Australia : February 14, 2008

Australia’s National Electricity Market (NEM) has undergone unprecedented change over the past 12 months due mainly to drought related supply issues and increased input costs. Large market forward pricing leapt from approximately 6.5c/kWh (peak) to over 18c/kWh (year 1) in some cases, but has softened to between 8c and 11.5c in the last two months. One thing is for certain, the NEM has crossed a threshold of no return with price stability and predictability being a thing of the past.

Now enter the Kyoto Protocol with popular understanding being that previous delays in signing were both economically and politically based. With over 80 percent of electricity generation being sourced from coal, the challenges in complying with Kyoto will be enormous. The only current source that approximates zero emission is hydro-electric generation, however, this source only accounts for 7.6 percent of total generation. The contributions from wind and solar generation are so small they have yet to register in the country’s generation portfolio.

Of controversy is the fact that the Australian governments provide almost $10B per annum in subsidies for the production and use of fossil fuels. Whilst the vast majority of the subsidies go to transport, approximately $1.7B was given to the electricity sector during 2005-06.

It follows that further input cost increases are on the way for nearly 93 percent of the country’s electricity generation as these subsidies are progressively withdrawn. The impact of subsidies can be illustrated further as their amounts often rival or exceed the profits of some companies. Combine this fact with ever increasing Renewable Energy Credits or RECs, and various state government greenhouse gas abatement charges and we could witness an average increase in electricity pricing of 0.9 to 1.1c per kWh.