Wholesale Electricity Price Crises Continue — More Hefty Hikes Likely

Electricity price rises in Australia

Australia’s wholesale electricity price crisis is in its fifth month.  This ongoing disaster began in April and really took off in May, June, and July.  It continued through August, but the crisis wasn’t as crisisy as the previous three months. It’s confined to the eastern states, so WA and NT have escaped its clutches.  The ACT is also getting off lightly due to its commitment to 100% renewable electricity.

In this article, I’ll provide an update on what happened with wholesale electricity prices over August and explain why we’re still on track for further electricity price hikes next year.  If you want background information on the crisis, you can check out this article…

An Idiot’s Guide To Australia’s Electricity Price Problem

(Note that the reader isn’t necessarily the idiot.  I wanted to write a smart person’s guide to the crisis, but that was never a realistic goal for me.)

I also wrote about how the situation became less bad at the start of August… 

Three Days Of Non-Insane Prices Spark Hope Wholesale Electricity Crisis Is Easing

Wholesale Spot Prices Still High

Here’s a graph I made showing the average monthly wholesale spot price so far this year for the five eastern states. 

Queensland started the year with high average wholesale spot prices thanks to an unprovoked explosion at the black coal Callide Power Station, while in the other eastern states, they were all under 9 cents per kilowatt-hour.  Thanks to a strong economy, these prices were above average but not out of the ordinary. But by July, no state had an average monthly wholesale spot price of under 32 cents per kilowatt-hour. 

Due to the decrease in August, the graph suggests things are rapidly returning to normal.  But for as long as there’s invading going on in Ukraine, there’s no reason to expect a return to normality, as international prices for coal and natural gas will remain high.  The only way we’re likely to see a price decrease soon is if…

  1. Russia exits Ukraine, or…
  2. There’s more government regulation of wholesale electricity prices.

At the moment, the first looks far more likely than the second. 

Gas Prices Far Better

A few months ago, eastern state natural gas prices soared to $100 a gigajoule before being capped at $50 – still around five times higher than usual.  After that, they tended to be over $40 a gigajoule until the end of July, when they fell again.  I’m not privy to the details, but apparently, many threats were made and metaphorical heads busted behind the scenes, causing domestic gas prices to fall. 

On the last day of August, gas prices per gigajoule were:

  • Adelaide:  $17.01
  • Brisbane:  $13.68
  • Victoria:  $13.25
  • Sydney:  $13.60

Natural gas prices are now well below export prices.  It’s a miracle!  This still isn’t a great situation, as every gigajoule of gas we burn represents a fistful of dollars going up in smoke in lost exports.  But because natural gas has an outsized effect on wholesale prices, keeping its price artificially low — by hook or by crook — is probably the most effective short-term solution to the crisis available.

More Electricity Price Hikes Coming In 2023

If the crisis continues with wholesale electricity prices averaging as high as they were in August, then all eastern Australian states will see hefty electricity price increases next financial year.

An early end to the Russian invasion is on the cards.  It could occur either due to continued Ukrainian military success or be the result of a negotiated settlement sparked by Putin spontaneously deciding to spend more time with family members — specifically, the dead ones. 

But even if wholesale electricity prices soon return to last year’s levels,  a big hike will already be baked in because they’ve been so high for so long.

But wholesale market spot prices aren’t the same as wholesale electricity prices, as most electricity is traded through contracts rather than the market.  This means there is hope the contract prices will be more reasonable and so moderate the extreme wholesale market prices we’ve been seeing.  But the longer the crisis continues, the more contracts will be updated with higher prices and the more likely it is most Australians will be hit with huge increases in electricity bills next financial year. 

While it’s not possible to know what sort of price hikes we’ll be hit with in 10 months’ time, I would not be surprised if the average increase is 5 cents per kilowatt-hour or more.  The only good news is I also expect a considerable increase in solar feed-in tariffs

Emergency Measures

When coal and natural gas prices octuple or decuple or octa-decuple, that sends a clear signal to stop using them so much. 

But one of the many flaws in the way we manage retail electricity is that high wholesale prices may not affect retail prices for more than a year after they occur.  This means the price signal that tells people to reduce consumption doesn’t happen until long after a wholesale price crisis has passed. 

