The truth behind electricity price increases

By Leith van Onselen

The Australian Institute (TAI) has released a great paper by renowned energy analyst Dr Hugh Saddler, entitled National Energy Emissions Audit – Electricity Update, which reveals a strong correlation between domestic electricity prices and gas prices, despite gas making up only 10% of electricity generation.

Below are the key extracts from this report:

High electricity prices are caused by the high wholesale price of gas, in both SA and other states

A specific examination of retail prices in SA leads to three strong findings:

  1. electricity prices have historically always been higher in SA than in other states, because there are no low cost, high quality coal and hydro resources in the state;
  2. there is absolutely no positive relationship between the share of wind generation in supply and wholesale electricity prices in the state – in fact a negative correlation;
  3. there is a very strong positive correlation between wholesale gas prices and wholesale electricity prices. It is therefore concluded that price increases in SA, and to a large extent in other states also, are almost entirely the consequence of high wholesale gas prices…

Electricity prices

On 1 July, retail electricity prices increased substantially – reports suggest between 10 and 20 percent, though that depends on how the calculations are done – in Queensland, NSW, SA, Tasmania and the ACT. Prices in Victoria will change, and almost certainly increase, on 1 January 2018. The announcement of the increases has provided ill-informed commentators with another opportunity to attack renewable generation, singling out South Australia for special criticism.

NEEA Electricity Update seeks to provide soundly based factual information about Australia’s electricity system, in the hope of raising the quality of policy debate. To that end, Figure 6 presents a history of residential electricity prices in the NEM states since 2001, expressed in real 2016-17 dollars.

The graph shows that:

  • prices in the four mainland states have increased by between 60 and nearly 100 per cent since 2001, with smaller increases in Tasmania and the ACT;
  • the relative increase has been less in South Australia than in the three mainland eastern states;
  • most of the increase has occurred between2007 and 2013, and, although this cannot be concluded from the graph, was largely caused by higher transmission and distribution (“poles and wires”) costs;
  • prices in the ACT have always been lower than elsewhere, mainly because of the low cost, compact structure of its distribution network, but, importantly, will be little affected in coming years as its renewable generation share grows towards 100%, because most of the contract prices for renewable electricity are close to or below the expected NEM wholesale prices shown in Figure 7;
  • prices in South Australia have, conversely, always been higher than in other states, but the difference is no more now than it was in 2001 and less than it was in many of the years in between.

It can also be deduced that, when the 1 July price rises flow through to CPI figures, the resultant retail prices in NSW, Queensland, SA, Tasmania and the ACT will be the highest ever, in real terms as well as nominal terms, and that will also be the case in Victoria from 1 January next.

The reason that prices are higher in South Australia than elsewhere is that the state does not have the large, low cost coal resources of other states, and is completely lacking in significant hydro resources. Together, these were the foundation of the rest of the Australian electricity supply system throughout the 20th century. Until the mid 1950s South Australia was completely dependent on coal imported from NSW, and imported petroleum products. It then developed the remotely located, poor quality coal resources at Leigh Creek, which fuelled a series of power stations built at Port Augusta, and then, when gas was discovered in the far north of the state in the 1960s, was able to add natural gas. Its generation costs have always been significantly higher than those in most other parts of Australia. However, in the 21st century, as the electricity system transitions to renewable generation, South Australia’s abundant wind and solar resources will eliminate, and may even reverse its current generation cost disadvantage.

Why have retail prices gone up? The answer is easy to see in the combination of Figures 7 and 8. Figure 7 shows past real wholesale market prices in each NEM region (excluding Tasmania).

The large increase in the year just ended, most of which occurred during the six months from January, is easy to see. Figure 8 shows market expectation of how wholesale prices will move over the next four years, which serves as an indicator of the sorts of prices at which electricity retailers are contracting to buy the electricity they will be supplying to their customers over the coming months. Few anticipated the large wholesale prices increases of the past six months, which means that prices for 2016-17 were largely based on wholesale prices of around $40 to $50 per MWh (4 to 5 cents/kWh). A level of around $100 to $120 per MWh, as Figure 8 suggests, would equate to an increase in retail prices of about 6 cent/kWh. Most of the announced price increases have been a little below this level.

Turning again to South Australia, it is fairly clear from Figures 6 and 7 that higher prices in that state have nothing to do with the amount of wind generation there. That is confirmed by Figure 9, which shows wholesale prices from Figure 7 superimposed on the annual share of total electricity supplied in South Australia (including net imports from Victoria) supplied by wind generation. Clearly, there is absolutely no relationship between the two.

