Australia Energy Market Report – November 2018

​Market Changes:

Wholesale electricity prices rose across Australia’s National Electricity Market (NEM) by 130 per cent between 2015 and 2017. The value of electricity traded in the NEM more than doubled, from about $8 billion to $18 billion. Household bills increased by up to 20 per cent in 2017 alone.

Three issues caused the price increases. First, two big, old, coal-fired power stations closed (Northern in South Australia in 2016 and Hazelwood in Victoria in 2017). Second, the price of key inputs, especially gas and black coal, rose just when the plats they fuel were more often in need. The third issue is that generators ‘game’ the system; they use their power in concentrated markets to create artificial scarcity of supply and so force prices up. Supply in all NEM states (Queensland, NSW, Victoria, South Australia and Tasmania) is concentrated, so a single outage, plant closure or transmission constraint can lead to a supplier having a high level of transient market power. In these circumstances, generators can temporarily force prices up.

Price trending in all states for November 2018 as seen on the charts in this report, the volatility still remains within the market.

Why coal – and not renewables – is the root cause of surging Australia power prices:

New analysis from BloombergNEF (BNEF) shows that the rising cost of coal power generation in Australia is the primary yet often overlooked cause of the recent doubling of power prices on the National Electricity market (NEM).

The new analysis from BNEF confirms that thermal coal power prices have doubled in the last two years, and in turn caused a doubling in the price of coal capacity in the NEM, so that wind and solar are now lower than even just the short-run cost of thermal coal from the spot market. The short run cost does not include the money spent on building a coal plant.

This means that it is already cheaper to build a new solar or wind plant than burn export-linked coal in an existing, fully depreciated, coal plant.

This graph above shows the dramatic shift in the last two years, when new wind and solar plants clearly cost more than existing coal generators, but because of their falling price, and coal’s rising price, the two are now around the same cost.

It also confirms the recent conclusions by Snowy Hydro that “firm” wind and solar obtained in its recent tender was “cheaper than current baseload”, meaning coal generation, and similar observations from Origin Energy and AGL, which says it is cheaper to build new cleaner technologies than try to extend the life of Liddell coal generator.

The current wave of solar and wind farms under construction should therefore put downward pressure on power prices when they become operational in 2019-20 and should also soften the impact of international fuel prices on domestic power.

Wind and solar are the electricity market’s hedge against exposure to rising international coal or gas prices.

If coal is not setting the wholesale price of electricity in Australia, it is likely to be gas, which is even more expensive. There are, however, a few occasions when the sheer weight of wind and solar prices pushes the market down to midday lows, or even negative prices, as we have seen in Queensland, Western Australia, and just this past weekend in South Australia.

The BNEF report also comes as a new analysis from Carbon Tracker found that nearly half of all coal generators in the world were running at a loss, one third pf them were more expensive to run than building new wind and solar plants, and by 2030 that percentage would rise to 96 per cent.

The price of coal generation has doubled from 2016 levels, in line with seaborne thermal coal prices. Since black coal currently makes up some 54 per cent of the NEM’s energy mix – up from 51 per cent in 2016 – this increase in the cost of coal generation is one of the most important, yet overlooked, factors driving up power prices.

Black coal generators are producing more power following the closure of several brown coal plants in 2016 and 2017, forcing operators to source more fuel at spot market prices that have risen sharply. The result is that they have to charge more for their power. Thousands of megawatts of coal capacity that was offered at AUD 20-40 per megawatt-hour of electricity during most of 2016 is now made available for AUD 40-60 per MWh.