Why is my new electricity contract costing me more?

by Energy Action | May 20, 2016
Many customers renewing their electricity contracts are experiencing increases in the energy component of their new contract. To understand this we need to look at what has happened to the energy-only price from 2013.

Prior to the worldwide recession of the late 2000’s, demand for electricity in Australia had been growing at about 2% a year with this trend going back for many decades. Around the time of the worldwide recession, electricity demand began to fall in both Australia and in many other developed nations. This was partly due to the recession itself and the subsequent closure of many industrial facilities, in the case of Australia the most notable being several aluminium smelters, which comprise the largest class of electrical loads in the country. However, an influential factor to the higher prices in Australia has been increasing energy efficiency in both commercial and residential premises. This factor contributed significantly to the sharp decline in demand for electricity.

As a result, a sizeable oversupply built up in the generation sector with the dam bursting in late 2013. From about July 2013 to mid-2014, prices fell on average by around 20-25% in NSW and Victoria, with these states having the largest generation oversupply. In Queensland and South Australia, prices held up much better over that period. In Queensland this was partly due to anticipation of higher electrical demand to be delivered by additional electrical load from the then under construction LNG liquefaction facilities in Gladstone, most of these facilities now being in production. In South Australia, firm prices were mostly due to a relative shortage of low case coal fired generation in that state and the relative weakness of the transmission interconnector to Victoria, thus limiting availability to much lower electricity prices from that state.

Since mid-2014, prices have recovered. In the cases of NSW and Victoria this has been from a very low base. The recovery has come from the combination of three factors:

- Ageing coal plants have closed across all states, with some further closures expected. Some gas plants have also reduced their output in response to increasing fuel costs;

- As a result of the year-long hiatus over the future of the federal government’s Renewable Energy Target scheme, many wind power developments were put on hold. Since mid-2015 when continuation of the scheme was confirmed, it has taken time for the project pipeline to recover and it is unlikely that this will fully recover for several years. As a result, competition in the generation market has not been as fierce as expected;

- Decline in electrical demand has bottomed out and is now flat in all states other than Queensland which still exhibits some growth in addition to that provided by the LNG facilities.

The most marking price feature of the last 12 months has been the rapid and pronounced upwards spike in prices in South Australia commencing in mid-2015. The price in South Australia has long been at or close to the most expensive for all of the eastern and southern states. It has also been the most volatile by a considerable margin.

 EAPI graph

The reason for this sudden spike are diverse. In mid-2015, Alinta Energy announced that it would be closing its 500MW coal-fired station at Port Augusta in the first quarter of this year. That may have created fear amongst the retailers of a pending shortage of generator contracts with this acting to push up prices.

Another factor may have been concerns over an excessively hot first quarter of this year. Whilst the associated excessively high spot market prices did not eventuate, they may well have been anticipated and factored into the retail price. The recent spike in South Australian prices has since abated somewhat, although a recent upturn in South Australian prices indicates that price volatility in that state may not yet be over.

One pricing factor that is not captured by the EAPI but which is highly relevant to electricity customers is the increasing price of Large-scale Generation Certificates (LGCs). As alluded to above, a shortage of large scale renewable generation versus federal government’s renewables target has been building up as a result of past uncertainty over the scheme. The price of LGCs has risen from around $40/MWh to around $85/MWh over the last year. The theoretical maximum price for these certificates is $92.86/MWh. If prices go much higher than that, retailers, who are mandated to buy a portion of their electricity from renewable sources may instead elect to pay the penalty rate for failure to purchase sufficient certificates. 

The required purchase percentage for LGCs – currently 12.75% of the retailer’s total load – translates to 1.084c/kWh when charged through to the customer ($85/MWh * 12.75% = $10.84/MWh = 1.084c/kWh). This is up from around 0.4c/kWh a year ago and this higher rate is what customers currently renewing their contracts could expect to pay. With the purchase percentage set to reach 20% by the end of this decade, the price charged to customers for LGCs could reach around 1.7c/kWh unless exceptionally large volumes of new renewable generation are built, which seems unlikely given the magnitude of the impending shortfall. Fortunately prices under other renewable energy schemes (e.g. Small-scale Technology Certificates (STCs), Energy Efficiency Certificates (ESCs) in NSW and Victorian Energy Efficiency Certificates (VEECs)) are not suffering such large shortfalls and prices for those certificates may remain moderately stable.        

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