Electricity Pricing Trends

As an essential service, the pricing of electricity receives keen attention from consumers, government and media. We hear constant reporting of the problems our electricity supply chain has, the push for renewables and reliable supply, but lets cut through all of the noise; what will happen to electricity pricing throughout the national market over the next few years?

“Quite simply, prices will continue to rise and there is very little anyone, including government can do about it. Why?”

The transition to cleaner energy is expensive. The debate about the need to transition to clean energy has been well aired and I don’t intend to rehash them here. I am focusing only upon cost. In basic terms, if you replace the lowest cost generation source (coal fired) with the highest cost source (wind and solar) then there will be price increases. This year has seen the closure of the coal fired Pt. Augusta power station in SA and the announcement of the closure of the very large Hazelwood coal fired power station in Victoria (it will cease operations in March 2017). The electricity that would have been produced at these sites is now being produced from other sources, such as wind and solar. The cost of wind, even after significant government subsidy, is about double that of coal, with the effect on pricing self-evident.

Another complication in this melting pot of issues is the unpredictability of solar and wind. Conventional fossil fuel generators (coal and natural gas) can adjust their output relatively quickly according to demand; the power is “dispatchable” on demand. This is not the case with wind and solar. If the sun doesn’t shine or the wind doesn’t blow, no electricity is generated. Thus these sources of electricity are “non dispatchable”, with only intermittent supply possible. This lack of certainty around the ability of renewables to dispatch power means that it is difficult to forward contract the output from these sources. To put it differently, the lack of certainty is a risk for energy retailers, and with risk comes higher pricing.

As we continue to move towards a low carbon economy, the pressure on prices will continue, as lower cost generation is replaced by higher cost generation and dispatchable power is replaced by non dispatchable power, higher risk and higher pricing. It is our current view that residential prices will increase by at least another 10% to 15% in June 2017, and this trend will continue for the foreseeable future. Commercial prices will follow this trend.