{"id":11332,"date":"2017-05-16T15:39:44","date_gmt":"2017-05-16T05:09:44","guid":{"rendered":"https:\/\/www.solarquotes.com.au\/blog\/?p=11332"},"modified":"2017-10-04T10:13:44","modified_gmt":"2017-10-03T23:43:44","slug":"natural-gas-blamed-for-rising-electricity-prices-but-is-not-the-main-villain","status":"publish","type":"post","link":"https:\/\/www.solarquotes.com.au\/blog\/natural-gas-blamed-for-rising-electricity-prices-but-is-not-the-main-villain\/","title":{"rendered":"Natural Gas Blamed For Rising Electricity Prices But Is Not the Main Villain"},"content":{"rendered":"
\"lady

Is the rising electricity price\u00a0really all down to gas prices?<\/p><\/div>\n

Last week<\/a> I wrote about how electricity prices in Australia are about to shoot so high the International Space Station will have to take evasive action.\u00a0 It appears it’s not enough for the electricity sector to make Australians pay ridiculous prices, they are going to force us to go right to ludicrous.https:\/\/www.youtube.com\/watch?v=oApAdwuqtn8<\/p>\n

You may say:<\/p>\n

But Ronald, you’ve already covered this!<\/em><\/p>\n

You told us how much electricity prices will go up by — Roughly 20%.<\/em><\/p>\n

When it will start — July for most states and it’s already underway in Victoria.<\/em><\/p>\n

How long it will take — 2 to 3 years.<\/em><\/p>\n

Who will get off relatively lightly — Hopefully the Northern Territory, Tasmania, and the ACT.<\/em><\/p>\n

Who will cop it in the neck — NSW with a possible 25% increase in household electricity bills.<\/em><\/p>\n

And how to avoid paying through the nose — Own or install a good sized rooftop solar system.<\/em><\/p>\n

So why are you bringing it up again?\u00a0 Don’t we already know everything we need to?<\/em><\/p>\n

And I’ll respond by saying we’ve hardly started!\u00a0 We haven’t even done the most important thing!\u00a0 Or at least, the most important thing according to politicians and the media, which is deciding who to blame.<\/p>\n

\"\"<\/p>\n

The good people who govern our country and also those who own our newspapers and TV stations, don’t like complex, messy explanations which involve multiple causes and accurately reflect reality.\u00a0 They like to pick one thing and run with it and not be too concerned if important information, nuance, or truth itself is lost along the way.<\/p>\n

So politicians and pundits have cast around for something suitable for soundbites they can blame for the increase in electricity prices.\u00a0 I’m sure the Coalition would have been happy to pin it all on renewable energy, but that would be too much of a stretch even for them.<\/p>\n

Fortunately, they found an almost perfect suspect and the villain of the piece was declared to be rising natural gas prices.\u00a0 The spot price of natural gas has more than tripled from what it was six years ago, which makes it a very plausible explanation for increasing electricity prices.\u00a0 And when specific details are required, they can say the hope that household electricity bills would not become ludicrous was killed by Santos<\/a>, in Queensland, with a natural gas export terminal<\/a>.<\/p>\n

But the problem with this narrative is that because Australia only generates 8.2% of its electricity from natural gas, the tripling of natural gas prices by itself is only enough to directly increase residential electricity bills by around 3% and not the 25% that may happen in NSW.\u00a0 As natural gas often sets the price that is paid to all generators an increase in its price can have an disproportionate effect on electricity prices, but not an extra 25% effect.\u00a0 That’s just nuts.<\/p>\n

So while increased natural gas prices do bear their share of responsibility, the amount of blame assigned to them by politicians and the media is out of proportion to their effect and this has allowed the other culprits to remain hidden from the public’s view.\u00a0 And because gas prices are only one factor, even if Prime Minister Turnbull’s much publicized intervention<\/a> in the gas markets is wildly effective it will only reduce and not stop the electricity price increases that are to come.<\/p>\n

Increased Gas Prices Have Little Direct Effect On Prices<\/h2>\n

Australia used to have the lowest natural gas prices in the developed world, but once gas from eastern states started being exported to Asia, prices launched themselves skyward as they approached international levels.<\/p>\n