More detailed analysis shows that market wholesale prices are consistently lower when there is a high level of wind generation, than when there is little wind. Over the past four or five years in the South Australia wholesale market, volume weighted prices received by wind generators have been around 20 to 30 per cent lower than volume weighted average prices for the market as a whole, and even further below the volume weighted average prices received by gas generators.

Most of the time, gas generators are the marginal source of supply in the SA market, and thus set the market price. Figure 10 shows the relationship between wholesale gas and electricity prices in the SA market. The gas price is what is called the Short Term Trading Market (STTM) price at the Adelaide gas trading hub. This is the price needed to balance supply and demand each day in the SA gas market. Most gas is traded under term contracts, not through the STTM, but the STTM is a good indicator of the marginal price of gas. Similarly, the NEM spot price is not the actual price at which most electricity is traded, but is the marginal price.

The correlation between the two data series is striking, confirming that higher wholesale electricity prices, and hence higher retail prices in SA are almost entirely caused by higher gas prices. Technical data on power station performance makes it possible to calculate the quantitative relationship between the two sets of prices. The two largest gas fired power stations in SA are Torrens Island B and, when it is operating, Pelican Point. According to AEMO data, Torrens Island B has a sent out efficiency of 28.5%, meaning that 12.6 GJ of gas are burned for each MWh of electricity sent out. This means that an increase in the price of gas, from $5 per GJ in Q1 2016 to $9.5 per GJ in Q1 2017, will increase the fuel cost of Torrens Island B by $57 per MWh, or just under 6 cents/kWh. The corresponding increase at Pelican Point, which is much more efficient, but much smaller, would be $35 per MWh. No wonder retail electricity prices have gone up in South Australia.

A similar, though less stark effect is seen in the other mainland NEM states…

Full report here.

Comments

  1. sydboy007MEMBER

    Our politicians will consider this to be fake news. The loon pond will see it as very fake news

    • darklydrawlMEMBER

      Exactly!! Blame wind, blame Elon & Crazy Jay, Blame anyone else. Besides Everyone knows those ugly turbines ruin the view and give you brain tumors. Imagine what Elon’s great throbbing battery is going to do to anyone within 100 kms radius!! There’ll be panic in the streets I tell ya. Panic!!

  2. darklydrawlMEMBER

    Com’on Leith, Give it up on the facts, data, charts and evidence. We all know in our bones it is those pesky renewables that is causing this. Your data is just confusing the issue. – hehe. just kidding of course. 😉

    But in all honestly, I bring this up as I was in the doctors waiting room yesterday with the morning news on the TV and there was some LNP pollie banging on how ‘grannies were going to freeze to death’ as they cannot afford to put on the heater and this was all the fault of those stupid renewables. Couldn’t believe the Churnalist didn’t call him on it. Nope, just smiled and nodded like some drooling idiot. Sheeesh – no wonder I quit working in broadcast TV news.

    • Andrew LeesMEMBER

      The Project did a nice piece on it – both ironically highlighting the vacuous acceptance of said politician’s spray and clearly showing the real driver – high gas prices. Which means that young people are likely to be more aware of the real issues than oldies.

    • reusachtigeMEMBER

      We have a competitive advantage in coal, unlike gas which is foreign owned, so should use more of it.

  3. truthisfashionable

    Did this get discussed?
    http://mobile.abc.net.au/news/2017-07-09/sanjeev-gupta-new-owner-of-sa-whyalla-steelworks/8691072

    “he’s concentrating on renewable energy.
    He has big plans for green power at Whyalla including pumped storage hydro, solar and combined heat and power”

    A perfect use for all those abandoned mines around the country would be to turn them into pumped hydro. It would be like IT workers who have to train their replacements if aging coal mines were turned into wind and hydro power plants.

    • reusachtigeMEMBER

      Back in the dark days when I actually had to work for a living I was at a big bank that had a whole floor dedicated to IT personnel who were on retainer to train imports from an Indian IT services company in how to do their jobs before receiving their farewell “bonus” for great service to getting rid of their own jobs. Funny. Losers those IT people. More interested in a carrot sized shitty bonus than fighting for their jobs. They gag for for replacement, like, “let me suck you off while you take my job”. LOLOLOL… IT people…

  4. My dad used to always say correlation doesn’t mean causation and I think it’s a good thing to remember and I try to whenever reading data and statistical stuff.

