Power prices to surge amid volatile markets

Power prices are expected to jump over the next two years as an international commodity crunch pushes up the wholesale cost amid a bumpy transition to renewables.

Power prices are expected to jump over the next two years as an international commodity crunch pushes up the wholesale cost amid a bumpy transition to renewables, energy bosses say.

The cost of living shock has already led to forecasts of a 35 per cent jump in power bills next year and energy bosses said the current volatility and high futures prices were likely to keep costs elevated for several years.

“We’ve had very high wholesale prices this year and they are currently following through to the full price of electricity for the next financial year in 2023-24,” Australian Energy Regulator chair Clare Savage said. “I do think it’s reasonable to expect a significant increase next year.”

Origin Energy, one of Australia’s biggest power retailers, said there would be a further price squeeze in the next financial year despite households already being slugged with an annual power bill hundreds of dollars higher.

“We are looking at price increases next year based on recovery of the wholesale costs of energy that have already been incurred in the system and continue to be incurred,” Origin chief executive Frank Calabria told The Australian.

“You’re seeing orders of magnitude much greater again next year after the increases this year.”

The disruption from Russia’s war was set to add volatility in Australia’s power market well into the next financial year after initially emerging as a short-term hit. The AER will on Thursday launch a series of reforms over how the nation’s energy system approaches bill vulnerability among consumers amid the cost crunch.

“What we can see at the moment is that we’ve got very high international coal and gas prices and there are future markets for both international coal and gas and undoubtedly they’ve been shaped by two things: one being the post-Covid recovery initially and then the war in Ukraine,” Ms Savage said.

Australian Energy Regulator chair Clare Savage: ‘I do think it’s reasonable to expect a significant increase next year.’

“They’ve lifted considerably but the forward price is still strong for both coal and gas internationally over the next two years. And that is what is flowing back into our power market.

“It might be seen as being a temporary dislocation from the war in Ukraine. But that impact on global fossil fuel prices is being felt for more than just this current year. So we do see that looking out over the next two years as well.”
Still, energy retailers must be allowed to pass on some of the extra costs they were incurring, the AER chair said.

“There are protections for consumers around unjustifiably high prices. But if we don’t allow the costs that are being incurred by energy businesses to be passed on to consumers, then we would expect to see widespread failure of energy businesses.

“So there’s two competing issues there. One is if you try and cap the price that can have quite damaging consequences for the market. But we can’t also allow prices to go above cost because it has damaging impacts for consumers.”

The AER’s consumer vulnerability strategy lists 15 reforms to tackle market complexity, removing barriers to participation, boosting protections, and improving affordability for consumers by reducing retailers’ cost to serve customers.

The AER chair said it was also concerned over the inability of retailers to secure hedging contracts after Macquarie and Bell Potter restricted their clearing services for electricity futures amid ongoing ructions in the sector.

“I’m very concerned to be honest about the state of the contract market at the moment when you see big, significant jumps in the forward market,” Ms Savage said.

“So this is about buying contracts to insure yourself against high prices next year or the year after. Most retailers and generators already have those contracts in place for this year, so even though there have been some very high prices in our spot markets, they haven’t flowed through to retail bills because that insurance has been in place.”

Being unable to access that insurance could have a damaging impact on the market, according to the AER chair.

“When you do see the withdrawal of clearing houses like Bell Potter or the stepping back that Macquarie has flagged, that can have a significant impact on the ability of participants to buy that insurance.

“And so from our perspective, that does have potentially quite significant consequences for how we would work out the price of electricity in the future when we do something like the default market offer. But also how participants manage risk in this market.”

The huge jump in electricity and gas costs echoes soaring prices in the UK, which prompted protests and consumers to burn their energy bills.

The Origin chief said the problems faced by the UK were not as acute in Australia.

“The UK situation is more acute than here but we did see seven retailers that have failed through that period of time (in Australia). So I think that’s one of the key things about how we continue to have a robust and competitive energy market.

“That doesn’t mean that the price increases won’t be a challenge for Australia, they certainly will.”