The energy transition and power bills: Why aren’t they cheaper?

With energy prices increasing for households and businesses there is the question: why aren’t we seeing lower bills given the promise of cheaper energy with increasing amounts of renewables in the grid.

A recent working paper (The Counterfactual Scenario: are renewables cheaper?) published by Griffith University’s Centre for Applied Energy Economics & Policy Research, has tested the proposition of whether a renewables grid is cheaper than a counterfactual grid that has only coal and gas as new entrants. It provides good insights into the dynamics that have been at play.

While it finds that renewables are a lower cost alternative to coal and gas plants, the wholesale costs of a 50 per cent renewable grid are still higher than the $40/MWh average spot price observed in the mid-2000s with a more traditional grid, even after inflating these costs to 2025 dollars. But stopping the renewables rollout and just having coal and gas as the new entrant generation to meet demand would be even more expensive based on the modelling the paper by Professor Paul Simshauser and Associate Professor Joel Gilmore. The assessment highlights that reverting to building coal or natural gas generation would see wholesale costs higher than for the renewable scenario.

So there is a cost to the energy transition and there is no going back in the hope of reducing power costs. While this analysis looks at the cost of generation, it’s worth remembering the transition also requires new transmission and network upgrades and the introduction of energy storage technology to support renewables. It is a once-in-a-lifetime transformation which comes with a price tag.

A changing landscape

The introduction of more renewables into the grid to replace coal plants was supported by governments andindustry to reduce emissions with the added justification that renewables were the lowest cost technologies, so would be the cheapest pathway for power bills. The analysis notes that when various governments of all political persuasions suggested renewables would be cheaper, up until 2022 “they had reasonable grounds for saying so”.  Indeed, the Federal and state governments in the NEM’s largest three regions (New South Wales, Victoria and Queensland) introduced renewable policies or targets on the basis that household bills would fall. So what changed and why haven’t we seen lower cost energy for households and businesses?

In the mid-2000s the generation mix was predominantly baseload coal that ran continuously, combined cycle gas plants that could deliver intermediate generation as demand increased and open cycle gas plants that could deliver at the peakiest demand periods. There was also hydro in the mix in some jurisdictions.

The energy transition has driven a shift from this baseload, intermediate and peaking plant mix to a system in which generation is delivered by coal plants many of which are approaching the end of their technical lives, as well as an increasing amount of newer generation sources like large-scale solar, rooftop solar and wind. Given the variability of this new generation there is also firming in this system that is delivered by the available coal plant, battery storage, pumped hydro, as well as existing and new gas generators.

This energy transition has been underway for more than two decades. As noted in the paper, between 2000 and 2018 the growth in wind and solar generation was driven by government policy that saw the introduction of the Renewable Energy Target (RET) and renewable certificates. During that period 125 renewable projects (11.4 GW) reached financial close.  From 2019-2025 with minimal new policy 105 renewable projects (19.3 GW) reached financial close.

In the National Electricity Market (NEM) investing in renewables reached a turning point in around 2018, according to the authors. This was roughly when the cost of new wind and solar projects fell below the production cost of the NEM’s ‘marginal’ coal and gas plants. It was also when the 20 per cent Renewable Energy Target was thought to be met.

Things changed dramatically in 2022. The Russia-Ukraine war in early 2022 had a real impact on energy markets globally. Since 2022 when we saw an energy crisis leading to the suspension of the NEM, we have also seen electricity equipment supply-chain constraints, higher construction costs and higher interest rates.  As a result, the unit cost of onshore wind projects, as well as the cost of transmission augmentation, has more than doubled over the past five years[i].

The cost of coal and gas

Coal and gas-fired generation were the lowest cost technologies in the mid-2000s, but, as with renewables, cost pressures emerged and by 2025 the unit fuel costs have increased well above inflation. As a result, the analysis shows that deploying coal and gas to meet aggregate demand “prove to be surprisingly expensive”.  Coal is now 8 times the value of legacy long-dated coal supply that was available in the mid-2000s, and gas has increased by a factor of 4 driven by international dynamics as well as a structural shortage.

Equipment costs for gas-fired plants have increased in line with inflation, but the capital cost of coal-fired plant is much higher than historic build costs because we would need to build ultra super critical plant, and contend with higher construction costs and tighter environmental conditions, according to the paper.

The paper modelled the Queensland region based on existing trajectories of generation technologies (aging coal plant, wind, utility-scale and rooftop solar) with new entrant dispatchable firming capacity in the form of batteries, pumped hydro and gas and found costs and prices are around 30–50 per cent lower than the counterfactual scenarios of new entrant coal and gas. These outcomes are generalised for the rest of the NEM. You can see the outcomes in figure 1.

Figure 1:  Counterfactual Scenarios Vs Renewable Scenario[ii]

Source:  Centre for Applied Economic & Policy Research: Working Paper Series 2025-07.

(Note: 2005 Esc shows the 2005 results escalated by the CPI over the period 2005-2025.)

The implications for power bills

As noted by the Australian Energy Regulator when setting its regulated prices the wholesale price in the NEM remains higher than in 2021. Another feature of wholesale prices we are now seeing is that spot prices are having increasing periods of volatility with both the frequency and size of price fluctuations growing. (See figures 2 and 3). We have previously looked at this increasing volatiity (Is increased volatility the new norm?)

Figure 2: Future Baseload Wholesale Prices 2021-2025

Source: NEOexpress data

Figure 3: Wholesale Spot Prices 2021-2025

Source: NEOexpress data

With the increasing energy market cost pressures from 2021 to 2024 household electricity tariffs rose by an estimated 33 per cent, but as the paper states, it is worth noting that in the same period (with similar factors at play, ie higher fuel costs, increased construction costs etc) wholesale electricity prices in the EU and the UK rose 200 to 400 per cent.

Those price increases are what have driven many to ask why we aren’t seeing better outcomes given the public narrative of more renewables equalling lower power bills and given the scale of the increases it is what is driving governments to find quick solutions like rebates and the squeezing of the retail component of the bill.

Conclusion

The analysis is a valuable contribution to our discussion of the energy transition. It provides a useful insight into the likely impact on consumer bills of different paths forward.  Without needing to focus on the emissions reductions benefits of the energy transition, it demonstrates that re-building the energy system as it reaches end of life on a like for like basis (coal replaces coal, gas replaces gas) is a very expensive option, which no one within the energy sector is seriously considering.  It also demonstrates the nuance of “renewables is the cheapest form of energy” rhetoric.  While it is cheaper compared to the like-for-like replacement counter factual, it is not likely to be cheaper compared to the historical experience, because of the additional costs of firming renewables, the very large network investment required and the increased fuel costs for both gas and coal still in the system.

That should also not come as a surprise given the scale of the transition we are undertaking and the general cost pressures being felt locally and globally. Going back is not an option.

And quick, lasting and meaningful solutions to higher power bills will be difficult to find or achieve given the backdrop.  Perhaps what is needed going forward is a realistic conversation about the costs involved in making the shift to a lower emissions grid and an acceptance that since it still has a long way to go, it will take time for us to realise the full benefits.

[i] The Counterfactual Scenario: are renewables cheaper? Centre for Applied Energy Economics & Policy Research, working paper series 2025-07.

[ii] Scenarios: 2005 is based on the Queensland power system and a time-weighted (baseload) spot price of $40/MWh; 2005 Esc - 2005 results escalated at the cumulative consumer price index over the period 2005-2025;  2025 Coal is based on new entrant coal and assumes 0% RE; 2025 Gas is based on new entrant gas and assumes 0% RE.