Energy bills soar in shift from coal power stations
4 January 2017
Electricity companies have begun hiking consumer prices around the country, blaming the closure of coal-fired generators and the increased cost of renewable energy for higher-than-predicted increases of more than $130 this year.
EnergyAustralia and AGL have increased electricity tariffs in Victoria by $135 and $132 on average for the year respectively — greatly exceeding state government modelling that concluded bills would rise by $27 to $100.
The Victorian price rises will flow from this week but the companies’ customers in other states, including South Australia and NSW, face a yet-to-be announced price rise in June.
Red Energy, the retailing arm of Snowy Hydro, informed customers in NSW its rates would increase this week because of “increases in the wholesale cost of electricity and the large-scale renewable energy certificates”.
Some tariffs were raised by almost 25 per cent.
The consumer price rises will increase political pressure on state and federal governments to deal with escalating energy costs that have sparked business warnings that rising power charges are undermining competitiveness.
The Australian Energy Council has warned the impact will be greatest in Victoria and South Australia, which face the biggest wholesale price increases.
The South Australian government is under pressure over its heavy reliance on renewable energy, particularly with the closure of the Northern power station and blackouts sparked by severe storms. Queensland, which has a regulated market, is reviewing its energy tariffs with results expected by the middle of the year.
The Energy Council’s corporate affairs general manager, Sarah McNamara, said the Victorian wholesale price increases were a “byproduct of the reduction in the state’s generation capacity by around 20 per cent, a direct consequence of the upcoming closure of the Hazelwood power station in March”. The Energy Council, which represents major electricity and gas producers, has repeatedly called for a national strategy to deal with supply issues and price volatility as older power stations are retired and an increasing amount of large-scale renewable energy is made available.
An EnergyAustralia spokesman said the average $11 a month increase in Victoria reflected “higher generation, general business and government green-scheme costs”. In that state, there was an increase in the cost of buying electricity for 2017 from about $40 a megawatt hour in January to more than $60 a megawatt hour in November, he said.
“The closure of the Northern power station in South Australia, increased demand for gas by large LNG projects in Queensland, reliability issues and … the market’s reaction to the closure of Hazelwood were among the main factors,” he said.
AGL, through a spokesman, said residential electricity prices would rise by $2.59 a week, on average, or a 9.9 per cent increase, while small and medium-size businesses would see costs increase by 13.4 per cent.
Despite the higher charges, the closure of Hazelwood could boost earnings at AGL, which owns the Loy Yang A power station, by up to 10 per cent, according to analysts at investment bank JP Morgan. That analysis, released late last year, assumed the closure of Hazelwood would increase wholesale prices by 15 per cent in Victoria and 10 per cent in NSW.
Victorian coal generators will also face increased royalty costs this year, with the subsidy intended on making renewable energy more attractive rising to 22.8c a gigajoule for companies mining brown coal from 7.6c, netting the government about $250 million over four years.
The Minerals Council’s Victorian executive director, Gavin Lind, said the brown coal royalty increases introduced by the Andrews government were harmful and ignored the practicalities of the electricity market.
“The expected increase in electricity costs will hit Victorian businesses hard, especially the manufacturing sector where uncertain economic conditions are already placing the industry under strain,” he said. “The Victorian government seems intent on increasing the state’s dependence on expensive and part-time energy sources and committing Victorian households and industry to higher energy prices. It will pass the cost of the scheme on to electricity users via their energy bills. In so doing, it will subsidise uneconomic renewable energy projects while driving out affordable, reliable coal-fired energy.’’
A government spokesman defended the increase. “The royalty rate has not changed in a decade, and this will simply bring Victoria into line with the other states. We are ensuring Victorians get a fair return for the use of our state’s natural resources,” he said.
In Queensland, the state’s Competition Authority is in the final stages of setting electricity tariffs for 2017-18, with the Palaszczuk government unveiling a 50 per cent renewable energy target by 2030 that could slash earnings at the government-owned electricity generators.
Renewable energy schemes were blamed by Red Energy for this week’s increase in retail prices, although Snowy Hydro declined to provide details about the increases. “There are a number of factors that can push energy prices higher for consumers and the need to source renewable energy certificates to cover a portion of the energy consumed by customers is one of them,” a spokesman said. “We cover the resulting REC liability through a combination of RECs generated by the Snowy Scheme with the remainder sourced from the market.”
The price of those certificates has jumped in recent months, netting some electricity retailers windfall gains, as concerns grow that Australia will not reach its 2020 renewable energy target.
