Why energy costs are falling (and yours are not)

This is going to come as a bit of a shock to all those businesses and households that have experienced a huge jump in their electricity bills, but wholesale electricity prices in Australia have actually been falling to record lows in the past year, and it's been denting the earnings of those companies that produce the energy.

This is not an isolated situation. The two major listed utilities, Origin and AGL, and the owners of the third, TruEnergy, have reported falls in wholesale energy prices. And in the case of AGL, it was enough to wipe out the entire earnings of the Loy Yang A brown coal power station in which it holds a one-third share.

Australia's largest operator and owner of wind farm installations, Infigen Energy, reports a similar experience in wholesale prices in the last financial year, with some states at their lowest levels since the National Electricity Market was created just over a decade ago, enough to offset increased production in the last year from improved wind conditions and new assets.

In NSW, for instance, the average wholesale price in the last financial year was around $37.50/MWw, compared to the 10-year average of $43.50/MWw. In South Australia, it was $32.50/MWw compared to a 10-year average of nearly $40/MWw. For large parts of the year, wholesale prices in both states were in the $20-$25/MWw range.

Partly this is to do with reduced demand caused by mild weather and the economic impact on manufacturing, and partly because of cheap gas, and partly because of an excess of wind capacity, particularly in South Australia. There were fewer extreme weather days, the sort of events that send wholes price up to $12,000/MWh and which serve to boost the year average, and are relied upon by both base-load and peak load generators.
 
For Infigen, which relies on the wholesale (or black) price), plus the returns from renewable energy certificates (green price), its meant reduced margins from its 508MW of wind capacity in Australia, with a combined return of around $77/MWh for the 42 per cent of the electricity it generates that relies on a market price. The other 58 per cent is contracted with electricity retailers and is likely to have an average price of $100/MWh or more. The average return for its entire portfolio fell to $87.80/MWh from $92.32/MWh a year earlier.

Infigen says the situation looks like it will remain the same this financial year, with energy futures trading suggesting a combined black and green price of around $76 in fiscal 2012, before jumping to around $96/MWh in 2013 and $105/MWh a year later. That's when it expects the renewable energy developments to finally get going on.

(The reason that lower wholesale prices have not been reflected in consumer bills is that they make up a small portion of the retail electricity price. Most of it comes from the cost of poles and wires, where charges have soared, and the electricity retailers have been picking up some of the margin).

Interestingly for Infigen, the wind farms it operates in NSW reported a higher average price for the electricity they produced, because their output was produced at times of higher demand. In South Australia, however, the company had to cease production from its wind turbines at certain times, because the excess wind output sent prices into negative territory.

In the past year, Infigen produced 1,335GWh of electricity from its Australian wind farm portfolio, at an average capacity factor of 30.1 per cent, up from 29.3 per cent a year earlier. Australian revenue rose 12 per cent to $117 million, but its operating margins fell due to the lower prices and increased maintenance costs as some of its wind farms come out of warranty periods.

CEO Miles George is confident that the 20 per cent renewable energy target can be met, but it needs policy stability, and it also needs the big utilities to return to the market to strike power purchase agreements.

George notes that the three big utilities have spent nearly $1 billion buying cheap renewable energy certificates in the past two years, a surplus caused by the unchecked rush to rooftop solar, rather than investing in new large-scale projects. When the development does start, Infigen will also be focusing on large-scale solar opportunities, as costs of solar PV in particular fall and begin to compete with wind. “We think solar will be very much part of Infigen's future,” he told Climate Spectator in an interview.