The road to cheaper energy is bumpy but we must focus on the destination
Prices today are about 10 per cent less than they were when prices peaked in 2018 and they are likely to be about 6 per cent less again in 2024. The savings are largely due to cheaper large-scale renewables and rooftop solar, backed up with dispatchable energy such as batteries and gas, displacing more expensive sources of energy.
It is undoubtedly good news and, unless there are significant changes to policy settings, we now have a clear view of a future with lower prices and lower emissions.
That’s our destination and we need to keep our eyes firmly focused on that as we navigate the bumps, potholes, forks, and potential dead ends in the road ahead.
The fall in wholesale prices – or what we pay for the actual generation of the electricity we use – is a good story, but we also need to manage some challenges and avoid hazards.
If we want electricity prices to continue to fall, we need to get the cheapest electricity with the most efficient back-up into the grid first. This includes ensuring renewables are complemented by resources that are available when there are expected or unexpected changes in the weather. The sun goes down every evening and can be blocked by heavy cloud cover or even brief storms, and we’ve recently seen the United Kingdom experience a lengthy period where the wind simply failed to blow.
That’s why we are working with the energy sector to incentivise the market to bring forward the right mix of firm, flexible and variable resources, including storage and demand-side responses. We have already begun this work in the area of most urgent need: the essential system services required to keep the system stable and the lights on.
When we define and value security and reliability services, we encourage the innovation in new technology that we will need as the system transforms. For example, both old and new technology – in the form of synchronous condensers and grid forming inverter – are being deployed and developed respectively to meet our system security needs.
We know incentives work, but the speed at which we see results will vary. From a reliability perspective, we can see that battery technologies are still evolving, hydro takes time to develop, and newer technologies on the demand and supply side are continually emerging.
While we get ready for these things to happen, we need to be careful.
The price spikes caused by the closure of the Hazelwood thermal generator in 2017 meant higher prices for everyone, and we know today that when the Liddell Power Station closes in stages in 2022 and 2023, it will put upward pressure on prices in that time frame.
The good news is that – this time – the impact is forecast to be less because we are better prepared. We have had longer notice of the closure, we understand more about the impact of closure, and there has been increased investment in renewables and peaking plant. Because we’re better informed and prepared, we’re confident that prices will fall again and further in the following year.
Beyond what we pay for the generation of electricity, between one-third and half of every electricity bill goes to pay for the towers, poles and wires that deliver that electricity to where it is needed. These prices are going up and are expected to accelerate over the years ahead as significant new investments are needed to connect new renewables.
Much of this investment is in the future and there are too many unknowns yet for us to model what it will mean for the prices we pay beyond 2024. But what we do know is that the projects most likely to go ahead will add about another $13bn to the value of transmission networks in the coming years, on top of the $21.7bn they are worth today.
That money must come from somewhere and, given the long-lived nature of these assets, the costs will be recovered for many decades yet to come. That’s why it is so important that any network investment is done in the most cost-efficient way to avoid a situation where the cost of networks erodes the benefits of those cheaper renewables for consumers.
There are also environmental costs and retail costs that make up about 16-25 per cent of a typical bill and will influence what we’ll pay in the future. If governments decide to extend subsidies or change the current approach to retail competition, these costs could also rise or fall.
While we have a clear downward trend today, there is more to do so that we remain on the right path.
Our destination is important, and so is our journey. We know we are travelling towards lower-cost and lower-emissions electricity and are determined to keep steering towards the best outcomes for consumers.
Anna Collyer is chair of the Australian Energy Market Commission and Energy Security Board
Based on the best knowledge we have today, electricity prices across Australia are falling.