Most of the increase from the recent run-up in wholesale prices won’t hit your bill until July 2023.  Hopefully, by then, the Russian invasion of Ukraine will be over and international energy prices back to normal — or potentially lower than normal if Russia floods the market to pay war reparations.  

Obviously, Australia’s governments should take steps to reduce electricity consumption now, rather than wait ten months for higher prices to do it.  

But there is something they can do almost immediately that won’t cost anything overall.  They could eliminate, or at least reduce, daily supply charges while raising per kilowatt-hour charges to keep revenue the same. 

Households with average electricity consumption will see no change in what they pay, while those with below-average consumption will pay less.  Regrettably, high consumption households will have to pay more, but everyone will have an incentive to use less grid electricity because the price per kilowatt-hour will be higher. 

While I don’t expect this to happen, it’s not as big a stretch as some people think.  The only reason we have daily supply charges is to encourage people to use more electricity.  The money collected isn’t earmarked for koala orphanages.  It all goes into the same money bucket as the per kilowatt-hour charges. 

Europe Has It Worse

Australia’s electricity price crisis is serious, but things are far worse in Europe, which must import much of its energy. 

Fortunately, Europe is filling its gas reserves and has lots of wind, nuclear, and other sources.  This means no one has to freeze to death in winter.  Except in the UK, where they’re planning to freeze poor people to death anyway:

UK electricity price increases

Posted by Craig @exhippy23 on Twitter.

This is the bill for a snack bar and shows that from the 19th of September 2022, they’ll be charged £1.20 per kilowatt-hour for electricity.  That’s $2 Australian and more than what it costs to run a generator here.  

I don’t approve of burning gas, but I do hope for the following:

  1. Russia gets the hell out of Ukraine soon, which will allow energy prices to fall.
  2. Everyone learns the lesson not to rely on coal and gas and abandons them with great haste.

But whatever happens, internationally traded gas and coal will go into decline.  Nations will not want to rely on fuels that can soar in price and crash economies when wind and solar power can provide energy at a competitive price and have zero fuel cost.

Solar Energy Saviour

Even if international energy prices remain at their current levels and governments make no further efforts — or at least no fruitful efforts — to bring electricity prices down, there are reasons to expect a further easing of wholesale prices over the next few months.  This is because Australia consumes less electricity in spring, and as the days grow longer and the sun rises higher in the sky, solar output also improves.  

But there’s no need to wait for more sunshine to improve the output of existing solar power systems. 

If you don’t have solar, get some slapped on your roof.  There’s no point in waiting.  The same goes if you have solar panels but are thinking of getting more.  Having a solar power system installed won’t only directly reduce your electricity bills, it will also reduce them for others.  This is because the surplus solar energy that gets sent into the grid helps push down wholesale electricity prices to the benefit of everyone. 

So, installing solar panels now will not only provide immediate benefit for you but will help protect Australia against future episodes of extreme wholesale prices.

Prepare For The Reasonable Worst

Some people say you should prepare for the worst.  But I don’t recommend that, as I can think of some pretty awful things and would have to spend the rest of my days cowering in an underground bunker, behind boxes of tinned food. 

I do recommend preparing for the reasonable worst.  These are things that are unfortunate and have a reasonable chance of occurring.  This definitely includes a painful increase in electricity prices next July.  You can probably guess what’s number one on my list of precautions, but I do have more than one suggestion:

  1. Install solar panels.
  2. Improve your home’s thermal envelope.
  3. Consider investing in energy-saving appliances, such as a heat pump hot water system.
  4. Get off gas. 
  5. Get a home battery — but only if you’re okay with not making a financial return.

If you do follow these steps and, for some reason, it turns out we don’t have a big hike in electricity prices next year, then all you’ll have done is made the world a better place. 

About Ronald Brakels

Joining SolarQuotes in 2015, Ronald has a knack for reading those tediously long documents put out by solar manufacturers and translating their contents into something consumers might find interesting. Master of heavily researched deep-dive blog posts, his relentless consumer advocacy has ruffled more than a few manufacturer's feathers over the years. Read Ronald's full bio.

