Power, gas price pain to last years: Australian Energy Regulator
Power prices hit a record high in June and July, with the national energy regulator warning costs may remain elevated for several years.
Electricity and gas prices reached record highs in June and July and are set to remain high for years driven by elevated fuel costs, coal station closures and a looming shortfall in gas supply on the east coast, the Australian Energy Regulator has warned.
Spot prices for east coast gas and electricity markets soared in the June quarter and hit fresh records in the first two months of winter with the Ukraine war pushing international coal and gas prices up while a shortage of the two fossil fuels at home meant domestic generators offered less energy into the market.
While energy prices dipped in August as the Albanese government threatened export controls on LNG to dodge a domestic shortfall, futures have now jumped back near highs with the regulator cautioning of several years of further pain to come.
“Expectations are for high prices to continue in coming years,” the AER said in its wholesale markets quarterly report.
“High fuel costs are likely to continue as international coal and gas prices remain at historical highs. Generation closures, including the impending closure of Liddell power station in April 2023, and tight gas supply conditions, with a domestic gas supply shortfall projected for winter 2023, means that market conditions will remain challenging for some time.”
Levels at Victoria’s underground gas storage plant, Iona, dropped to a record low and forced the Australian Energy Market Operator to put an official system security threat in place. Gas storage levels remain critically low, according to the AER.
“High price pressures still exist and remain a concern for gas supplies to southern markets for the coming months. August international LNG prices are at a historical high and gas storages have been significantly depleted,” the AER said.
With the UK government mulling an intervention to freeze consumers’ energy bills, AEMO said users were being saddled with major cost hikes including a $200m hit after the market was suspended in June.
“These are still meaningful costs to pass through, and I appreciate that any costs are a burden on retailers,” AEMO chief executive Daniel Westerman said. “Particularly in an environment where many retailers are already grappling with a very challenging commercial environment.”
“And of course in an environment where inflation is over 6 per cent, energy costs are at the forefront of everyone’s mind, and consumer trust in the energy sector is low.”
The AEMO chief said Australia needs to break the dependency between commodity and electricity prices by developing more renewable generation along with transmission and back-up power.
Still, he conceded the exit of coal this decade and move to clean energy would invariably see more volatility in the market.
“This will not be the last pothole we hit on Australia’s rapid energy transition,” Mr Westerman said.
A surge in thermal coal prices to a fresh record also had a knock-on effect for Australian energy users with the AER calculating the minimum cost for black coal generators in NSW and Queensland to generate was the equivalent of $225 per megawatt hour, triple the level of a year ago.
“As global economies emerged from Covid lockdowns, the demand for coal and the associated price has increased significantly. By June, the marginal cost to generate was above $225/MWh. This highlights that generators that need to source spot coal now require very high prices to generate,” the AER said.
Solar in Queensland produced at lower levels in the first six months of 2022 than the prior year while average wind capacity in South Australia was also lower for a majority of the June quarter.
Hydro generation and gas have been setting prices more frequently in recent months, the report found, with hydro in May and June setting the price around 55 per cent of the time compared with 30 per cent in January and February 2022.
“Underlying market conditions clearly explain the majority of these changes. Increases in coal and gas input costs and environmental constraints impacting hydro generators have played a significant role in these outcomes,” the AER said.
“However, this is another important example of where a lack of visibility over contract markets limits our ability to fully determine the incentives underlying offer behaviour and the extent to which this may be a concern.”
Wholesale electricity prices more than tripled in the second quarter of 2022 to average $264 per megawatt hour compared with $87MWh in the first three months of this year, AEMO said, with Queensland and NSW posting the highest prices.