High Australian electricity prices here to stay, report says

The Grattan Institute finds a correction from the historic oversupply in Australia’s energy market will ensure high wholesale prices will remain for a long time.

Higher wholesale electricity prices are the “new normal” in Australia – a situation likely to create favourable conditions for investors, according to a think tank report.

The Grattan Institute’s paper, Mostly working: Australia’s wholesale electricity market, showed that wholesale electricity prices – what generators are paid for the electricity they produce – across Australia’s National Energy Market have increased by more than 100 percent from A$30 to A$50 ($22-$37; €19-€32) per MWh in 2015 to A$80 to A$100 per MWh now. Prices have fallen slightly in 2018 but are still well above 2015 levels.

The report said the rise in prices was down to a tightening in energy supply, increased input costs and inefficient bidding behaviour from energy generators which are ‘gaming’ the trading of electricity in the National Energy Market by using “their power in concentrated markets to create artificial scarcity of supply and so force prices up”, according to Grattan.

With the long-run marginal cost of new, firm generation at A$80 per MWh, it is “hard to see how the addition of new supply will bring prices down to 2015 levels”, the report noted. The current high prices may show the market is “ripe for investment”, it added, but the long-run marginal cost of new generation will ensure that any short-term price drops caused by the introduction of additional capacity is unlikely to be sustained.

Even the lower cost of renewable energy generation could require an extra A$25 to A$30 per MWh to firm up capacity when the intermittent energy provided by wind and solar is unavailable.

In addition, the report notes that Australian federal and state governments should provide more policy stability to encourage investment, beginning with the National Energy Guarantee. The NEG’s final design will be deliberated at a meeting of the Council of Australian Governments’ Energy Council in August, with some states and territories yet to signal a commitment to the policy.

The Grattan Institute also rejected calls for government intervention in the market, warning it is “likely to spook potential investors”.

The federal government recently became the sole shareholder in Snowy Hydro when it acquired stakes from the governments of New South Wales and Victoria for more than A$6 billion, and it has committed to going ahead with the Snowy 2.0 pumped hydro project.

The Grattan Institute did not respond to requests for further comment.