Comments

  1. Totally agree re the Daily Supply Charge. Something ACOSS should be screaming for on behalf of low energy users but would rather pick on solar owners

    Mine in SA with AGL went from 101.64c to 109.76c per day. And there is no way of avoiding it

    • George Kaplan says

      From a consumer side daily supply charges are undesirable. From the retailer side they’re a guaranteed pot of gold – they’re following the water and sewerage model.

      At present you only pay a daily supply charge if you’re connected to the electricity grid. For water and sewerage however you pay a daily supply charge if piping goes past your property – a connection is not required!

      Thus water and sewerage companies have worked out that maximising the daily supply charge and minimising the actual usage charges allows them to maximise profit whilst spreading the cost to as many people as possible. And a small percentage increase on all the various charges allows for a large revenue increase.

      Electricity companies want in on that model. Instead of charging people on the basis of the power they use, they can instead primarily charge people for the privilege of a connection, or all their connections if they have multiple forms. By making connection charges not usage charges the primary charge, solar owners, who comprise roughly 1:4 Australian households can be forced to pay similar amounts to non-solar owners – or forced to export massive amounts to offset the charges.

      Such a model incentivises folk to move to off-grid battery power, but that’s only possible for those with significant disposable income i.e. not the average battler or blue collar worker. Nor is opting out certain if power companies convince government to allow them to bill daily charges because electricity goes near a property.

  2. Your blog article to contained the statement “The only good news is I also expect a considerable increase in solar feed-in tariffs.”.
    I would be I tested on how you form that opinion. AGL say that the have reduced FIT because the quantity of Solar energy they receive makes it worth nothing.

    • George Kaplan says

      Ronald has been predicting an increase in FiTs since … last year?

      My own experience is the reverse – I’ve dropped about 65% and am presently not even breaking even with FiTs v charges. A relative will be dropping over 70% once his contract expires at Christmas.

      Wattever still lists AGL as offering 10c/kWh but their site only offers the standard 5c/kWh.

      • I am told AGL FIT will be 10c for the first 14 kWhs, then 5c for the rest. I like you have been RAPED by AGL, after increase in kWh rates, supply charge, and reduction in FIT from 12c. These changes will wipe out my expected credit which was $250 for Dec 2021/Feb 2022, after doing projections using new rares and FIT.

  3. Ian Pershouse says

    I think that Australia should be making more solar panels in Australia and everyone should have solar power on their roof tops

    • George Kaplan says

      Ian, roughly 1:4 households already has solar, but 2021 census data says 13% of households are townhouses, and 16% apartments. You can’t really slap private solar on an apartment building, and townhouses may or may not be possible.

      Even if you could have solar on every private, corporate and government building, solar’s peaking and plummeting nature makes it unreliable. Batteries allow those extremes to be moderated to some degree, but batteries are extremely expensive and the cost to supply residential power for Australia for 12 hours would be prohibitive.

  4. Not sure about the issue of the financial return on the battery. Mine’s already paid for now as long with its practical function it served. Yes, it’s a blended payback, but who cares? (Yes, I know the battery on its own without solar, would not recoup its cost but there’s much more to the battery than just the financial return). The overall cost of $21k paid for the solar PV and battery system combined has been recouped. (that is, whatever it would have cost me if I had to buy the same amount of electricity has been covered by FiT and self-consumption). The battery boosted self consumption by about 40%. The best year I had so far, I achieved about 80% self-powered. 20% grid import was for winter heating and there wasn’t enough solar to cover that requirement. The solar system is made up of 3 different system added on over the years since 2011 and the Tesla PW2 battery is not quite 5 years old.

    Fortunately, only had 1 issue with one of the solar inverters but that was under warranty and was replaced.

    From here on, I would actually start to make money on the system. At least I still have 5yrs+ warranty left on the Tesla PW2 battery and the last solar PV system added still has over 1 year left warranty on the inverter. So, should be pretty good going forward.

    Next step???? an EV….. just can’t quite make the leap to switch over. My current ICEV is not 5 years old and only has 80,000kms on it. Not worth the cost to trade off and unless petrol gets to about $3.85/litre in my situation, I’ll stay put with the ICEV as much as I don’t like using petrol, there’s not enough a compelling reason to switch now. But I do look forward to getting the EV, maybe when I get my super out in a couple of years time! Just have to bide my time…. hopefully then, we’ll have a good choice and price to pick from compared to the current situation (supply and $$$$).

