatever policy levers they can to encourage the “orderly exit” of Australia’s remaining coal-powered generation fleet.
Because, as Vesey told the Australian Energy Week conference in June, “the alternative is ugly. It’s the disorderly exit. And I can tell you, it’s one or the other, because we’re not going to stay where we are.”
To its credit, Frontier clearly acknowledges this in its own analysis: “We would note that we would not expect that the trends that we observe over the period to 2018/19 would necessary persist into the 2020s,” it says.
“The key reason is that the different trends in the southern and northern regions are the results of the market responding to the sudden retirement of Hazelwood. When the market adjusts to its new long term equilibrium with new investment responding to the price signals, we would expect that the prices in all regions will return to similar trends.”
In other words, when – after years of political meddling and uncertainty – the RET finally starts working as it should, then the market will adjust accordingly, and the result for consumers should be lower electricity bills.