Australia’s Electricity Markets On A Rollercoaster

By Paul Homewood

h/t TomO

From ABC in Australia:

Electricity prices are set to fall across the country over the next two years, offsetting this year’s price increase.

Key points:

Electricity prices will start to fall from mid-2018
Prices rose by 11 per cent this year
AEMC warns of instability and blackouts if new systems are not managed efficiently

The Australian Energy Market Commission said the price drop will happen as variable wind and solar generation comes online, which is paid for by the Government’s Renewable Energy Target.

Nationally, prices rose almost 11 per cent this year, but with the extra supply from wind and solar, the commission predicts that will be offset by a 12 per cent fall over the following two years.

The AEMC’s annual report on price trends provides an overall picture of factors driving electricity prices for households in each state and territory.

AEMC chairman John Pierce said this year’s report showed wholesale electricity costs were now the single biggest driver of change in residential electricity bills, unlike earlier price trends reports which found network costs were the main driver.

"Prices rose sharply this year by almost 11 per cent on a national basis as consumers felt the impact of Hazelwood and Northern coal-fired plants retiring and the lack of replacement investment, combined with high gas prices," Mr Pierce said.

"But we expect these price rises will be reversed over the next two years as wind and solar generation enters the system."

Photo: The Hazelwood power station closed down in March 2017. (ABC News: Nicole Asher)

The report also found that over time, low wholesale prices contributed to the closure of coal-fired plants.

"Without investment in replacement dispatchable capacity, wholesale prices will go up again and remain volatile," Mr Pierce said.

"And the rollercoaster will be repeated."

The AEMC also warned of instability and blackouts if the new systems were not managed efficiently.

The commission said the price fall will begin from mid-2018.

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Reading this article, you would think that prices will come down because renewables are cheaper. But you will have been misled.

Electricity prices have gone up in the last year because of the closure of the Hazelwood and Northern coal plants, which have been squeezed by subsidised wind and solar. As a result, supply has tightened thus forcing up wholesale prices.

It is richly ironic of course that the aforesaid renewables have benefitted very nicely as a consequence.

With more new capacity coming on stream in the next couple of years, wholesale prices should return to previous levels. Nevertheless, subsidies will carry on rising.

The subsidy system in Australia is similar to the ROC mechanism in the UK. It operates as a Large-scale Renewable Energy Target (LRET).

The LRET creates a financial incentive for the establishment or expansion of renewable energy power stations, such as wind and solar farms or hydro-electric power stations. It does this by legislating demand for Large-scale Generation Certificates (LGCs). One LGC can be created for each megawatt-hour of eligible renewable electricity produced by an accredited renewable power station. LGCs can be sold to entities (mainly electricity retailers) who surrender them annually to the Clean Energy Regulator to demonstrate their compliance with the RET scheme’s annual targets. The revenue earned by the power station for the sale of LGCs is additional to that received for the sale of the electricity generated.

The LRET includes legislated annual targets which will require significant investment in new renewable energy generation capacity in coming years. The large-scale targets ramp up until 2020 when the target will be 33,000 gigawatt-hours of renewable electricity generation.

There is also a parallel Small-scale Renewable Energy Scheme.

Currently the market price for LGCs is about A$85/MWh

These costs are added to electricity bills. Analysis by BAEconomics estimates that the cost of these subsidies was nearly A$3bn in 2015/16, (about £1.7bn in proper money!!)

The AEMC report, referred to above, puts the cost of these environmental policy costs as between 5% and 15% on an average bill, depending on jurisdiction. They say these subsidies will increase by another 20% in the next two years.

As for the claimed benefit of lower wholesale prices (which merely cancel out the rise in price last year, the AEMC are very clear.

There will be no sustained fall in wholesale prices as more and more renewables come on to the market. Instead, there will be a continual rollercoaster.