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Energy Insights

Are higher electricity prices here to stay?

Many businesses seeking to renew electricity contracts today are experiencing higher electricity prices as they return to the market. This is being driven by a number of long and short-term factors that have the potential to continue to support current price levels and remain as key considerations when determining an effective procurement strategy.

Firstly, over the last 3 years approximately 15% of all coal-fired generation within the NEM has been decommissioned or mothballed. The most recent example is the closure of the 1,600 MW Hazelwood power station in Victoria, which followed similar plant shut-downs in New South Wales and South Australia.

These closures were in response to a period of highly reduced demand for electricity between 2009 and 2014. During this period, total electricity consumption within the National Electricity Market (NEM) fell by almost 8% largely led by improved energy efficiency in the domestic commercial sectors.

To put this drop into perspective, approximately 9% demand growth would have been expected under normal market conditions. The decline in demand that was actually experienced led to a rapid build up of excess supply in the generation sector in New South Wales and Victoria and in turn, prices fell close to their lowest historical level. Commercial electricity users that entered into a contract at that time would have benefited from this price erosion but other market developments have since created a stark price differential.

The extent of these coal-fired plant closures has also paved the way for gas-fired generation as a viable alternative during peak times. Gas prices have also experienced substantial price increases from approximately $3 per gigajoule to around $12 per gigajoule for power generation. This feeds into a required selling price of over 12c/kWh to cover the fuel costs alone. The subsequent impact on retail electricity prices has further compounded price pressures.

When looking at alternative supply sources, the quantity of generation from renewable sources has not been as great as anticipated, despite the ongoing proliferation of rooftop solar. Uncertainty impacted the renewable energy target scheme for close to 2 years following the 2013 Federal election. This ultimately led to a hiatus in the renewables project pipeline given the unknown future of the scheme, and increased the available market for fossil generation, which has in turn supported the price of commodity electricity. Another effect was that the price of renewable energy certificates doubled between 2014 and 2016. Encouragingly, the Clean Energy Regulator has recently outlined that the large-scale 2020 renewable energy target is achievable, however, this is contingent on the pace of investment over 2017 remaining at current levels.

When viewed separately, each of these supply and demand side forces have impacted the fundamentals of the electricity market over the past 2 years. When viewed together, we have seen these factors converge to accelerate price increases and reduce the likelihood of short-term price relief.

That has brought about a situation where the possibility of higher electricity prices remaining at current levels, or increasing further, is a reality and commercial electricity users should consider these factors when procuring their next electricity contract in the current market.

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