As Australia slides into an energy crisis, UNSW Business School’s Katja Ignatieva explains what customers – and markets – can expect next.
Australian east coast residents are currently shivering their way through a cold snap. But while their instinct may be to reach for their heater dial, energy prices in Australia are set to go through the roof, with price increases predicted to worsen cost-of-living pressures.
Wholesale electricity prices have risen. The Australian Electricity Market Operator (AEMO) reported that in the first quarter of 2022 wholesale prices went up 141 per cent from last year, and the ASX showed prices this quarter at $AU302.
With factors such as the Russia-Ukraine war threatening energy supplies, and supply chain difficulties having a global impact, commentators have for months now been warning of an oncoming Australia-based energy crisis.
“Businesses and households will inevitably face an increase in energy prices,” explains Katja Ignatieva, Scientia Associate Professor at UNSW Business School, whose research focuses on the dynamics and volatilities of the energy markets.
“It’s an increase driven by multiple factors including rising gas and coal prices; reduction of thermal power generation due to unplanned outages at multiple generators and increasing generation cost.”
She also says that a challenging global environment and extreme weather events in NSW and South-East Queensland have contributed to the rising prices. “All this has made energy demand spikier (spikes are sharp unpredictable increases in demand), which results in higher cost of wholesale electricity for retailers.”
But what do rising wholesale electricity costs mean for Australians’ power bills? What does it mean for the future of Australia’s energy market, and could it speed a shift to renewables?
Why are wholesale energy prices so high?
Assoc. Prof. Ignatieva: A combination of short and longer-term economic, political and weather-related events have led to the high energy prices in Australia.
Australia exports most of its fossil fuels including coal and gas, overseas. Since coal and gas (as well as oil) prices are increasing worldwide, and transportation costs are going up, the electricity-generating cost from these fossil fuels is rising. This has resulted in an increase in wholesale energy prices on the domestic market.
Some recent price spikes are also linked to supply chain disruption resulting from outages at several coal plants, and a significant increase in demand as linked to extreme weather events.
The Russia-Ukraine war has also brought instability to the global energy market, generating a significant supply shock when most European countries have rejected oil and gas supply from Russia.
It is likely that we will see further increases in energy prices until some resolution is met in the war, and the Organisation of the Petroleum Exporting Countries (OPEC) increases its production of oil for export, which could release some pressure on prices for other fossil fuels.
But Australia has its own coal and gas resources. Why would the Russia-Ukraine War impact our electricity costs?
Yes, Australia extracts enough coal and gas to sustain its own needs. But it is also part of the global trading market and is linked by supply agreements to export most of its fossil fuels. Revoking or significantly reducing Australia’s exports cannot be done easily in the short term. Australia remains almost entirely dependent on imported energy, leaving the country vulnerable to future global price shocks and supply disruptions.
But in terms of the impact of the Russia-Ukraine war, energy prices were on the rise even before the war began. During the pandemic, the economy slowed down. Many industries were forced to shut or reduce their operations, resulting in a decline in demand for energy. So, supply also fell.
When the economy started to recover, the supply could not meet the demand for energy and energy prices started to rise. Then, these increasing energy prices were significantly worsened by the Russia-Ukraine war when Europe rejected oil and gas from Russia, but no immediate alternative was available to replace Russia’s exports.
The war has also significantly slowed down the planned transition from fossil fuels to renewables following the Russian invasion in Europe. While the dependence of Europe on Russia’s fossil fuels has generated a push for achieving energy independence, it may be difficult to scale it up quickly as installing wind turbines, solar panels, battery storage and other approaches take some time.
Would having more renewable energy sources decrease the chance of energy price shocks in Australia?
Assoc. Prof. Ignatieva: The adoption of renewable energy sources could help to reduce energy prices in the medium to long run. While renewable energy is impacting the profitability of the coal plants (with some like Eraring Power Station at Lake Macquarie retiring ahead of the schedule), renewable energy is an effective way to replace generation from major coal-fired power plants and to reduce wholesale energy prices and energy bills for businesses and households.
But in the short-term, when we are going through the transition stage of shutting-down of major coal-fired power plants while increasing the share of intermittent renewable energy generation, and experiencing more extreme weather that results in extreme demand periods, we can expect to see even larger price fluctuations.
This transition stage of increasing energy prices is likely to continue until there is sufficient hydropower development and battery storage that meet government targets.
Associate Professor Katja Ignatieva is available
