Wholesale energy prices soar as coal falters and a lack of connection hinder the grid

The challenges faced by the electricity grid have been thrown into sharp relief as record solar output fails to offset coal outages and a lack of interconnection, driving spot prices higher.

Interconnection limitations have been blamed in part for higher wholesale spot prices.

Average prices for both gas and electricity in the last three months of 2024 were higher than in the same period the previous year, despite new records being set for solar output and minimum electricity demand, the Australian Energy Regulator says.

The price outcomes were largely driven by “significant coal outages” and higher priced wholesale energy offers in the market, along with interconnector limitations, the regulator said.

The data in the AER’s wholesale markets quarterly, released on Thursday, mirror those released also on Thursday by the Australian Energy Market Operator, which showed that the cost of generating electricity across Australia’s grid over the final three months of 2024 increased more than 80 per cent.

AEMO, which calculates its prices in a different manner however reached broadly the same conclusions, said this was driven by record high demand for electricity amid soaring temperatures, which coincided with all-time low availability of coal power.

The challenges facing Australia’s grid operators are evidenced in the AER report, which says there was more volatility in electricity prices across the day, “as more expensive fuel types were needed outside hours of high solar generation to meet demand’’.

“Overall, average wholesale electricity prices increased in all regions by between 49 per cent and 134 per cent compared to the same quarter last year, with price outcomes driven by significant coal outages and higher-priced offers, combined with interconnector limitations and more variable demand profiles,’’ the AER said.

The regulator said while spot prices did not flow directly into future retail prices, they did have an impact on forward price setting.

“At the end of the quarter, base futures prices for 2025 dates were generally higher compared with the previous quarter, most notably in New South Wales and Queensland,” the AER said.

“2026 base future price movements in each region were similar to, but smaller than, 2025 price movements.’’

AER board member Jarrod Ball said: “While wholesale electricity prices ended 2024 high by historical levels, these remain below those seen during the extreme highs of 2022 across all regions”.

Mr Ball said there were a number of new records set during the quarter.

“This quarter, solar output reached a record of 14,980 MW on December 12, minimum daily electricity demand records were set in NSW and SA, and there were a record number of negative-priced 30-minute periods in the National Electricity Market,” Mr Ball said.

East coast downstream gas prices were 25 per cent higher than in the same quarter the previous year, with prices in Queensland higher due to weather conditions combined with record gas exports.

“Downstream gas demand fell with the seasonal decrease following winter, however the demand for gas-powered generation in the National Electricity Market was higher than this time last year, particularly in Queensland where warmer weather and record-high export demand also put upward pressure on prices,’’ the AER said.

During the quarter, more than 2500MW of new registered electricity generation capacity entered the market, made up of solar, wind and battery capacity.

“While many projects are yet to achieve full output, this represents the highest quarterly new entry of the transition to date,’’ the AER said.

The price increases will feed into the Default Market Offer for electricity prices, with the AER to release a draft determination in March before a final decision in May.

Most analysts expect modest decreases, however the new price data could be a headwind to those anticipated declines.

WHOLESALE SPOT PRICE CHANGES

• NSW – $170 per MWh, up 134 per cent

• Queensland – $148 per MWh, up 88 per cent

• South Australia – $81 per MWh, up 52 per cent

• Tasmania – $75 per MWh, up 49 per cent

• Victoria – $58 per MWh, up 71 per cent

*Change compares Q4 2024 with Q4 2023

Originally published as Wholesale energy prices soar as coal falters and a lack of connection hinder the grid