Why SA power prices are too high

Much has been made about the impact of the carbon tax and clean energy initiatives on South Australian power prices, completely missing the wider story of a decline in wholesale energy costs and faulty government forecasts.

Clean energy support schemes such as the Renewable Energy Target and Energy Efficiency Targets are pushing down the wholesale price of electricity, substantially offsetting their impact on consumer bills. Yet news coverage around regulated electricity price rises has failed to take this into account.

Last week the Essential Services Commission of South Australia (ESCOSA) brought down a special variation on regulated electricity tariffs to account for changes that had taken place since its original price determination made in December, 2010. As usual we saw the headlines in The Australian and Adelaide Advertiser about the carbon tax causing huge price rises.  

If you look up the actual price variation decision you’ll find that this came to $13.90 per megawatt-hour or $22.60 a quarter for an average household consuming 6.5MWh a year.  In addition there was a major hangover from the poorly structured solar PV feed-in tariff. The failure to make the feed-in tariff automatically adjust downward (as Germany does) when installed capacity surges beyond government targets, resulted in costs blowing out to seven times higher than originally forecast. This added a further $21 per MWh to household bills, which is far higher than was necessary to induce significant growth of solar and a major mistake in policy design.

But the interesting element, which the newspapers neglected to look at, was that the determination also concluded a major mistake had been made which overestimated the wholesale electricity costs faced by retailers:

“The Commission has also decided to commence an investigation of the retail cost components that make up the standing contract price... market data suggests that wholesale costs faced by retailers may have changed from the amount determined [by the Commission] through the long run marginal cost approach.”

A price determination based on the “long run marginal cost approach”, essentially meant that the Commission, rather than setting its estimate of retailer costs for acquiring electricity based on actual market prices, instead used financial models of what it thought it would cost to build and operate new power stations to meet forecast growth in demand.

This added $14.20 per MWh to prices, which was higher than the carbon price impact and far greater than the cost of the RET ($3.16/MWh) and the South Australian Energy Efficiency Target scheme ($0.32/MWh). 

Yet none of this increase should have happened. That’s because the cost of acquiring electricity from the market has in fact gone markedly down rather than up. The table below illustrates how South Australia’s wholesale electricity prices (in real terms) experienced a precipitous drop in 2010/11 and 2011/12 to historical lows. Other states have also experienced noticeable drops during this period.

This reduction in pool prices is largely because grid-based electricity consumption has declined across the country since 2008, as acknowledged recently in a speech by energy minister Martin Ferguson.

While some of the decline is due to reductions in industrial manufacturing, a new report released today by the REC Agents Association and prepared by Green Energy Markets, calculates that more than half of the reduction has been due to the installation of solar power and solar hot water systems supported by the Australian government’s Renewable Energy Target, and energy efficiency activities supported by the Victorian and NSW energy savings schemes.

Also the addition of large amounts of low operating cost wind power into South Australia has acted to significantly depress wholesale market prices in the state, even leading to a number of negative price events. Something explained in this Climate Spectator article

The thing is that if the 25 per cent of households that are still on the regulated electricity tariff were to shop around for another retailer, they could capture some of these savings. The chart below illustrates that consumers could save themselves nearly $200 per year by moving off the regulated tariff set by ESCOSA (shown by the blue horizontal line). This could completely offset the increased costs of the carbon price, the RET and the energy efficiency target combined.

Pity the newspapers failed to point this out to their readers.

Market offers and the regulated standing contract prices of electricity

Source: ESCOSA data from ACIL Tasman (2011)

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