Wholesale (“spot”) electricity prices are going bonkers with customers in some parts of Australia seeing their rates double. Beside me as I write this blog is a letter from my retailer giving me seven days’ notice of an increase from 19c/kWh to over 30c/kWh – that is to say, an increase of 58%! Thankfully, my installed solar plus battery storage system protects me against such ballistic electricity prices.
Earlier this month the five-minute interval in Queensland, NSW, Victoria and South Australia reached approximately $250/MWh, about ten times the normal price.
According to Bruce Mountain, director of the Victoria Energy Policy Centre at Victoria University, spot prices have been about 50% higher than last year in Victoria, South Australia and Tasmania, while NSW is experiencing an 80% increase and Queensland a 150% increase.
Why are prices surging?
Like any complex market, it isn’t easy to provide a precise culprit for such a precipitous price rise. Of course, the obvious contender is the spiking prices of gas and coal. Newcastle “spot” coal is trading five times higher than at any point in the last three years, and Queensland spot gas has seen a similar jump.
Mountain points to the difference in price surges between South Australia and Queensland, South Australia with the highest renewable energy penetration seeing smaller increases, and Queensland with the lowest renewable energy penetration seeing the highest. “In the year to date,” said Mountain, “Queensland’s average wholesale price has been twice SA’s.”
The price trends reported by Mountain are supported by the Australian Energy Market Operator’s (AEMO) latest quarterly report, which showed that the higher dependence on black coal power amongst the big states (e.g. NSW and Queensland) meant they were more vulnerable to price spikes and less protected by cheaper renewables than South Australia.
AEMO’s executive general manager, reform delivery, Violette Mouchaileh, said: “Wholesale prices in Queensland and NSW were again significantly higher than in southern states. This was due to the larger price-setting role of black goal generation and system security constraints limiting daytime electricity transfers from Victoria into NSW, despite an average price difference of $48/MWh.”
Indeed the wholesale electricity prices in the National Electricity Market (NEM) rose 67% from Q4 2021 to Q1 2022, a rise AEMO attributed to increased demand, coal generator outages, higher electricity-generating fuel costs, and continuing constraints on northward energy transfers, which is to say, the movement of cheap renewables from the southern states to the north.
“Compared to the first quarter of 2021,” continued Mouchaileh, “over 3,000 MW of black coal offers shifted from lower-price bands to above $60/MWh – the largest year-on-year quarterly change since 1998. While higher quarterly offer prices coincided with the surge in international coal prices to record levels, offers had already trended upwards in the months leading up to Q1 2022.”
It should also be noted that Western Australia is in no way immune to these challenges, the state has seen its own average Balancing Price increase by 14% since Q4 2021.
One cause of this fossil fuel price surge is Russia’s invasion of Ukraine, the largest conflict on the European landmass since the end of World War II. The conflict has finally triggered the European Union’s expensive disentanglement from Russian fossil fuel dependence.
However, pointing to war in Europe may be a rouse to distract the focus of extravagant rates from the unreliability of coal-fired power plants, plants which are proving increasingly stressful to the NEM.
After all, it is not yet clear that Australia is exporting more coal and gas than normal, and yet prices for the fossil fuels are being benchmarked to the international price.
Hence why Mountain suggests another driver is electricity producers withholding generation capacity to inflate prices. In other words, producers are using the European conflict and interrelated supply chain issues as a veil for profiteering. What more reason could you want to get out from under the thumb of gentailers?
Of course, this wouldn’t be the first time such ‘withholding’ has happened, at least one firm was found to have withheld capacity from the market after the closure of Victoria’s Hazelwood coal-fired generator in 2017.
Unfortunately, the true scope of the price increases and how long they will continue is largely uncertain. The Australian Energy Regulator’s (AER) Default Market Offer, which determines the maximum price a retailer can charge customers on default contracts (or standing offer contracts) has been delayed until May 26, presumably due to the Federal Election. Since the Coalition lost the election to Labor, this delay now looks like a scorched earth tactic from the retreating Libs, a time-bomb set to explode just as newly elected Prime Minister Albanese takes the reins.
The price rise is so dramatic that reports are emerging that second-tier retailers, including Sydney-based Discover Energy and Queensland’s LPE, have delivered the news of doubling rates to their customers with advice that they should seek new suppliers.
You know we’re living in uncertain times when power companies are telling their customers “Leave us, we’re too expensive.”
What can be done?
“The best way to restrain price surges in the medium term,” argues Mountain, “is to increase the penetration of low-cost energy from the wind and sun, and to back it with storage.”
Indeed, storage on the grid-scale is already proving its worth. AEMO has reported that batteries were the major providers of services to stabilise the grid, known as the FCAS market, for the first time in Q1 2022.
The same is true on the residential scale as solar plus storage protects against ballistic electricity prices. In these uncertain times, one thing can be said for sure, the higher electricity prices soar, the better the savings and return on investment (ROI) from a residential solar and battery storage system becomes.
The simple explanation for the improving economics of PV panels on the roof hooked up to a battery in garage is the delta between the solar feed in and the electricity price. As prices from the socket go up, the value of the solar you produce on your roof and use in the home, rather than feed back into the grid, increases.
As a rough example, when electricity prices are low, say around $0.10/kWh, then if you get a feed-in tariff of $0.07/kWh – you’re only missing out on $0.03/kWh of value. But when prices shoot up to $0.20, 0.30 or far beyond that, the value of being able to store your PV power increases. Batteries begin to look like bargain.
That 58% electricity price increase I received in the mail a week ago looks set to rise to 100%, meaning a $2,000 solar and battery annual saving today will turn into a $4,000 saving in the weeks to come. Similarly, an eight-year ROI today becomes a four-year ROI.