Wholesale electricity prices in Australia fell sharply last year, raising hopes for relief among households and small businesses grappling with soaring power bills. The Australian Energy Regulator (AER) reported that the average annual wholesale electricity price dropped between 44% in South Australia and 64% in Tasmania in 2023.
Several factors contributed to this price decrease, including milder weather conditions, a surge in affordable wind and solar power generation, and reduced fuel costs, partially attributed to government-imposed price caps. However, the AER cautioned that the transition of these lower wholesale prices to retail tariffs would take time, with an expected lag.
The AER explained that many retailers had purchased hedges during periods when forward prices were considerably higher. As a result, the wholesale costs for these retailers might remain elevated as long as these contracts are in effect.
Benchmark tariffs
Looking ahead, the AER is set to unveil proposed benchmark tariffs for standing offer prices in early March, effective from July 1 in NSW, Queensland and South Australia. Final tariff decisions will be made in May. In Victoria, a similar tariff announcement will be made, albeit using a slightly different model.
Macquarie analysts indicated that there would likely be minimal changes to the Victorian default tariff in the upcoming financial year. While the default offer for other states may be somewhat more favourable, it assumes largely stable profit margins for major electricity retailers, such as AGL Energy (ASX:AGL) (ASX:AGK) and Origin Energy Ltd (ASX:ORG).
In terms of regional variations, the AER disclosed that average wholesale prices were highest in NSW in 2023, at $105 per megawatt-hour, followed closely by Queensland and South Australia. Tasmania reported the lowest average prices at $56/MWh, with prices aligning more with long-term averages after the spike seen in 2022. In the December quarter, spot prices averaged less than $80/MWH across all regions.
Energy Minister Chris Bowen highlighted that government policies and the increasing availability of cheap renewable energy were key drivers behind the substantial reduction in wholesale prices, with the ultimate benefit expected to reach consumers. The growing prevalence of solar power also contributed to widening price gaps between daytime and evening periods.
Ensuring grid security and reliability
Rooftop solar generation saw a remarkable 17% surge in the December quarter compared to the previous year, and the annual output increased by 24% from 2022. This surge resulted in record-low minimum power demand levels from the grid in Victoria and South Australia. However, the AER noted the need for measures to ensure grid security and reliability, which could include curtailing rooftop solar.
Furthermore, the share of electricity generated from coal and gas reached a record low of 66% in the fourth quarter, a 1% decrease from the previous quarter. The AER anticipates a significant increase in new generation capacity entering the market in 2024, contributing to a changing energy landscape.
These findings from the AER come amidst supply and demand challenges in Queensland's power grid, driven in part by delays in coal power unit restarts and constraints on power export from NSW.