    I’m also getting concerned by almost all expert opinion when it comes to energy in Australia at the moment and so on because when you google the source you nearly always find they have one foot in one camp or the other and it looks like it might be the same for Hugh Saddler who I see is Honorary Associate Professor Centre for Climate Economics and Policy and more Google tells you he writes for all sorts of green type groups and it’s a worry that probably a lot of what all these experts claim is likely from a particular view? There doesn’t seem to be many independent experts left sadly it seems.

    Yesterday someone gave a lot of information from a group that sounded very impressive but later when I googled the group I was surprised to find it was very involved in all sorts of opposition to coal and other stuff so I felt I couldnt take what it says at face value but with a critical eye and I guess a bit of scepticism. I’m not saying fake news like the person above just I’m cautious I guess once you start to see that a lot of stuff isn’t always what it seems if you get my drift.

      • Please, say what you like about 3d1k, but he was VERY articulate, this guy is not in 3d’s league.

        Edit: No offence intended, Nick, I’m nowhere near 3d either!

      • drsmithyMEMBER

        Please, say what you like about 3d1k, but he was VERY articulate, this guy is not in 3d’s league.

        I’d be surprised if the mine bot only posts with a single persona.

        “Nick” is hitting all the same talking points in the same way, just with a different style.

    • adelaide_economistMEMBER

      OK. So do you have any factual inaccuracies you’d like to point out or just want to cast aspersions on imagined leanings of the individuals?

    • Jake GittesMEMBER

      This text reads as if it was first written in some south Asian dialect and then machine translated into English and then stylistically turned in naive ‘grandpa speak.’ It has the authenticity of paid comment.

  5. Coal plants have been retired and there is increasing reliance on gas creating higher demand for gas. The price increase from Q2 2016 aligns perfectly with Port Augusta closing down.

    The same situation has occurred in Victoria in 2017 with the closure of Hazelwood. Wholesale prices have increased since the plant closed.

    Anyone who does not understand that increased demand for a commodity like gas will cause an increase in price missed the first lesson in economics.

    The foolish part about SA’s position is the mistaken belief that intermittents can actually provide value in an on-demand power network. They actually destroy value.

    • Johannes Kepler

      Honestly , that is literally the most retarded thing I have ever read, well, since the comment directly above from Nick, which also verges on mental rectal effluence.

      http://markets.businessinsider.com/commodities/natural-gas-price

      Natural Gas prices are down from a peak of $14 in 2007 to around $3 – while Australian prices have REVERSED that trend while supply has MOAAAARE than quadrupled.

      Now explain your erudite economics lesson to us all one more time – this time include the negative impacts of externalities like monopoly price control in inelastic markets – CHAMP !

      • The energy market was not a monopoly market until intermittents, that rely solely on the fast response of gas, made coal uneconomic. The monopoly on gas or total reliance on gas has occurred because the coal power stations are no longer there.

        Introducing more intermittents increase the power of the gas monopoly. Intermittents have annihilated the value of the NEM. They are not compatible with on-demand power supply network.

      • I agree with Rick, the Merit Order Effect (Europe) or Duck Curve (US) of Intermittents displacing Base Load Coal power is well documented everywhere where we have a large amount of Renewable in the mix. So even though the opex cost for Electricity from Renewables is cheaper than from coal the total bill ends up being much higher because the Gas turbines are not simply used to top up Base load coal generation but rather become the only reliable fall-back solution for all the electricity that the grid requires. What the wind and sun don’t deliver must come from Gas. Naturally the Gas turbine operators are reaming the consumer, why wouldn’t they leverage the strong control position that has been delivered to them by Renewable integration in the grid, after all it’s just business…this is what people apparently want, and this is the cost for delivering what they want.
        From a consumers perspective it’s high time they took control of the situation and investigated their own alternatives ….and so the death spiral continues.

      • Right now 1800hrs Friday July 14th, the 4395MW of installed wind plant in Australia is delivering just 1600MW. It will continue to fall as the evening peak hits. Wholesale price in SA forecast to reach $328/MWh at the evening peak as more gas fired plant comes on stream to make up the shortfall.

        Replace baseload coal generation with intermittent wind and fast response, low efficiency gas plant and you get high cost electricity – simple.

  6. Im so sick and tired of the fucking loon pond clutching at one dimensional economics ranting that they know better.

    We have one astrotrusfer saying there is no correlation to the electricity price increase with the cost of gas, and another saying it’s purely demand driven.

    I am fucking fed up with this country. Everyone can fuck right off.

    /end rant.