This briefing paper provides an overview of wholesale and retail electricity
prices in New South Wales and more broadly in the National Electricity Market.
The specific causes of electricity price movements over recent years are
discussed, as are consumption and supply forecasts.
This is the first of a series of companion briefing papers related to gas,
water and renewable energy sources.
The National Electricity Market
New South Wales is part of the National Electricity Market (NEM) which spans
Australia’s eastern and south-eastern coasts and comprises four other
interconnected states (Queensland, South Australia, Victoria, and Tasmania).
The NEM commenced operation as a wholesale spot market for electricity in
December 1998. There are over 100 registered participants in the NEM which
collectively supply approximately nine million customers, accounting for $11.4
billion worth of electricity trade in 2012–13. [2]
Generators and retailers trade electricity in the NEM through a gross pool
managed by the Australian Energy Market Operator (AEMO).
The Australian Energy Market Commission (AEMC) is responsible for reviewing,
amending and expanding the National Electricity Rules which govern the
operations of the NEM.
The enforcement of these rules, in addition to the economic regulation of
electricity transmission and distribution networks, is the responsibility of
the Australian Energy Regulator (AER). [2.1]
Wholesale electricity prices
Prices across most NEM regions peaked between 2006 and 2008, largely driven
by supply constraints, when drought constrained the availability of water for
hydro generation and cooling in coal generation.
Declining electricity demand and the rising uptake of renewable generation
(particularly wind and solar) contributed to historically low spot electricity
prices in 2011−12.
This trend reversed in 2012–13 as average electricity prices more than
doubled in most NEM jurisdictions. According to the AER (2013), the higher
prices partly reflected carbon pricing, as well as supply constraints in
mainland NEM regions, stemming from plant closures.
With the exception of the cyclical spike in January and February, prices
have trended down over the past 12 months, affected largely by relatively
subdued demand growth in the NEM.
As at June 2014, South Australia had the highest average spot price in the
NEM at $54.4/MWh; it was followed by Queensland ($50.9/MWh), New South Wales
($49.7/MWh) and Victoria ($49.2/MWh). [3]
Between 2004–05 and 2009–10, there was an escalating trend of
extreme price outcomes in the NEM. During that period, the number of 30 minute
prices above $5000 per MWh peaked at 95 events in 2009–10. The incidence
of extreme prices has since fallen sharply. [3.1]
Market participants commonly manage their exposure to forward price risk by
entering into hedge contracts that lock in firm prices for the electricity that
they intend to produce or buy. In Australia, two distinct financial markets
support the wholesale electricity market: over-the-counter markets which
involves direct contracting between counterparties; or the exchange traded
market, in which electricity futures products are traded on the Australian
Securities Exchange (ASX). [3.2]
NERA Economic Consulting (2013) estimated annual wholesale energy costs out
to 2015-16. In the zero carbon price scenario, prices for New South Wales,
Queensland and Victoria rise in each year of the modelling period, albeit at a
lower price than if the carbon tax was still in place. [3.3]
Retail electricity prices
As at March 2014, the ABS electricity price index was highest for Brisbane
(134.8) and Melbourne (128.5), followed by Sydney (123.5), Perth (116.4) and
Adelaide (115.3). Sydney has experienced the highest rate of growth in retail
electricity prices over the last decade, with the index more than doubling
since June 2004 at an average quarterly rate of 2.5 per cent.
Until 1 July 2014, the Independent Pricing and Regulatory Tribunal regulated
retail electricity prices in New South Wales. In response to a report released
by the AEMC in 2013 (which found that competition was effective in NSW
electricity markets), the NSW Government removed retail electricity price
regulation.
Retail electricity prices have risen significantly over the past five years.
The AER concluded that network costs were the key driver. The carbon price also
contributed, leading to price increases of 5 to 13 per cent in 2012−13.
[4]
According to the AEMC (2013), residential prices in most jurisdictions are
expected to either increase at a rate less than inflation or decrease over the
next three years from 2012/13 to 2015/16. Residential market offer
prices in New South Wales are forecast to decrease, on average, by 0.7 per cent
a year for the three years from 2012-13 to 2015-16. [4.1]
Electricity Consumption
As at the end of 2012-13, in total New South Wales consumed the most
electricity when compared to the other more populous States in Australia at 74
TWh. Growth in electricity consumption has slowed over the last decade or so
across all of the States, except Western Australia, relative to their
respective longer term trends. Electricity consumption in New South Wales
remains virtually unchanged in 2012-13 as it was in 2002-03.
