The recent media hype about moves by the Australian Energy Regulator to ‘slash power bills’ is at odds with new analysis suggesting that electricity prices may double between 2011 and 2017.
The AER is seeking rule changes to enable it to more closely scrutinise the efficiency of investment in power networks, but as Edwin O’Young of Port Jackson Partners has demonstrated, this is by no means the only area of pressure on prices.
Speaking at the ‘Powering Australia 2011’ conference in Melbourne last week, O’Young said many factors will continue to drive retail electricity prices upwards over the next six years following increases of more than 35 per cent in inflation-adjusted terms over the past four.
Many of these cost increases are unavoidable and should be reflected in consumer bills, he said, acknowledging that it is of great importance to ensure that they do not increase more than is necessary – the same point being made by AER chairman Andrew Reeves.
O’Young says that, after 15 years of relative power price stability, average electricity prices have risen from around 15 cents per kilowatt hour in 2007 to 21 cents this year. This trend applies in particular to Sydney, Melbourne and Brisbane, the three main load centres.
The breakdown of the bill for New South Wales, for example, shows a marginal increase (0.3 cents) for wholesale power supply, a big rise (2.2 cents) for networks, a substantial shift (0.7 cents) in mandatory green power costs and a doubling (up 1.2 cents) of retailer operating costs and customer acquisition costs. This adds up to a rise from 16 cents per kWh in 2007 to 20.4 cents today.
What lies ahead, according to O’Young, is a very large increase in the wholesale electricity charge (rising 7.5 cents), a big jump in network charges (7.2 cents), a continuing increase in renewables costs (up another 0.1 cents) and a further rise in retailer costs and margins (up another 1.1 cents) to deliver an end-user bill of 36.3 cents per kWh in 2017.
He attributes the wholesale power rises to increasing coal prices as contracts for power stations come up for renewal, increasing gas prices as the east coast industry moves in to export mode, the impact of the Gillard government’s carbon price on the dominant fossil-fuelled generators, rising capital construction costs for new power stations and higher volatility in the competitive east market with a potential increase in the power price cap from today’s $12,500 per megawatt hour to $16,000.
O’Young points to the continuing huge rises in Chinese coal demand – forecast to increase by 60 million tonnes a year to 2020 – as well as high demand from India as important factors in new local fuel contracts. “While this is good news for our coal exporters, it is not good news for domestic power prices,” he warned.
With construction of new coal-fired power stations virtually impossible in the present environment and with gas expected to be the main fuel for new generation this decade, O’Young sees the east coast LNG developments driving domestic prices far beyond their present levels. “The current experience of independent power producers in Queensland,” he says,”is that they are simply unable to secure gas contracts for much more than 2-3 years and (seller) price expectations remain significantly above historic levels.”
A rise in gas prices of $4 per gigajoule, he points out, leads to an increase in generation costs of $28 per megawatt hour. “That is an increase in wholesale electricity costs of 45 per cent before a carbon price.”
O’Young says a $27 per tonne carbon price will add $26 per MWh to coal generation costs and around $14 to gas-fired power production.
To this he adds an increase of about 12 per cent in renewable energy charges over the next six years, but warns that if the federal government’s small-scale renewable energy scheme (promoting solar power) continues to expand at anywhere near the levels we are seeing today, the cost of retailers’ meeting their RET liabilities could be much higher.
The headache for politicians, federal and state, lies in O’Young’s summary of the situation: “Many things are unavoidable, including network costs, which are locked to 2015, and fuel costs that will rise as coal and gas prices are linked to export markets – and as the carbon price is factored in.”
Keith Orchison, director of consultancy Coolibah Pty Ltd and editor of Powering Australia yearbook, was chief executive of two national energy associations from 1980 to 2003. He was made a Member of the Order of Australia for services to the energy industry in 2004.