In 2011 the average wholesale spot price of natural gas in Australia was around $3.20 a gigajoule<\/a>1<\/a><\/sup>.\u00a0 So far this year it has averaged around $10 a gigajoule.\u00a0 That means the price has more than tripled from less than 6 years ago, so we’re really paying through the nose or whatever orifice applies for gas.<\/p>\n

But because only one twelfth of Australia’s electricity is produced from natural gas, the price increase alone is only enough to directly raise the average cost of generating electricity by around 0.7 cents2<\/a><\/sup>.<\/p>\n

Higher Gas Prices Indirectly Boost Wholesale Electricity Prices<\/h2>\n

Currently coal power supplies 77% of Australia’s grid electricity<\/a> and generally bids a relatively low asking price into wholesale electricity markets.\u00a0 Wind and solar farms, which supply 5.8% and 0.3% of grid electricity, normally don’t bid at all and just take the price that is set by other generators.\u00a0 Rooftop solar which supplies around 2.7% of Australia’s electricity isn’t included in the wholesale electricity market.\u00a0 The end result is that gas at 8.2% of supply and hydroelectricity at 8.3% often determine the wholesale price of electricity.<\/p>\n

Natural gas determines the wholesale electricity price during periods when it both bids higher than other sources of generation and its output is required.\u00a0 Under these circumstances all generators supplying electricity are paid the same as the natural gas generator that bid in the highest price and has its output used.\u00a0 Because gas generators will always bid at least as much as what their fuel costs them an increase in natural gas prices can have a disproportionate effect on wholesale electricity prices.<\/p>\n

Higher Natural Gas Prices Aren’t A Sufficient Explanation<\/h2>\n

The efficiency of natural gas generators in Australia varies from around 25% to 50%.\u00a0 If it is assumed the average efficiency of gas generation is 33% and the cost of natural gas to generators3<\/a><\/sup> has risen in line with the $6.80 increase in natural gas spot prices since 2011, then the cost of electricity generated from it will have increased by 7.3 cents per kilowatt-hour.\u00a0 But because gas generation will only determine the wholesale electricity price some of the time, it’s not enough to account for the full increase in wholesale electricity prices.<\/p>\n

South Australia is the state that produces the largest portion of its electricity from gas.\u00a0 The spot price of natural gas this year has increased by approximately $5.50 from its average over the previous 3 years.\u00a0 If the efficiency of gas generation is assumed to average 33% then the increase in gas price would be sufficient to account for a 5.9 cent increase per kilowatt-hour, if gas generators always set wholesale electricity prices.<\/p>\n

This graph compares the average wholesale electricity spot price in cents per kilowatt-hour for February, March, and April this year to the average of those months from the previous 3 years:<\/p>\n

\"Average<\/p>\n

As you can see, the 9.5 cent increase in wholesale electricity spot prices South Australia has experienced is much more than the estimated 5.9 cent increase that would result if natural gas generators always set prices, which they don’t.\u00a0 So we can be certain that natural gas price increases alone are not sufficient to explain this year’s increase in wholesale electricity spot prices.\u00a0 I’m also confident the same applies for other states that generate a much smaller portion of their electricity from natural gas.<\/p>\n

Other Culprits Are Involved<\/h2>\n

As increased natural gas prices alone are not enough to explain the increase in wholesale electricity prices, other factors must be involved.\u00a0 One obvious immediate cause is the closure of Victoria’s brown coal Hazelwood Power Station<\/a> which has reduced the supply of electricity available and contributed to higher wholesale electricity prices.\u00a0 I will admit this has gotten some attention in the media and not all coverage has been gas gas gas.\u00a0 But this is not the only factor involved.<\/p>\n

In addition to the Hazelwood closure there have been literally decades of political mishandling of electricity reform and privatization.\u00a0 It is obvious from Australian electricity bills that privatization has been a disaster for the country.\u00a0 The attempt to introduce competition into the electricity sector has resulted in a situation where there is often too little competition for markets to function efficiently.<\/p>\n

I will unmask the main\u00a0culprits in my next post<\/a>. Stay tooned.<\/p>\n