Western Australia (13,199 kWh/capita) and Queensland (12,743 kWh/capita)
have the highest levels of electricity consumption per capita, followed by New
South Wales (10,037 kWh/capita). [5]
According to forecasts by the AEMO (2014), growth in electricity consumption
in the NEM is forecast to remain relatively subdued over the next few years
(increasing by 0.4 per cent annually between 2013-14 and 2016-17).
New South Wales electricity consumption is forecast to increase at an
average annual rate of 0.36 per cent between 2013-14 and 2033-34, with growth
expected to be constrained due to reduced large industrial forecasts.
[5.1]
When compared to the other Australian States and Territories, New South
Wales ranked fourth in terms of household electricity consumption, consuming on
average 133.7 kWh per household per week.
New South Wales ranked third in terms of household electricity expenditure,
spending on average $31 per household per week. [5.2]
Electricity Supply
Most electricity dispatched in the NEM is generated using coal (55 per cent
of generating capacity), gas (20 per cent), hydro (17 per cent) and wind
technologies (5.4 per cent).
As at April 2014, 68 per cent of generation capacity in New South Wales came
from black coal generation; the majority of the remaining generation capacity
came from hydro (17 per cent) and gas (12 per cent). [6.1]
Electricity generation trading rights in New South Wales are now split
between the government entities Macquarie Generation (28 per cent) and Delta
Electricity (12 per cent), and the private entities Origin Energy (26 per cent)
and EnergyAustralia (17 per cent).
New South Wales has relatively high fuel costs, making it a net importer of
electricity. Imports reached a ‘peak’ in 2010-11 in which they
represented 12.8 per cent of regional energy consumption. [6.2]
Price signals in the wholesale and forward contract markets for electricity
drive new investment in the NEM. From the start of the NEM in 1999 to June
2013, 13 850 MW of registered generation capacity (around 1000 MW per year) has
been added to the NEM.
Between 1999-00 and 2012-13, South Australia had increased its capacity by
71 per cent, while Queensland’s capacity was 59 per cent higher. New
South Wales and Victoria, on the other hand, have had more subdued growth in
generation capacity, increasing by 21 and 16 per cent respectively to the end
of 2012-13.
According to the AEMO (2014), committed projects total 1,165 MW of capacity,
with expected commissioning between July 2014 and January 2016. [6.4]
For the first time in the NEM’s history, as a result of decreasing
operational consumption, no new capacity is required in any NEM region to
maintain supply-adequacy over the next 10 years.
From the AEMO (2014) analysis, it was found that more than 7,500 MW would
need to be removed from the market to affect supply-adequacy in 2014–15.
Even by 2023-24 between 1,100 MW and 3,100 MW of capacity could still be
withdrawn from New South Wales, Queensland, and Victoria without breaching the
reliability standard. [6.5]
Profile of the Retail Electricity Market
AGL Energy, Origin Energy and EnergyAustralia jointly supplied 77 per cent
of small electricity customers in 2012-13. As at the third quarter of 2013-14,
these three retailers accounted for 91 per cent of customers in New South
Wales.
Switching activity between retailers by customers in New South Wales and
South Australia rose in each of the past few years, with rates in 2012−13
being the highest recorded in each state. [7.1]
In October 2013, the AEMC released its final report
reviewing competition in New South Wales retail energy markets. The Commission
found that competition was delivering discounts and other benefits to small
consumers in the New South Wales retail electricity markets.
In response to these and other recommendations, the NSW Government has
removed retail price regulation from 1 July 2014. This means that IPART no
longer sets electricity prices for regulated customers. [7.2]
For a benchmark low income household that receives energy bill concessions
electricity costs accounted for between 2.9 and 7.9 per cent in 2012−13.
The number of residential electricity customers in New South Wales with debt
stood at 111,514 in the March quarter of 2013-14; with the average size of that
debt at $542 per customer, down from $655 in September 2013-14.
Rising electricity prices has led to an increase in the number of
residential disconnections, particularly in New South Wales where the number of
residential electricity disconnections has risen by 64 per cent between 2009-10
and 2013-14.
New South Wales currently has the largest number of customers on hardship
programs, at 19,787 in the March 2013-14 quarter; this is 21 per cent (or 3,404
customers) higher than in the September 2013-14 quarter. [7.3]
