Factors Behind the Long Term Increase in Electricity Prices

by Vivid User | Jun 13, 2017
Prices for commodity electricity have increased greatly over the last two to three years and are now at levels at least twice as high as those available when the market was at a long term low in 2014. Many customers returning to market are becoming aware of these increases for the first time and are suffering contract renewal shock as a result.

The following four factors help explain what has caused this sustained rise in the price of commodity electricity.

  1. Over the last three years 15% of all coal-fired power stations in the National Electricity Market (NEM) has either closed or is about to close with the most recent example being the 1,600MW Hazelwood power station in Victoria. Such a large reduction in supply also means upward pressure on price.
  2. The large number of coal-fired plants closing has opened the way for gas-fired generation to step in during peak times. With the price of gas-fired generators having increased from around $3/GJ in the early years of this decade to above $9/GJ today, the flow-on impact to electricity prices is substantial.
  3. Total electricity consumption in the NEM fell by almost 8% between 2009/10 and 2014/15 with this contributing to the rapid accumulation of excess capacity in the generation sector. More recently this demand reduction has abated and demand is now flat in all NEM states other than Queensland where it has continued to grow mostly due to appetite in the 100s of MW from the new LNG processing plants in Gladstone. Where the expectation has been for continuing falling demand, demand that is seen to be growing – or at least not falling – puts upwards pressure on price expectations.
  4. Despite the onward march of rooftop solar, renewable generation has not come on as fast as was expected. Currently there is barely enough renewable generation to meet the government’s target this year and with the target increasing annually until the end of the decade we are expecting renewable generation to be insufficient at least until then. Part of the reason for this shortage of renewable generation goes back to before the Rudd/Abbot election when there was considerable speculation that an incoming Liberal government would freeze or substantially wind back the scheme. This uncertainty went on for around two years during which time new projects were delayed and the renewables sector is still struggling to make up for this hiatus in the project pipeline. Less generation from renewables means more available market for the fossil generators.

 

In addition to these long standing influences there are also some shorter term factors that may be influencing the price. In particular, the market may be concerned that the price of gas for power generation could increase beyond even its current elevated level over the forthcoming winter. One of the major uses of gas is for residential space heating with this source of demand being particularly strong in Victoria where residential gas infrastructure is most developed. Any further increase in the gas price would knock on into electricity pricing.

 

Energy Action’s view on prices is that, whilst we do not make judgements of where the price may go in the future, we expect the forces that have delivered the increases seen over the last two years to continue into the current year. In particular, we consider that, whilst it is entirely possible that the prices may come down slightly at some point, we do not see a collapse in prices to anywhere near the levels last seen in 2014 any time soon or potentially ever. There is a real possibility that prices could remain at around their current levels or continue to increase over the next 12 months and customers should take this into consideration when procuring their next electricity contract. 

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