Market insights

Overcoming ideology to support new power plant investment and reduce power prices

12 April 2017

REPORT LINK:  Overcoming ideology to support new power plant investment and reduce power prices


Australia’s skyrocketing energy prices – how we got here and what to do about them

A new paper released by energy market analysts Tristan Edis and Ric Brazzale finds that over the past two years Australia’s east coast National Electricity Market has experienced a profound, decisive and permanent unravelling of conditions that kept Australia’s east coast wholesale power prices low by international standards. 

Under the guise of reducing the cost of living, the Federal Government has abolished the carbon tax, wound back the Renewable Energy Target by a fifth, while also freezing energy efficiency standards.  

Yet prices for power on the forward electricity contract market are now trading at levels double what the wholesale market price was when the carbon tax was in place.  They are now some of the highest in industrialised world.

The report explains why our wholesale power prices have gone from some of the cheapest in the world to the most expensive.

Over the 1970’s and 80’s state governments went on a coal power station construction binge to meet power demand that never materialised.  While these plant are expensive to build they are cheap to operate and the large oversupply of coal plant kept our power prices low.

In addition we had a Goldilocks set of conditions for gas supplies. They were too small in size to build export infrastructure but more than enough for domestic demand. This gave east coast Australia some of the lowest gas prices in the world.

Now these coal power plants are becoming old and several require significant investment to continue operating safely, reliably and efficiently. Investors, conscious these plants are incompatible for emission reduction goals, are electing to shut some of them down rather than sink good money after bad.

At the same time discoveries of large amounts of gas in Queensland coal seams has supported the construction of liquefaction plants that can export our gas to high paying Asian customers. This has led Australia’s east coast gas prices to spiral up to some of the highest in the world.

With the closure of Hazelwood power station and potentially other coal plant in a few years’ time, our east coast power prices are now increasingly set by very expensive gas generators.  While plenty of coal plant remain that are cheap to operate, they will simply take big windfall profits rather than push prices down.

It turns out the answer to contain power prices is competition from more renewable energy and energy efficiency.  Co-incidentally this is also the answer to deliver the government’s emission reduction goals.

It’s unambiguous that policies that enhance energy efficiency save more money than they cost.

What isn’t so well appreciated is that policies that encourage renewable energy will also lower energy bills. Renewable energy technologies, just like mobile phones, computing, and many other electronic goods, have experienced dramatic reductions in cost as they’ve gained scale.  Unfortunately, many policy makers and media commentators aren’t up to speed with these technological developments. Nonetheless it remains the case that new renewable energy plant will need payments for power that are higher than what a coal power plant constructed long ago needs to cover its operating costs.  But as these coal plant age they need new investment or are shutting down and prices increasingly reflect the cost of gas. By providing policies that reward the abatement supplied by new renewable energy plant, they don’t need to recover all their costs from the wholesale power market.  The addition of new solar and wind plant with low operating costs will act to push out the most expensive power plants, lowering prices across the entire market.  So while consumers will pay a bit more for the extra increment of renewable energy added to the system, they will save money across all the rest of the power they buy.

The report highlights that there are wide range of policies that could do the job and the most important thing isn’t to get the policy perfect but to act quickly. 

Expanded renewable energy targets, an emissions intensity trading scheme, or even a policy that opened up the Renewable Energy Target to also reward clean coal or gas could all do the job.  

Report author Tristan Edis observed, “Australia’s energy prices have reached ridiculous levels.”

“We can continue this immature, ideological squabbling over whether climate change is real and exactly which policy and which technology is the best of them all.  We can pretend we can somehow achieve policy perfection.  But while we squabble investors will refuse to make the investments required to relieve high power prices,” said Edis.

Ric Brazzale noted, “I’ve been involved in the development of the Australian Energy Market since its inception in the 1990’s.  You could see this crisis coming from a mile off, but ideology seems to have blinded key people to accept the kind of policy measures that could address it.”

For interviews and a copy of the report contact Tristan Edis ph. 0409 286 872

REPORT LINK:  Overcoming ideology to support new power plant investment and reduce power prices