Power price shock for NSW and Victoria

The above chart from an article in the Australian by Matt Chambers ($) says it all.

The days of affordable electricity are quickly becoming a distant memory.

Notably, Victoria's comparative advantage—low-cost brown coal—saw prices below $40 MWh during 2016 & 2017. That's set to hit $80 by 2020, according to the Goldman Sachs report, notwithstanding the fact that Victorian wholesale prices hit $95.54 last month.

The article highlights the following:

• Recent softening in electricity futures prices underestimates a coming price shock by 20–30 per cent.
• Even if the National Energy Guarantee is put in place, wholesale electricity prices will rebound towards a new peak of between $120 and $130 per megawatt-hour
• In South Australia, prices are forecast to average $150, while in Queensland, which has state-owned coal generators, prices are forecast to fall to about $50.
• The cost of power will not dictate retail electricity prices; they will be driven by market conditions that require high prices—sometimes spiking to the maximum of $14,000 per MWh—to activate the increasingly frequently needed gas-peaking power.
• In 2016–17, wholesale power prices averaged $88 per MWh in NSW, $70 in Victoria, $123 in South Australia and $103 in Queensland
• Since the closure of Hazelwood (brown coal power station), average prices over this financial year so far have jumped to $95 in NSW and $103 in Victoria but fallen to $82 in Queensland and $102 in South Australia.

Our take?

We should ask how Queensland's state-owned power generators can deliver wholesale power prices cheaper than South Australia, NSW, and Victoria, given that privatisation was meant to drive competition and wind power is claimed to be cheaper than coal (but don't remove the subsidies).

We know the recent price jump in Victoria is due to relatively high-priced gas power generation stepping in to fill the gap left by the exit of 1600 MW of capacity when Hazelwood closed last March.

The solution?

We think this quote from the article by interim CEO of the Minerals Council of Australia, David Byers, gets it right:

“Policy settings need to ­ensure that ageing baseload ­generation is replaced with low-cost, reliable energy,” council interim chief David Byers said. “As a country, we should be focusing on how to reduce energy costs..."