Electricity prices still on the rise

by Energy Action | Aug 04, 2016
Many customers renewing their electricity contracts are experiencing substantial increases. The majority of this is coming from both the electrical energy price (the price for the electricity itself) and from the price of large scale renewable certificates (a subsidy for wind generators). At the same time, distribution network prices (the cost of delivering the electricity) has fallen and is now expected to be largely flat going forward, which is fortunate as for many customers the network component can make up around half of the total bill. This article looks at some of the reasons behind the price behaviour that we have seen over the last year.

- Electricity only price up by 50% year on year in NSW and Victoria, up 30% in Queensland and 90% in South Australia.
- Large scale renewable certificate charges up 170% year on year.
- Network prices down and now expected to be flat for several years.    

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. Another factor has also been increasing energy efficiency in both commercial and residential premises which contributed significantly to the sharp decline in demand for electricity.

As a result of the falling demand 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 cost coal fired generation in that state and the relative weakness of the transmission interconnector to Victoria, this 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 pronounced 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

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.

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 retailers’ 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, an increase of around 170%, 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 the other renewable and energy efficiency 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.

One positive factor amongst a raft of negative ones has been in the form of distribution network pricing. After many years of up to double digit price increases in some states this sustained increase in the level of network prices has now abated. In 2014 the Australian Energy Regulator (the body responsible for policing distribution network pricing) used newly increased powers to instruct the NSW distribution networks to cut their prices by up to 30% with these reductions taking effect from 1st July of that year. Since then the regulator has imposed smaller reductions in the region of 7% on the Victorian and Queensland distribution networks with South Australia being the only state to buck this trend receiving an increase for 2016/17 of around 9%. Having made these cuts the prognosis for distribution network prices is for increases close to CPI over the next several years.

All in all the price impact of all of these changes when taken together will vary from customer to customer. However, for most customers the benefit from lower distribution network prices will already have flowed through and we will not see a reduction of this magnitude again. For the electrical energy and certificate components of the bill customers renewing their contracts can expect to see substantial increases over the prices that they secured one to two years ago.

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