Electricity price rises are primarily driven by uncertainty, which pushes up the price of futures and forward rate electricity contracts. These financial instruments are needed by energy suppliers (generators and retailers) to hedge against highly volatile spot market electricity prices. Continued energy policy uncertainty is driving up the cost of these hedging contracts.
Uncertainty is bad…
Uncertainty comes from a number of sources. There’s the usual uncertainty surrounding long term weather forecast. Weather is an important determinant of our energy demand (eg. when it’s hot, we turn the a/c on and our refrigeration works harder).
There’s the economy which drives demand. (ie. when the economy is doing well, our businesses are producing more and therefore require more power to do so).
And then there are our policymakers who are driving uncertainty on the supply side.
Energy policy indecision is driving prices up!
What our electricity market needs more than anything right now is a clear plan for the future; clear policy direction. Once we have this, then the companies that produce our electricity will be able to establish a business case for long-term investment in upgrading existing generation and building new generation capacity.
And here we go again…
The Federal Energy Minister, Josh Frydenberg, recently announced a review that would examine the best ways to meet Australia’s climate commitments. Sadly, the scope of the review was quickly dialled back after the hard right of the coalition pulled their strings and forced Mr Turnbull to once again backtrack. Given that this is simply a REVIEW of potential options to ensure energy security (and price stability) to all Australians, it’s disappointing to see that a vocal minority can rule out potentially feasible options before they can even be considered.
Are the last 10 years of energy policy back-flipping and uncertainty going to continue for the next 10 years? Let’s hope not for the sake of the energy consumer.