Finance Finance News ‘Nasty’: Power bills tipped to rise as wholesale electricity prices surge
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‘Nasty’: Power bills tipped to rise as wholesale electricity prices surge

electricity prices
Electricity prices are tipped to rise over winter in response to a hotter wholesale market. Photo: TND
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Household energy bills are set to rise this winter as a “perfect storm” of factors drives up wholesale electricity prices, energy analysts have warned.

Plant outages and surging coal prices have helped push up wholesale electricity prices in the first quarter of 2021 to double what they were a year ago, according to analysis by University of Melbourne research fellow Dylan McConnell.

The analysis shows wholesale electricity prices rose above $100 per megawatt hour (MWh) in the first quarter – between 64 per cent higher (South Australia) and 284 per cent higher (Queensland) than the year before, as the below graph demonstrates.

It’s a significant increase from the $70/MWh price celebrated by Treasurer Josh Frydenberg in his pre-election federal budget papers and suggests the run of falling prices due to surging renewables has come to an end.

“Futures prices for the next quarter are [also] looking pretty nasty,” Dr McConnell said.

Why power bills are set to rise

Rising electricity prices have been put down to a few key factors.

First, demand has been higher, particularly across Queensland, amid widespread flooding in February.

The extreme weather has also made it more difficult to supply enough coal into power stations in New South Wales, with some stations in Queensland and NSW also not working.

Second, soaring global prices for coal and gas are making it more expensive to generate electricity from fossil fuels in Australia.

Coal and gas prices have been going up due to global factors, namely shortages in Europe that have been exacerbated by the war in Ukraine.

And despite the recent surge in renewables, coal and gas still make up the majority of Australian electricity supply, meaning higher prices lead to higher household energy bills.

Grattan Institute energy program director Tony Wood said “everything that could go wrong” to put upwards pressure on wholesale prices has gone wrong.

“Perfect storm is a good term … it’s just about unprecedented,” he said.

“The forward prices don’t suggest it gets better any time soon.”

Wholesale prices have risen most across Queensland and NSW, where power stations are more exposed to changes in the global coal prices.

Victoria and South Australia – connected to Victorian generators – have been insulated because the brown coal that feeds their markets is not exported overseas, Mr Wood said.

Notably, South Australia is also less reliant on fossil fuels than other states, somewhat protecting its electricity grid from higher coal prices.

But power prices have gone up considerably in all states and territories.

“This will flow through to consumer prices,” Mr Wood said.

“It may be visible before the federal election.”

When power bills could rise

How quickly rising wholesale prices flow through to households will depend on the protection afforded to retailers by their hedging contracts.

These contracts allow retailers to lock in electricity supply ahead of time, shielding them from future rises or falls in wholesale costs.

But those who haven’t locked in lower prices will be forced to pass on higher wholesale prices much sooner, Dr McConnell said.

“Some larger retailers, in particular, might be well covered and not have to pass on the full rises to their customer bases,” he said.

“Others (typically smaller, second-tier retailers) might be more exposed and have to raise prices more to cover their position.”

Dr McConnell said prices would rise for some customers within months but it was difficult to say by how much.

Mr Wood said retailers, even those that are well hedged, would need to put up prices at some point to reflect the higher wholesale costs.

And the government-regulated price ceilings in most markets would also be increased, he said.

It could come at a politically sensitive time, with the federal election just over a month away and tipped to focus on the rising cost of living.

“Governments like to take credit for lower prices,” Mr Wood said.

“[But] they are hardly likely to take blame for this situation.”