Pearls and Irritations

The closure of Eraring power station and AGL’s takeover bid are likely to reduce electricity prices for consumers as low-cost renewable energy and additional storage replace the retiring coal generators.

Implications for household and business electricity prices

Two recent announcements could lower electricity prices and speed up the switch from coal and gas to renewables.

First, Origin Energy announced it would close Eraring coal-fired power station in NSW seven years earlier than forecast, in 2025.

Second, Mike Cannon-Brookes’ Grok Ventures and Brookfield have made a bid to acquire AGL Energy, close down its coal generators by 2030 and construct up to $20 billion worth of renewables, storage and other energy resources. Cannon-Brookes says their plan could reduce electricity prices in the long term. And as renewables increase, the Eraring exit could also have a minimal impact on price, potentially even reducing prices in the long term.

So why is the Federal Government yelling higher prices?

How are electricity prices set?

About one third of a household’s electricity bill is the cost of generation, almost half is network costs (poles, wires and substations in the transmission and distribution networks), and the rest is retail and environmental costs.

The price paid to electricity generators is determined in the wholesale electricity contract market and the spot market.

The wholesale electricity spot market runs like an auction every 5 minutes. All electricity generators (coal, gas, hydro, renewables etc.) place a bid for the price they can generate electricity. The lowest bidding generators are allowed to generate electricity and are paid. Generators that are too expensive are not allowed to generate and are not paid in that 5 minute period.

Solar and wind are the lowest cost form of new build electricity generation in Australia. They have very low operating costs, so can bid low. They are therefore almost always allowed to generate electricity.

Coal and gas generators relying on purchasing fuel are more expensive to run, so bid higher.

Coal is inflexible – it can’t easily be turned off or on – so generators will sometimes bid into the market at a loss, simply to stay online. This is rapidly eroding the profitability of coal-fired generators.

Gas generators are typically the highest priced generators, reflecting the high cost of gas. They turn on with high demand and high prices (on a hot day for instance), often running in evening peak periods.

Batteries absorb excess electricity when spot prices are low and deliver electricity when spot prices are high. They also free up surplus energy that might otherwise be wasted, acting to reduce system costs. The Climate Council has found new batteries are cheaper than new gas peaking generators.

The longer-term contract market, where participants enter contracts guaranteeing the sale or purchase of a certain price and quantity of electricity over longer periods of time (e.g. 12 months), lets participants manage spot market risk. It enables retailers (such as AGL and Origin) to offer long term supply contracts to customers.

Bringing more supply into the electricity generation market increases competition, with generators likely reducing prices. In turn, removing supply, like when a generator retires, can drive prices up due to a reduction of competition. In theory, higher prices for sustained periods incentivises the building of new energy resources. If lower cost energy resources are built to replace a retiring generator, and everything else remains constant, prices will drop to lower than before the generator’s retirement.

Adding more low cost renewable energy into the National Electricity Market (NEM) has historically brought wholesale electricity prices down, particularly in the middle of the day in the sunny period.

This wholesale market trend is predicted to continue – as more renewables are added into the system to replace exiting generators – and as wind, solar and battery costs continue reducing.

Network costs (transmission and distribution) have also been reducing in recent years. With new network infrastructure now needed to integrate renewable energy into the grid, it will be key to make sure this investment is efficient so that this network component of electricity bills stays steady or continues to trend downwards.

Retail and environmental costs are forecast to remain relatively steady according to Dr Kerry Schott.

The total cost of supplying electricity to households, which includes generation (from the wholesale electricity spot and contract market), network costs, retail and environmental costs, is now the lowest it has been in 8 years, largely due to low cost renewables, according to the ACCC. This overall trend is predicted to continue. The Australian Energy Market Commission (AEMC) forecast households will pay around $77 less (or 6%) for electricity in 2024 largely due to cheaper renewable energy, reducing prices to their lowest levels since 2017.

Eraring closure likely to have minor impact on wholesale electricity prices

The NSW electricity infrastructure roadmap is bringing in 12GW of renewables and 2GW of storage by 2030, likely at low cost, through the NSW electricity infrastructure roadmap. This will put downward pressure on wholesale electricity prices as Eraring exits.

The NSW Government is also accelerating transmission to new Renewable Energy Zones, and plans to fast track pumped hydro projects and install a large 700MW battery to ensure there’s no supply gap when Eraring exits.

Origin is also planning a 700MW battery at Eraring.

AEMO says NSW won’t have a supply gap when Eraring closes. That means the Federal government’s proposed Kurri Kurri gas expansion is unnecessary.

If new capacity comes online as planned, any wholesale electricity price increase is likely to be minimal, and temporary.

The increase in investment in renewables and storage is forecast to be almost entirely offset by reductions in Eraring’s fuel and operations costs according to ITP Renewables modelling.

Impact of a Grok Ventures/Brookfield takeover of AGL on prices

Grok Ventures and Brookfield want up to $20bn worth of low-cost renewable energy and storage brought into the system while closing down AGL’s old coal generators by 2030. This could reduce wholesale electricity prices as renewable generators have lower operating costs than the exiting coal generators.

There is a caveat. Brookfield controls Ausnet – an electricity transmission, distribution and gas network owner/operator. If Brookfield and Grok Ventures acquired AGL, Brookfield would own generation, transmission, distribution and retail assets. The business segments must be separated per ring fencing guidelines with monitoring in place to ensure various parts of the business do not make decisions benefiting Brookfield as a whole.

The closure of Eraring and AGL’s takeover bid are more likely to reduce wholesale electricity prices for consumers in the long term, rather than increasing them, as plenty of low-cost renewable energy and additional storage supply is planned to replace the retiring coal generators.

It will be key to make sure network investment is efficient, so that savings due to low cost renewables continue to flow to consumers.

Johanna Bowyer is an Australian electricity analyst with the Institute for Energy Economics and Financial Analysis (IEEFA), a not for profit think tank.