The spot price of those certificates rose to about $87 at the end of last month compared with an average of $54 in 2015, although the largest retailers can obtain RECs as part of the normal course of business or at lower contract rates.
A very solid effort from Kylar Loussikian. LGC (aka RECs) prices have headed North, as Kylar notes, due the effect of the looming imposition of the ‘shortfall charge’ (the latest figures appear above, courtesy of Mercari).
But it would be rude not to help Kylar with his last paragraph, where he says that “the largest retailers can obtain RECs as part of the normal course of business or at lower contract rates”.
As to the former proposition, Kylar is correct – ‘retailers can obtain RECs as part of the normal course of business’.
Retailers do so for one reason and one reason only: to avoid the $65 per MWh shortfall charge which retailers are hit with for every MWh short of the Federal Large-Scale Renewable Energy Target (LRET) that they fail to purchase and surrender a REC.
As Kylar knows – because he and Sid Maher wrote a very solid piece on the topic back in November – the full cost of the shortfall charge to retailers is $93 per MWh and that every last cent of that gets passed on to customers through retail power bills. Under the LRET, as currently configured, the cost of the shortfall charge for power consumers will top $20 billion (see our post here).
As to the latter argument – that the large retailers can obtain RECs ‘at lower contract rates’, Kylar is a little off beam.
To help get him back on track we’ll start with an observation by the Australian Financial Review’s Mark Lawson about how SA’s wind power outfits operate under the LRET:
When the wind is blowing strongly wind farm power will flood the market to pull prices down to minus $20 (generators pay retailers to take the power). This is obviously uneconomic for conventional generators, but wind and solar generators can still make some money under the renewable energy target.
In short, wind power outfits collect the same amount of revenue, irrespective of the spot price. However, conventional generators receive the prevailing price – and, unlike wind power outfits, do not receive any form of subsidy for what they dispatch: the market perversion driven by the LRET and subsidies for wind power is what has caused SA’s conventional generators to become unprofitable; and it’s that lack of profitability that led to Alinta’s decision to close its Northern Port Augusta plant in May last year.
The Power Purchase Agreements (PPAs) struck between wind power outfits and retailers (which you’ll never once see the likes of Infigen or Trustpower talk about publicly) are built around the massive stream of subsidies established by the LRET – which is directed to wind power generators in the form of RECs.
Under PPAs, the prices set guarantee a return to the generator of between $90 to $120 per MWh for every MWh delivered to the grid.
In a 2014 company report, AGL (in its capacity as a wind power retailer) complained about the fact that it is bound to pay $112 per MWh under PPAs with wind power generators: these PPAs run for at least 15 years and many run for 25 years.
Wind power generators can and do (happily) dispatch power to the grid at prices approaching zero – when the wind is blowing and wind power output is high; at night-time, when demand is low, wind power generators will even pay the grid manager to take their power (ie the dispatch price becomes negative)(see our post here). As noted in the quote from the AFR, wind power outfits have been paying the grid operator up to $20 per MWh to take power with no commercial value.
However, the retailer still pays the wind power generator the same guaranteed price under their PPA – irrespective of the dispatch price: in AGL’s case, $112 per MWh.
Underlying the PPA is the value of the RECs that are issued to wind power generators and handed to retailers as part of the deal.
The PPA establishes the contractual basis for the transfer of RECs and the price fixed for each MWh of wind power dispatched and treated as a ‘supply’ under the PPA. The retailer pays that price and gets the benefit of the REC it receives from the wind power outfit: either selling RECs into the spot (or futures) market; or, more usually, surrendering them to the Clean Energy Regulator in order to avoid the shortfall charge.
However, like any financial asset, there are opportunities to speculate by purchasing, holding and selling RECs based on market conditions; and opportunities for arbitrage. In some cases this kind of trading has backfired, as in the case of Hydro Tasmania that was forced to book multi-million dollar losses ($12.5m in 2013/14 and $20.6m in 2014/15), when it was caught out punting millions of RECs from its Musselroe and Woolnorth wind farms which it had paid way over the market price for (see our post here).
With that minor quibble aside, Kylar Loussikian is doing what very few journalists in Australia have bothered to do: get a grip on the facts about the great wind power fraud and to fearlessly report them. Nice work, keep it up. And maybe soon, the morally bankrupt idiots that pretend to govern this Country will get a grip too. Australian families and businesses can only live in hope.