Sweet relief: why electricity prices are easing

Electricity prices are expected to ease from 2020 in the short to medium term as a number of key market conditions combine to soften wholesale prices across the National Electricity Market (NEM).

Falling fuel prices and increased new generation have reversed the three year trend of rising wholesale electricity prices. At least for now.

These conditions are summarised in the Australian Energy Market Operator’s (AEMOs) Quarterly Energy Dynamics Report, with NEM electricity spot prices averaging $72 MWh in the December 19 quarter, down 19 per cent from the same quarter in 2018.

The main drivers of lower prices are (1) continued increases in new generation capacity (mainly renewables) increasing supply, falling gas and coal prices and no major retirements of old capacity.

The combination of these conditions, while they last, are expected to sustain softer wholesale electricity prices through 2020.

AEMO reported east coast gas prices were down 26 per cent from Q4 2018, reflected in increased gas generation in the NEM, further increasing supply and easing prices.

Increased gas generation offset weaker hydro generation due to dryer conditions in NSW and Tasmania.

Demand continued to fall in the NEM with continued increases in rooftop solar PV, although this and increased renewable generation increased price volatility, particularly in South Australia and Queensland.

Increased renewable generation is pushing the incidence of negative prices to near record levels, resulting in utility scale wind and solar being curtailed 6 per cent of total output.

This volatility, increased negative prices and renewables curtailment are likely to continue to increase as more renewables are built, at least until large scale storage can reverse this trend.

Rooftop solar is also setting new records in driving minimum demand. On a mild, sunny, spring Sunday afternoon in South Australia (November 10) rooftop solar PV generated 832MW of electricity, 64 per cent of the state’s demand at the time. This pushed minimum demand in the state to a new record low of 458MW.

Electricity prices can be expected to soften until these macro trends reverse: renewables investment slows, thermal plants like Torrens Island A and Liddell close and gas prices increase.