Forward Power Pricing Drops in Australia in Response to Government Action

Sometimes, reading the comments from big gas, big coal, and big oil in the Murdoch press, I think I am back in the school playground stopping kids from namecalling and hitting each other with sticks. It is obvious that the Australian federal government’s action has hit a nerve, and equally obvious that oil & gas giant Santos and its gang of war profiteers are only in it for the money. Legislation for a gas price cap has passed through the Australian parliament. Forward power pricing has dropped. Yet the crazy power wars continue.

It is ironic that the Murdoch press calls the government actions “Soviet” when those actions have been caused by Russia’s invasion of Ukraine — “with the gas industry insisting it is entitled to make windfall profits out of the Ukraine war.” Daddy Warbucks lives again.

The government action has had immediate effect on forward power pricing. “[T]he forward pricing of wholesale electricity for NSW and Queensland — the major coal states — in the first quarter of 2023 has halved in the last month,” Tim Buckley, head of Climate Energy Finance, states: “In the last few days the gas lobby has shown that it is determined to ensure that nothing will get in its way as it plunders our sovereign public assets to line its own pockets.”

The average Australian household was expecting a 36% ($230) increase in power bills in 2023–2024. The new legislation should hold it to a 13% increase.

“If coal-fired power plants can purchase coal at lower prices, and this cost saving passes through into their electricity market bidding behaviour, prices should reduce in the time periods where those power plants set the electricity price. As the most expensive generator dispatched in a given period sets the spot price for that period, then reducing the bids of the coal generators that are currently facing high coal prices could result in a notable reduction in electricity prices. Coal set the electricity price in NSW 40% of the time in Q3 2022, while Eraring set the price in NSW 18% of the time in Q3 2022.

“The gas price cap of $12/GJ will limit the price of gas for gas-fired power plants, in particular for plants that have to buy additional gas outside of long term (and usually lower cost) contracts. Gas generators often set the spot price in the National Electricity Market (NEM) when demand and prices are high. Gas therefore has a key price setting role in the NEM, and over the past years NEM electricity and east coast gas prices have followed one another closely.

“Recently, while east coast wholesale gas prices were averaging $24–$27/GJ, the average electricity spot price set by gas generators in Q3 2022 was $330/MWh, an increase of almost 2.5 times from Q3 2021. For comparison, a gas price delivered to power stations capped at $12/GJ translates to a much lower short run marginal cost of $92–$194/MWh, depending on which generator is examined (calculated using Australian Energy Market Operator data).”

Whilst the cap on prices will give short-term relief, the “electrify everything package” will help businesses and households in the long run. Though, we’re yet to see the final legislation.

“While the details of the electrification package are yet to be developed, IEEFA says consideration should be given to funding the package by imposing windfall profit taxes on gas and/or coal exporters.” More tantrums to come then?

It looks like both the federal Liberal Party (conservative politicians) and the fossil fuel industry have not yet noticed that they lost the last election over climate change and energy issues and the public mood is no longer on their side. The reduction in forward power pricing will ensure it continues that way. Expect a massive misinformation campaign. Hopefully it will not work this time.

Featured image by Patty Jansen from Pixabay