Dem NEM bones

It occurs to me, reading the new Australian Energy Market Commission report to CoAG ministers on household price trends, published today, that the appropriate theme music for the NEM is “Dem Bones.”

You know how it goes: “toe bone connected to the foot bone” all the way through to “neck bone connected to the head bone.”

And here’s the AEMC: “Wholesale market outcomes are increasingly interconnected with environmental policy, the wholesale gas market and system security.”

(The commission offers this soundbite for the media in the “infographic” on the report: “Consumers are riding a power price rollercoaster driven by changes in generation.” And this thought for the politicians: “The key to an orderly restructure of the electricity sector is to keep making market reforms that don’t add to consumer costs.”)

The AEMC notes that wholesale electricity costs now comprise approximately 30 to 40 per cent of residential power bills – which went up by an average 10.2 per cent from 2016-17 to 2017-18 primarily due to rising wholesale prices flowing from power station closures and, says the commission, will decrease by 6.6 per cent in 2018-19 and 2019-20 primarily due to them falling again as a result of the introduction of 4,100 megawatts of new capacity (mostly renewables) and the re-entry to the market of Queensland’s gas-fired Swanbank E plant.

Of course, there are a heap of other factors at play and even the experts can struggle to produce a clear picture of the impacts. Here’s the AEMC again: “In (our) 2016 report interconnectors were expected to have a large effect on the trend in wholesale prices” following the close of Hazelwood – but this didn’t happen.

Perhaps the biggest commission expectation in the new report is that NEM electricity demand will stay flat from 2016-17 to 2019-20, so changes in wholesale costs will relate to what happens to supply.

The AEMC’s working hypothesis includes the view that gas prices on the east coast will remain high from 2017-18 to 2019-20.

And reinforcing my “Dem Bones” whimsy is the point that the projected downward trend in power wholesale costs in the short term is expected to be largely driven by new capacity pushed in to the market by the RET – but, says the commission, in the medium term this can contribute to earlier retirement of large-scale synchronous generation (which can’t recover operating and maintenance costs in the greener market), decreasing competition and increasing wholesale prices.

“Without investment in replacement dispatchable capacity,” the AEMC adds, “wholesale prices will remain volatile and the rollercoaster will be repeated.”

And there is another joker in the NEM pack: the expected decrease in wholesale costs, the commission warns CoAG ministers, “may not necessarily translate in to lower retail prices for consumers” because of increases in environmental and/or network costs in some jurisdictions.

There is also the small matter of the impact of RET flow-on effects on hedging contracts, a key NEM activity for generators and retailers faced with significant trading risks – an issue about which the community knows virtually nothing and cares even less. The commission says, “As traditional generators retire, there will be fewer (power producers) to supply firm hedging contracts (resulting in) upward pressure on wholesale electricity contract prices.”

“Further,” says the AEMC, “(with fewer generators providing contracts) the risk faced by retailers from volatile spot prices may increase” because they can’t hedge. Over the long term “this potentially affects the level of retail competition.”

Green boosters and politicians on the make brush this stuff aside as they rush to promote greater and greater levels of wind and solar investment and, especially the Labor party at federal and State levels, to capitalize on public sentiment favoring renewable energy.

(On this point, after a weekend when Bennelong voters dashed Labor hopes of a boilover in federal government, it is worth, I think, drawing attention to the latest Essential Report poll. The question posed was “when considering the outcomes of energy policy, what do you think should be prioritized?” Thirty-seven per cent of respondents opted for keeping down the cost of energy, 18 per cent for maintaining supply reliability, 15 per cent for reducing carbon emissions and 22 per cent said “we do not need to prioritize, all can be achieved.” Good old “don’t know” achieved seven per cent. Essential Report last posed this question in June when those opting for keeping costs down totaled 28 per cent. That was also when a special Newspoll found 60 per cent of respondents wanted action to push down energy prices as a top priority, with 10 per cent opting for prevention of power blackouts and 24 per cent wanting carbon abatement as the primary policy objective.)

Coming back to the new AEMC report, the commission includes this quiet admonition to CoAG: “A number of governments (have) recently introduced their own energy policies aimed at increasing renewable generation, providing system security or putting downward pressure on wholesale spot prices. These policies, like the RET, have the potential to additionally affect supply/demand dynamics and wholesale electricity costs.”

Considering the amount of shouting in some quarters about the impacts of environmental policies (the RET, solar subsidies and so on), one should also record that the AEMC says they and system security costs range from three to 14 per cent of household bills, depending on jurisdiction – and are higher in the ACT and SEQ. Looking out to 2020, the commission sees them decreasing in SEQ but rising elsewhere in the NEM. The reason they’re going down in SEQ is that the Palaszczuk government has reacted to non-PV community growls by removing the smeared solar bonus scheme charge and shifting it to taxpayers……….

The direct costs of environmental policies are estimated by the commission to rise by around 19 per cent over the next two years mainly due to higher costs for certificates under the large-scale RET and also State environmental feed-in tariffs.

Finally, given the importance of network costs in residential power bills (with transmission charges amounting to 5 to 12 per cent and distribution charges 30 to 45 per cent), the commission expects this component to rise in South Australia between now and mid-2020, to remain stable in south-east Queensland, New South Wales and Victoria, and to fall slightly in the ACT and Tasmania.

The bottom line in the AEMC message to ministers is that short-term gains flowing from fluctuations in wholesale power costs won’t last without investment in new dispatchable generation capacity – and it makes no bones about the problem: “uncertainty is stopping investment and will put upward pressure on prices in the medium term.”

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