  5. George Kaplan says

    Your Daily Dose of Pessimism :-|)

    “If you don’t have solar, get some slapped on your roof”? It’s foggy and cloudy outside. My system is presently generating insufficient to even boil a cup of coffee! And the forecast for the next little while is record breaking rain and storms. That being the case, waiting seems an entirely reasonable course of action, at least in this part of the world.

    Renewable energy retailer Elysian Energy has collapsed: https://www.news.com.au/finance/economy/australian-economy/electricity-provider-elysian-energy-collapses-after-price-hike/news-story/91f88ce91737a3829ab816bdf12a5f6c

    And a UK article on the subject (https://www.dailymail.co.uk/news/article-11171329/Elysian-Energy-collapses-begging-customers-switch-provider-costs-soared.html) warns Australians to expect power shortages from mid-2023 on as coal and gas plants are withdrawn from the grid.
    Massive investment in generation, transmission, and storage over the next decade is required to ensure homes and businesses are not affected – coal generation totalling 14% of Australia’s total electricity capacity will be retired. What proportion of total capacity will be lost through gas retirements isn’t specified.

    The article doesn’t reveal why there is so little interest in investing in power. Could it be too much uncertainty about government policy? Or is it economic instability – delays in importing materials from China, building costs through the stratosphere, or concerns about the grid collapsing if battery costs drop and the ~ 1:4 households with solar choose to disconnect and rely on batteries and generators instead?

    Ultimately all that Australians care about is whether power costs too much, and whether or not it’s reliable.

  6. Within a 50km radius of my house there are 250 turbines, a couple of large solar arrays, more rooftop than I care to count … and a bloody great battery!
    There is so much electricity I don’t know why our hair isn’t standing up.
    With all that going on it is understandable – sort of – that they just cut our fit by 50%, but how in the same breath they justify a grid price 8 to 10 times the fit escapes me.

  7. I’m confused. I am in Victoria. I have just roled over the domestic contract with Red energy at .22c a kwh and .6c a kwh feed in.

    • Ronald Brakels says

      Victoria got away without an overall electricity price increase this July. Unfortunately, Victorians are on track for a hefty electricity price increase next July. I do think there is a good chance the current government will spread the pain out over a couple of years, since Russia probably won’t invade anywhere else for a while, but we’ll just have to see if they allow the full cost to be passed on next financial year.

  8. George Kaplan says

    This may be of interest: https://www.news.com.au/finance/business/other-industries/another-energy-company-collapses-as-electricity-crisis-worsens/news-story/e136ab16ffb8a9d975ff47f11af73e03

    Seven electricity companies have collapsed this year alone, only four collapsed between 2016 and 2019. How many more will follow suit in the next few months?

    • Ronald Brakels says

      It all depends on how many electricity retailers failed to lock in reasonable wholesale prices before the Russian invasion of Ukraine. I’m sure the big retailers are sitting pretty.

  9. Here we are – a Country totally self-sufficient in natural gas that could run electricity generating power stations separate to the rest of the world without any need for coal but our fearless leaders have somehow managed to lock us into some sort of global cartel. A war on the other side of the globe between two countries now supposedly has to affect what we pay in our power bills. And we just bend over and keep taking it.

    The lunatics are in charge of the asylum !

  10. I'm Old Gregg! says

    It’ll keep going up as long as we’re stuck with the 19th-century centralised generation and the need to obtain combustible commodities so that we can set fire to stuff like we’ve been doing for the last 300,000 years or so.

    Since the 1980s, setting fire to stuff (or otherwise boiling water) is not our only option for extracting some useful energy.

    We are on the threshold of abundant, effectively inexhaustible, zero-marginal-cost, zero-marginal-emissions, uninterruptible electrical energy. Crusty old conservative die-hards will delay it for as long as they are able, but we’ll get there anyway.

  11. I live in Queensland and we had quite significant price hike (30%) but the Solar feed in tariffs didn’t change. I was wondering why is like that?

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