AEMO: Electricity prices depressed for years

AEMO has massively downgraded its forecasts of electricity demand, which suggest consumers will win. But coal power stations will be badly squeezed through carbon costs combined with depressed prices caused by renewables and energy efficiency.

With major implications for wholesale electricity prices and the viability of new electricity generation projects and new network investment, the Australian Energy Market Operator (AEMO) has released forecasts that massively downgrade electricity demand for the eastern Australian National Electricity Market. According to AEMO this has been driven by rapid growth in solar PV, greater energy efficiency, reduced economic growth and a reduction in manufacturing output.

While this is good news for electricity consumers and greenhouse gas emissions, it is most definitely bad news for those wanting to build new, large-scale power generation projects and existing coal power generators.

Average growth in annual energy for the next ten years is now forecast to be 1.7 per cent per annum, down from 2.3 per cent forecast in the 2011 Statement of Opportunities. This leads to electricity consumption in 2020 below 220,000GWh under the medium forecast and possibly barely above 200,000GWh under the low growth forecast. This is a radical downgrade from what was expected just three years ago.

Annual energy demand for the NEM to 2021-22 vs 2011 Forecast

Source: AEMO 2012 National Electricity Forecasting Report

In addition the chart below illustrates that peak demand across every state within the NEM is forecast to be dramatically lower than previously expected.

Average annual growth in maximum demand to 2021-22 (old forecast – orange; revised forecast – yellow)

Source: AEMO 2012 National Electricity Forecasting Report

Right now average wholesale electricity prices in real terms are the lowest they have ever been in the NEM, struggling to get above $30 per megawatt-hour. This makes a new combined cycle gas power plant completely unviable, even once we include the carbon price. Peaking prices are also likely to be subdued, although much will depend on the weather over the coming summers.  

For renewable energy project developers this depressed outlook for wholesale prices makes the carbon price especially important. Futures trading for baseload contracts post July 1 are at $50 to $55 per MWh, which will make a major difference and mean Renewable Energy Certificates have to do less of the heavy lifting to make a new project viable.

However the continual pushing of new renewable generation into a market that is already over-supplied with generation capacity is sure to make life harder for existing generators.

A few years ago we expected a carbon price approaching $40 combined with gas fired generation would start to force out some of the older coal generators. But now it looks like a carbon price in the realm of $20 might just do the trick. That’s because rather than getting squeezed by gas, coal will get squeezed by depressed electricity prices caused by renewable energy combined with energy efficiency.

As for what this means for consumers, it makes the $40 billion spend on networks look especially questionable. Once we finally reach the end of the current regulatory period governing network expenditure in 2014, we’ll probably see retail electricity prices go down rather than up as outlined in AEMO’s Economic Outlook Information Paper and touched upon by Climate Spectator on 7 June.

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