The Australian Energy Market Commission (AEMC) has recently published its Residential Electricity Price Trends report with the key finding being that household power prices are set to fall over the next three years. In this Chart of the Week we take a closer look at the wholesale power element of the retail bill.
The AEMC modelled residential prices to 2022 and found that rates would fall by an average of 7.1% over this period (equivalent to $97/customer, falling from $1,370 to $1,273/year), driven prominently by falling wholesale prices (accounting for two-thirds of the overall bill decrease), combined with smaller reductions in network and environmental costs. Wholesale prices are generally expected to fall due to improved supply of generation from renewable sources.
This will be welcome news to consumers and is the first time all three elements of the bill are expected to fall in the 10-year history of the AEMC report.
Focusing on the wholesale segment, there has been a consistent rise in prices across the NEM states for the past five years (see Figure 1), generally driven by tightening supply and demand balance. In 2015, the cheapest state for power (Victoria) saw traded prices averaging $30/MWh across the year, while the most expensive was Queensland with $52/MWh. Fast-forward to 2019 and the two states have switched positions – Victoria being the joint most-expensive with SA at $110/MWh and Queensland being the cheapest at $80/MWh on average, but the overall trajectory for all states has been a significant upward trend.
The traded markets (and the AEMC) are now telling us that this increasing trend is about to be halted. In the ASX Base Futures, we are currently seeing significant backwardation as traders are expecting the supply picture to improve. For instance, in Victoria, Calendar Year pricing drops from just over $92/MWh for 2020 to $75/MWh next year and $65/MWh by 2022. Victoria is a slight outlier as current prices have been driven higher by generation outages (Mortlake and Loy Yang), but overall a similar but less pronounced trend of backwardation is also seen across other NEM states.
Our own modelling (Benchmark Power Price Curve) also backs up the AEMC report findings for wholesale prices. We expect annual power prices to drop across all states over the period to 2022, with the biggest falls in SA and Victoria. As well as returning plants from outages, these are driven by the influx of new build renewables (with low or zero short run marginal costs). The extent to which these annual prices drop depends on the speed of connections for new projects. However, as noted in Issue 13, whilst average prices may fall, we forecast increased price volatility.
We expect the annual average prices to trend back up in the back-end of the coming decade as a result of plant retirements, especially in states such as Victoria and NSW which are heavily dependent on coal generation.
Our sensitivity runs show that the pace of these retirements, and indeed the elevated prices, are dependent on the market design outcomes of the ESB post-2025 review. Whilst an energy-only market may accelerate coal retirement, the introduction of a capacity payment, depending on design, could extend their life in the NEM.