Verdict
The main driver of higher electricity prices in recent years has been higher gas and coal prices, exacerbated by generation and network outages as well as insufficient supply of low-cost renewable energy. Accelerated rollout of new clean energy capacity will increase supply and place downward pressure on bills.
Analysis
Australians have experienced significant increases in their electricity bills in recent years. Various factors play a role in setting electricity bills, including wholesale electricity costs (the price paid by electricity retailers and large users), network costs (the poles and wires to deliver the power from point of production to homes and businesses), retailer charges, and other government charges.
The primary driver of increased power prices since 2022 has been higher wholesale electricity prices, due to higher gas and coal prices coupled with coal generator outages.1 Generally speaking, coal and gas generation are more expensive to run than wind or solar2, noting that wind and solar have zero fuel costs. Coal and gas are also exposed to international markets, meaning that global price shocks in these commodities have a knock-on effect for our local electricity prices. Power station outages also affect supply, and in June 2022, during the global energy crisis, following Russia’s invasion of Ukraine which triggered huge price spikes in gas and coal prices, the National Electricity Market was also faced with the outage of seven coal generating units for a variety of reasons3. This removed a substantial volume of generating capacity from the power system, reducing supply and markedly increasing prices.
Because of the staged way retailers buy electricity contracts, the wholesale price shocks of 2022 continued to flow through to higher retail bills over several years4. Coal generation outages are a common driver of increased wholesale prices, occurring periodically in the National Electricity Market. A recent study by energy advisory, Baringa Partners, found that more than half of the coal fired generators operating in the National Electricity Market are now over 40 years old, and that the average availability of these power stations is 65 per cent. This availability declines with age5. The Baringa report also found that coal outages have contributed to most major price spike events in the National Electricity Market in recent years. Renewable generation, or the lack thereof, can also contribute to supply tightness. In winter of 2024, for instance, a sustained reduction in wind speeds in southern Australia reduced available wind generation. This increased the need for expensive gas generation to replace the missing wind, spiking both gas and electricity prices6.
On balance, however, as more renewables entering the system increases overall supply, we will tend to see downward pressure on wholesale prices, as competition increases in the wholesale electricity market7. This has been a key factor contributing to reductions in wholesale prices over the last few years. In 2024, wholesale costs fell by 7% to 19% depending on the region.8 Electricity networks can also affect electricity bills in a number of ways.
Physical limits in the transmission system are a common driver of higher wholesale prices in some states, for example, between the south and the north of the east coast power system. Network lines can also be subject to failure, blowing down in storm events for example. This can also reduce available supply across the market, further increasing wholesale prices. There have been multiple examples of this recently9.
On the whole, the higher electricity prices seen by consumers over recent years have been driven primarily by higher gas and coal commodity prices, with a range of other contributing factors including increased outages, insufficient renewable energy supply and higher network costs. The faster deployment of new clean energy generation and storage will help to reduce our vulnerability to shocks, and place downwards pressure on power bills by increasing the supply in the market.
References
1 – Australian Competition and Consumer Commission. (2022). Inquiry into the National Electricity Market.
2 – UNSW Sydney. (2021). Are solar and wind the cheapest forms of energy? URL: https://www.unsw.edu.au/newsroom/news/2021/09/are-solar-and-wind-the-cheapest-forms-of-energy-and-other-faqs-about-renewables#:~:text=The%20basic%20and%20simple%20answer,a%20coal%2Dfired%20power%20station.
3 – Wattclarity. (2022). Whencan we hope to see the return of some of these coal units? URL: When can we hope to see the return of some of these coal units?
4 – Australian Energy Council. (2024). Explainer: Regulated prices and hedging contracts. URL: Explainer: Regulated prices and hedging contracts
5 – Baringa. (2024). The challenge of aging coal generators and the growing role of storage in grid reliability. URL: Baringa-_-Climate-Council-_-Final-Report-_-v2.pdf
6 – Australian Energy Market Operator. (2024). Quarterly Energy Dynamics Q2 2024, pages 11-12. URL: https://aemo.com.au/-/media/files/major-publications/qed/2024/qed-q2-2024.pdf?la=en
7- Grattan Institute. (2024). At last, wholesale power prices are falling. URL: https://grattan.edu.au/news/at-last-wholesale-power-prices-are-falling/
8 – Australian Energy Regulator, (2024), Wholesale Electricity Market Performance Report 2024, pages 11, and 25-31. URL: Wholesale electrcity market performance report – December 2024.pdf
9 – Australian Energy Market Operator. (2024). Quarterly Energy Dynamics Q3 2024. URL: https://aemo.com.au/-/media/files/major-publications/qed/2024/qed-q3-2024.pdf?la=en
