Dec 08 2022

What a difference a year makes

This time last year the Australian Competition and Consumer Commission (ACCC) was announcing that retail electricity prices were at their lowest level in 8 years. Now price caps on generator fuel costs are under active consideration by the Federal Government and states as a means to minimise substantial retail price increases and lower wholesale prices.

The focus on price as well as the extraordinary set of factors driving higher prices were prominent features of the energy industry’s year. Apart from price challenges, we saw the National Electricity Market suspended for the first time as cold weather, unavailability of capacity and the invasion of Ukraine drove up demand for gas and coal and, along with it, prices.

A price capping regime, conceived for different circumstances, greatly inflamed an already tight situation and pushed the Australian Energy Market Operator (AEMO) to its decision to suspend the market. Many of the systems used to manage an extremely complex market became dysfunctional and whilst AEMO did its best to work around them, there were times that, as a result, the power system itself was at much more risk than it needed to be. Through great efforts by AEMO and the industry, no customers were blacked out, but a disaster could easily have ensued.

There were announcements of accelerated coal plant closures including Loy Yang A in Victoria, Eraring and Bayswater in NSW and Torrens Island in South Australia, all heightening the unease about how Australia will effectively manage the transition.

A new Federal Labor Government committed to zero emissions by 2050 along with an interim target of 43 per cent by 2030 and plans for an 82 per cent renewable grid.  Leading into 2022, the AEC also committed to an interim target of 55 per cent by 2035 and released a series of discussion papers to outline areas where electrification and other measures could deliver on the energy transformation.

In 2023 we will see some of the government’s committed mechanisms to achieve its target, such as the expanded safeguard mechanism, rolled out. In the AEC’s submission to the Safeguard Mechanism Taskforce, we outlined the significant opportunity for increased electrification to support emissions reduction in other sectors of the economy. We argued that baselines should be set to incentivise the uptake of these electrification technologies where appropriate. Unfortunately, the arrangements in the past have led to facilities receiving excessive headroom, which has created a lagging effect on new technology uptake.

The year also brought major state-based announcements for energy ambitions and to drive greater emission reductions – Queensland’s Energy Plan and Victoria’s targets for storage, offshore wind and, most dramatically, the revival of the State Electricity Commission (SEC) to drive investment in renewables to meet the re-elected government’s more ambitious renewable targets.

In particular, the AEC is concerned that the Victorian Government’s election platform to reinstate the State Electricity Commission and expedite the exit of coal plant from the state will damage market and investor confidence. Proposals for state-owned generation also risk crowding out the private sector. Governments shouldn’t need to make direct energy investments where the private sector has demonstrated it is ready and willing to do so. The significant funds being deployed for these projects could be more effectively deployed elsewhere.

As we know, the media cycle has been dominated by the impact of power prices on the cost of living the past few months. Whilst energy policy isn’t often a feature of a Budget night speech, October’s was an exception – anticipated energy prices became front page news with the latest Federal Budget papers flagging the significant pressure on retail prices as a result of high upstream costs.

As a result of these atmospherics there is mounting political pressure for quick solutions. Energy Ministers have met several times in recent months and are scheduled to meet again today ahead of the National Cabinet meeting tomorrow. Multiple ideas have been floated in the media, with yesterday’s papers reporting that the Commonwealth has asked NSW and Queensland to impose their own coal price caps and recall parliaments to enact them, in addition to drawing up their own plans to cap gas prices. Yet, retail price caps are already in place and unfortunately there are no silver bullets that will see prices fall in the short-term. The levers Governments may have at their disposal could run the risk of unintended consequences that may create further issues within the energy system in the coming months and years, so will need to be carefully calibrated.

The year ahead

Prices will continue to be the dominant energy debate and relatively early in 2023, we will see the new regulated prices unveiled which will need to take account of the significant changes in the wholesale electricity prices. There was a glimmer of hope that the higher wholesale prices might have peaked as gas, coal and electricity prices across the world, and in Australia, after they took a correction downwards in October and November, but we are yet to see if that trend will continue. Regardless there is no doubt that the pattern of market interventions that we have seen in 2022 will continue to be a feature in the energy sector in 2023.

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