Will power prices come down? Not as a result of the current election announcements

As we head into the last week of the election campaign it is hard not to feel a little underwhelmed about the raft of short-term policy announcements across a range of topics, be it housing, long lunches,  tax concessions, or energy.

These announcements have been described across the media as political ‘sugar-hits’, designed to shore up votes as the cost-of-living crisis continues to bite, but unlikely to do much more than provide short-term relief and in some cases, potentially deliver counter-productive outcomes.

Michael Read at the AFR recently referred to the current election campaign as a “policy graveyard”, while CEDA CEO Melinda Cilento expressed frustration at the lack of long-term political thinking required to deliver much-needed structural economic reforms, noting that the worst possible outcome “is creating an expectation that policy will improve outcomes only to see the opposite eventuate”.

AFR Editor-at-large, Michael Stutchbury commented on the need for the “political process to construct a compelling aspirational narrative to shore up the nation’s envied prosperity”.

This sentiment was echoed in a letter facilitated by the Business Council of Australia and signed by 19 of its members, including the Australian Energy Council, calling for more substantive economic policy proposals that tackle these structural issues.

So why does the AEC care about broader structural economic reform? Because we are in the middle of an era-defining energy transition that requires enduring, sustainable long-term reforms to stimulate energy investment, maintain reliability and ensure least-cost outcomes for consumers.

The energy industry needs policy certainty that endures election cycles to ensure the right investments can be made at the right time as ageing thermal assets like coal-fired generation are retired over the next decade.

Promising energy bill reductions– is it helpful for consumers?

Promising incremental bill reductions to consumers off the back of political interventions is inherently risky. The sheer scale of the energy transition means these interventions are unlikely to be enduring or significant enough to result in lower prices over the longer term and distracts from the more targeted initiatives needed to support vulnerable customers experiencing long-term hardship. 

If I had a dollar for every time an energy market model was used to justify a policy announcement or claimed energy bill reduction, I could retire by now. Models are important and insightful when used for the right reasons. But they are inherently wrong.

This is because all forecasting models do the impossible – they attempt to predict the future, based on a series of assumptions made at a certain point in time. Assumptions which will never be fully realised. Again, if I had found an energy model that accurately predicted energy prices into the future, I could retire. But I’m here writing this article, so clearly that hasn’t happened yet either.

Yes, the AEC engages modellers as well. And yes, we have our own assumptions about where energy prices might go, but the truthful answer for what we can expect to see in the future is … it depends.

The good thing about forecast models is they can give you excellent insights into the critical factors that will shape the ultimate outcome. If policy makers focus on managing these critical factors through sustainable, enduring policy mechanisms, then we are more likely to realise lower cost outcomes for consumers.

Note that I say ‘lower cost’ here. This is because the amount of thermal generation needed to be replaced over the next decade is so significant that we are unlikely to see energy prices go back to where they were ten (or even five) years ago. There is a cost to replacing these assets (and building the transmission infrastructure to connect new assets), regardless of what type of generation we are replacing them with.

So, what do Governments and policymakers need to focus on over the longer term to ensure we can deliver the transition at lowest cost?

Onshore wind is a key driver of lower wholesale energy prices

• Ensuring the wholesale market and any transitional market mechanisms support the development of onshore wind in the right locations at the right time is important. While the Federal Government’s Capacity Investment Scheme will support this to a limited extent, the rate at which wind turbines are being built is not yet sufficient to fully support the exit of thermal assets. Wind is critical in replacing thermal generation as it has the capacity to provide energy during the shoulder and nighttime periods when solar is not generating.
• There are currently very long lead times to develop and connect wind turbines to the grid. Streamlining connections and approvals processes is critical to improve the pace at which wind farms can be built, noting that affected communities still need to be engaged and share in the benefits of renewable developments.
• Prices to construct wind farms have increased significantly over the last few years due to supply chain constraints and as competition for wind turbines increases at a global scale. Ensuring Australia remains a preferred place to invest in wind energy at a global scale will be important in ensuring we can access the right materials at an efficient cost to keep wind prices competitive.

Gas and long duration storage are critical in supporting a high renewables energy system

• The Federal Government’s current review into the wholesale electricity market is critical to ensuring that firm, dispatchable energy provided by gas generation and long duration storage are invested in as coal generation exits the system. Without these sources, there may not be sufficient energy in the system during times of renewable droughts. Regardless of the outcome of the election, this review of the wholesale market is critical and needs to continue, with strong support required at State and Federal levels.
• A coordinated approach between industry and Government to ensure there are sufficient gas supplies over the next decade is also critical. Given gas generation will play a key role in supporting renewables as coal exits, the price and availability of gas supplies becomes a key factor in determining wholesale energy costs.
• To promote investment certainty, Governments should consider market-based approaches rather than price or supply interventions to ensure an adequate supply of gas into the future.

Coordinating energy from rooftop solar and battery systems will reduce costs

• Currently, Australia’s 4 million rooftop solar systems have a larger combined capacity than all its coal-fired power stations. If the energy from these rooftop solar systems is not better coordinated, the capacity of the distribution network will have to increase, driving up network costs which currently comprise anywhere between 40-60% of a customer’s energy bill.
• There is a real risk that any savings gained through lower wholesale energy costs into the future will be wiped out by increases in network costs, which means very little energy bill relief for consumers if this is the case.
• Targeted approaches like the recently announced Cheaper Home Batteries Program are a positive step, incentivising consumers to store energy from rooftop solar systems when they are not using it, rather than exporting it to the grid.
• Whilst this scheme will provide material benefits for those able to access a battery if the current Government is re-elected, encouraging VPP participation would help broaden the benefits of storage and rooftop solar generation and see reduced costs for all, not just those that can afford to purchase a rooftop solar system.   

Timing is everything

We are in the middle of a once in a lifetime energy transition. Now is not the time to hit the pause button or significantly pivot on the way forward. There is sufficient understanding across the energy industry about the critical factors that will deliver a low-cost transition. Now we just need to ensure consistent, enduring and coordinated policy is developed to support this path

Our challenge to the next elected Government is to continue some of the good progress made to date on renewables (doubling down on wind in particular), stay the course on the wholesale market review, consider market-based approaches to incentivise gas supply and generation, and work with industry to support better coordination of energy generated from rooftop solar systems in ways that work for all customers.

These are the critical factors that will deliver the lowest cost outcome for consumers. We all want sustained lower power prices in the future, but it will take Governments thinking longer-term to achieve this.