Wholesale electricity prices jumped in winter in blow for bill relief next year

An increase in wholesale costs last winter will put upward pressure on calculations to determine how much Australians will pay for electricity in 2025.

The cost of wholesale electricity rose during winter as periods of depressed renewable energy generation coincided with soaring demand for power in bitterly cold weather, data from the Australian Energy Regulator has shown, tempering hopes of sustained bill relief for households and businesses in 2025.

Electricity bills are shaping as a critical election issue, with the next annual tariffs for 2025 expected to be announced just months ahead of an election that must be held by May, and Labor is desperate for continued bill relief after jumps of more than 20 per cent amid a global energy crunch when it assumed office.

In a blow for hopes of rapid falls in electricity bills, the AER said that while wholesale electricity prices during the three months to September 30 were lower than the previous quarter, they were up significantly from the same period one year earlier.

Year-on-year prices were significantly higher across all regions, with Tasmania up 290 per cent, Victoria up 114 per cent and South Australia up 76 per cent, it said.

The increase was fuelled, the AER said, by a spike in demand for electricity in July and early August as Australia suffered through a so-called wind drought when electricity production from the zero-emission source plunged. The issue was compounded by a drought in Tasmania, which relies heavily on pumped hydro.

“Variability in output in July and early August resulted in the need for more expensive firming resources such as batteries, hydro and (gas power generation),” the AER said.

The regulator noted that from mid-August to September the weather improved and wind generation increased, tempering the impact on quarterly wholesale electricity prices.

Still, higher wholesale prices during the period are a headwind to hopes for lower tariffs known as the Default Market Offer.

The Default Market Offer is calculated annually as the AER considers the wholesale cost of electricity, the toll of transporting electricity, and the cost of compliance with government rules and regulations.

Wholesale prices are the biggest, most influential component of the Default Market Offer, but the AER will use several years of data rather than one single 12-month period so the most recent jump is not a death knell for hopes of lower bills.

The AER will announce a draft Default Market Offer in March, ahead of the election that pits two different visions for Australia’s future energy grid against each other.

Labor is under mounting pressure amid a cost-of-living crisis that has seen a record number of Australians unable to pay their utility bills, a stark contrast to the pledge made by Prime Minister Anthony Albanese when in opposition. Labor campaigned on a platform of electricity savings of $275 a year.

Labor has set the aggressive target of having renewable energy generate 82 per cent of Australia’s electricity by 2030, and federal Energy Minister Chris Bowen said the AER report illustrates the plan is working, with a growing number of occasions wholesale electricity prices were $0.

“This latest report shows electricity prices are going down in the majority of our east coast grid, and more instances of spot prices under $0, proving our Reliable Renewables Plan is working,” said Mr Bowen.

Negative wholesale prices occur when renewable energy generation is so plentiful that it more than meets demand. Negative wholesale prices drag down the average cost of producing electricity, which eventually determines the price paid by households and businesses.

But the Coalition will seize on the year-on-year increase as evidence of the pitfalls of a renewable energy-dominated grid. The Coalition insists relying on renewables exposes Australia to periods when the wind is not blowing or the sun is not shining, and Labor is incentivising the exit of baseload power, most notably coal, which could step in.

Coal is rapidly retiring as the traditional fuel source struggles to compete financially with renewables. Coal has much higher operational costs than renewables and ever-increasing amounts of renewable energy are driving coal out.

The Coalition has proposed seven nuclear power stations to fill the void, but has yet to release costings of its plan, though polls indicate growing support for the plan.