Australia’s wholesale electricity price crisis is in its fifth month. This ongoing disaster started in April and really took off in May, June and July. It continued until August, but the crisis was not as acute as the previous three months. It is confined to the Eastern States, so WA and NT have escaped its clutches. The ACT is also doing well thanks to its commitment to 100% renewable electricity.
In this article, I will provide an update on what happened with wholesale power prices in August and explain why we are still on track for further power price increases. next year. If you want background information on the crisis, you can check out this article…
A Fool’s Guide to Australia’s Electricity Price Problem
(Note that the reader is not necessarily the idiot. I wanted to write a smart person’s guide to crisis, but that was never a realistic goal for me.)
I also wrote about how the situation got less bad at the beginning of August…
Three Days of Not Insane Prices Raises Hope Wholesale Power Crisis Eases
Wholesale spot prices still high
Here is a chart I made showing the average monthly wholesale spot price so far this year for the five eastern states.
Queensland started the year with high average wholesale spot prices thanks to an unprovoked explosion at the Callide black coal power station, while in the other eastern states they were all below 9 cents the kilowatt hour. Thanks to a strong economy, these prices were above average but not out of the ordinary. But in July, no state had an average monthly wholesale spot price below 32 cents per kilowatt hour.
Due to the drop in August, the chart suggests that things are quickly returning to normal. But as long as there are invasions in Ukraine, there is no reason to expect a return to normal, as international coal and natural gas prices will remain high. The only way to see a price drop soon is if…
- Russia leaves Ukraine, or…
- There is more government regulation on wholesale electricity prices.
At the moment, the first seems much more likely than the second.
Gas prices are much better
A few months ago, natural gas prices in the eastern state soared to $100 a gigajoule before capping at $50 — still about five times higher than usual. After that, they tended to be above $40 per gigajoule until late July, then fell again. I’m not aware of the specifics, but apparently there were a lot of threats made and metaphorical heads popped behind the scenes causing home gas prices to plummet.
On the last day of August, gas prices per gigajoule were:
- Adelaide: $17.01
- Brisbane: $13.68
- Victoria: $13.25
- Sydney: $13.60
Natural gas prices are now well below export prices. It’s a miracle! It’s still not a great situation, because every gigajoule of gas we burn represents a handful of dollars that go up in smoke in lost exports. But because natural gas has an outsized effect on wholesale prices, keeping its price artificially low — willy-nilly — is probably the most effective short-term solution to the crisis available.
More electricity price hikes to come in 2023
If the crisis continues with wholesale electricity prices on average as high as they were in August, all states in eastern Australia will see large increases in electricity prices during of the next exercise.
A quick end to the Russian invasion is on the cards. This could either happen due to Ukraine’s continued military success or be the result of a negotiated settlement sparked by Putin spontaneously deciding to spend more time with his family members, especially the dead.
But even if wholesale electricity prices soon return to last year’s levels, a sharp rise will already be expected because they have been so high for so long.
But wholesale market spot prices are not the same as wholesale electricity prices because most electricity is traded through contracts rather than on the market. This means that there is hope that contract prices will be more reasonable and therefore moderate the extreme wholesale market prices we have seen. But the longer the crisis drags on, the more contracts will be updated with higher prices and the more likely it is that most Australians will be hit by huge increases in their electricity bills over the next financial year.
Although it is not possible to know what type of price increases we will face in 10 months, I would not be surprised if the average increase was 5 cents per kilowatt hour or more. The only good news is that I also expect a considerable increase in solar feed-in tariffs.
When coal and natural gas prices increase eightfold or tenfold or octa-tenfold, that sends a clear signal to stop using them so much.
But one of the many flaws in the way we manage retail electricity is that high wholesale prices may not affect retail prices for more than a year after they occur. This means that the price signal that tells people to reduce consumption does not occur until long after a wholesale price crisis has ended.
Most of the increase from the recent wholesale price spike won’t hit your bill until July 2023. Hopefully by then the Russian invasion of Ukraine will be over and international prices for l energy will return to normal – or potentially lower than normal if Russia floods the market to pay for war reparations.
Clearly, Australian governments should take action to reduce electricity consumption now, rather than waiting ten months for prices to rise to do so.
But there is something they can do almost immediately that won’t cost anything overall. They could eliminate, or at least reduce, the daily supply fee while increasing the fee per kilowatt hour to maintain the same revenue.
Households with average electricity consumption will see no change in what they pay, while those with below average consumption will pay less. Unfortunately, households with high consumption will have to pay more, but everyone will have an incentive to consume less electricity from the grid because the price per kilowatt hour will be higher.
Although I don’t expect that to happen, it’s not as important as some people think. The only reason we have a daily supply charge is to encourage people to use more electricity. The money collected is not intended for koala orphanages. It all goes into the same basket of money as the fee per kilowatt hour.
Europe has worse
The electricity price crisis in Australia is serious, but things are much worse in Europe, which must import a large part of its energy.
Fortunately, Europe is filling its gas reserves and has plenty of wind, nuclear and other sources. This means that no one has to freeze to death in winter. Except in the UK, where they plan to freeze the poor to death anyway:
This is the bill for a snack bar and shows that from 19 September 2022 they will be charged £1.20 per kilowatt hour for electricity. It’s AU$2 and more than it costs to run a generator here.
I don’t endorse burning gas, but I hope for the following:
- Russia will soon get rid of Ukraine, which will allow energy prices to fall.
- Everyone learns the lesson of not depending on coal and gas and abandons them with great haste.
But whatever happens, internationally traded gas and coal will decline. Nations will not want to rely on fuels whose prices can skyrocket and crush economies when wind and solar power can provide competitively priced energy with no fuel cost.
solar energy savior
Even if international energy prices remain at their current levels and governments make no more efforts – or at least no successful efforts – to drive down electricity prices, there are reasons to be expect further easing of wholesale prices over the next few months. This is because Australia consumes less electricity in the spring, and as the days get longer and the sun rises higher in the sky, solar production also improves.
But you don’t have to wait for more sunshine to improve the performance of existing solar power systems.
If you don’t have solar power, install it on your roof. There is no point in waiting. The same is true if you have solar panels but are planning to buy more. Installing a solar power system will not only directly reduce your electricity bills, but will also reduce them for others. Indeed, the excess solar energy that is sent into the grid helps to lower wholesale electricity prices for the benefit of all.
So installing solar panels now will not only give you immediate benefits, but will help protect Australia against future episodes of extreme wholesale prices.
Prepare for the worst reasonable
Some people say you have to prepare for the worst. But I don’t recommend it, because I can think of some pretty awful things and I would have to spend the rest of my days cowering in an underground bunker, behind tin cans.
I recommend preparing for the reasonable worst. These are things that are unfortunate and have a reasonable chance of happening. This certainly includes a painful increase in electricity prices next July. You can probably guess which is the first on my list of precautions, but I have more than one suggestion:
- Install solar panels.
- Improve the thermal envelope of your home.
- Consider investing in energy efficient appliances, such as a heat pump hot water system.
- Get off the gas.
- Get a home battery, but only if you’re okay with not making a financial return.
If you follow these steps and for some reason it turns out that we won’t have a big electricity price hike next year, all you’ve done is make the world a better place.