Rising coal prices and Hazelwood closure to blame for sustained high wholesale electricity prices in New South Wales

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The Australian Energy Regulator (AER) has found that rising coal prices, the closure of Hazelwood and limited supply is causing high sustained wholesale electricity prices in New South Wales.

Average monthly energy prices have doubled in New South Wales in the past 12 months but the AER, which was tasked to compile a report on the situation by Federal Energy Minister Josh Frydenberg, excluded that market coordinated manipulation came into play.

No abuse by market players

In the report, the AER found that while competitive pressure on wholesale prices has fallen, there is no evidence to suggest that prices are being driven by rebidding close to dispatch or physical or economic withholding – behaviours more usually associated with the exercise of market power.

Wholesale spot prices were previously between $30 and $65 a megawatt hour but have since shot up to an average of between $80 and $110 a megawatt hour for every month since the start of 2017.

“The current sustained nature of high wholesale prices in NSW is not being driven by extreme price events, but rather coal prices and supply issues unique to NSW and structural change across the entire National Electricity Market,” AER chairman Paula Conboy said.

She also made it clear that extreme price events’ such as heatwaves or floods did not affect wholesale prices. 

NSW dependence on coal the biggest factor affecting energy prices

With NSW generation dominated by black coal, rising coal prices have affected the costs of generators which are purchasing coal under short-term contracts. This has been exacerbated by problems with coal supply affecting all NSW coal-fired generators, that now appear to be easing.

Ms Conboy said that while these supply considerations explain, at least in part, the higher offer prices in NSW, there are reduced competitive pressures in this market.

“We have found the closure of Hazelwood power station in Victoria is having an impact on electricity imports into NSW and increased the output of generators in NSW, and that increased gas costs and hydro preserving water for summer has reduced the competitive pressure gas and hydro generators can place on coal generator’s offers. These are issues which require ongoing analysis,” she said.

Lack of competition has an impact on sustained high prices for energy

However, it noted that the domination of NSW’s market by five companies which provide both generation and retail services had an ongoing impact on energy prices.

AGL, Origin, EnergyAustralia, Delta, and Snowy Hydro – raised their prices, from a base of between $0 and $30 per megawatt hour to an average of $70 per megawatt hour.

Snowy Hydro saw the highest peak price, offering energy at between $150 and $300 a megawatt hour.

Prices expected to drop after summer

Looking forward, the Australian Energy Regulator expects prices to fall in 2018, after a summer spike in demand.

“We have observed that some generators have revised their offers downwards in more recent months, although they are still higher than historic levels,” the AER said.

The Australian Stock Exchange has forecast a future baseload price of $107 a megawatt hour for the 2018 March quarter, dropping to $97 for the June quarter.

Monitoring of the NSW wholesale market will continue during 2018 as part of the AER’s first comprehensive review of the national wholesale electricity market, to be released in December next year. A report into the impacts of the closure of the Hazelwood power station will be released in March 2018.


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