Australia’s wholesale power prices double in a year as coal-fired power plants falter

The jolt in costs is being blamed mostly on more expensive fossil fuels and falling reliability of coal-fired power plants

Wholesale power prices in Australia’s main electricity market continued to rise in the first three months of 2022, more than doubling the cost a year earlier, with the increase blamed mostly on more costly fossil fuels and the falling reliability of coal-fired power plants.

Renewable energy, meanwhile, grew its share of the market to more than one-third, pushing carbon emissions from the largest polluting sector to new lows, according to the quarterly energy dynamics report from the Australian Energy Market Operator (Aemo).

Wholesale electricity prices averaged $87 per megawatt hour (MWh) in the first three months of 2022, up 141% from a year earlier, and two-thirds higher than the final three months of 2021. By the end of the March quarter, the average price in the four eastern mainland states was $94/MWh, up from an average of $65/MWh at the end of 2021.

On Thursday, future prices for this quarter topped $200/MWh for both Queensland and New South Wales, indicating the jolt in costs is continuing.

For the March quarter, generation at black coal plants in NSW and Queensland fell an average 456MW. Availability was off 3% to its lowest March quarter level since at least 2002.

The unavailability of those ailing units – along with higher demand particularly during heatwaves in Queensland – triggered a divide with those states facing “significantly” higher prices than Victoria, South Australia and Tasmania, Aemo said.

“Coinciding with unplanned coal generation outages, Queensland experienced significant episodes of high demand, with overall price volatility contributing $47/MWh of the region’s average Q1 price of $150/MWh, its second highest for any quarter since 1998,” said Violette Mouchaileh, an Aemo executive.

The leap in wholesale power prices is beginning to feed into the bills sent to households and businesses. Extra costs will also stoke the highest consumer price inflation since the introduction of the GST more than 20 years ago.

The higher power prices may also feature in the federal election campaign, with Coalition leaders such as the treasurer, Josh Frydenberg, repeating claims on Thursday that the government had lowered power prices while they had risen under previous Labor governments.

“The government is delivering on its commitment to secure affordable and reliable energy supply and has achieved its goal of wholesale electricity prices under $70/MWh,” the government stated in its budget just last month.

Labor, meanwhile, has argued its plan to accelerate the construction of transmission and other infrastructure would bring in more renewables and force down power prices. Consumers would pick up higher equipment costs but such a transformation is necessary as ageing, costly fossil-fuel plants aren’t likely to be replaced by similar kit.

Aemo said wholesale prices were already averaging almost a quarter more than that federal budget figure, with market bids by coal plants leading the increase as costs for the fuel increased.

“Compared to the first quarter of 2021, over 3,000MW of black coal offers shifted from lower-price bands to above $60/MWh – the largest year-on-year quarterly change since 1998,” Mouchaileh said. The shift had started before the surge in global coal prices triggered by Russia’s invasion of Ukraine, she added.

Gas prices also soared two-thirds from a year earlier. Prices were at near-record levels across all Aemo markets, averaging $9.93 per gigajoule, compared with an average $6.05/GJ in the March quarter of 2021. Record gas prices were set in Victoria, Brisbane and Adelaide, while Sydney posted its second-highest March quarter level.

Renewable energy sources continued to grab a bigger share of the market, with both capacity and output increasing. Wind and grid-scale solar output increased 743MW to a quarterly record of 4,190MW. Small-scale solar, mostly on rooftops, added another 460MW of capacity. Total renewable share reached 33.7% of supply.

With the near-zero cost of fuel for wind, solar and hydro, the expansion of those sources left 6.6% of all dispatch intervals across the national electricity market at negative or zero spot prices. While a record, it was smaller than the share of such pricing in the December half of 2021.

“Southern states continued to see higher incidences [of zero or negative prices] at 16.4% for South Australia and 12.5% for Victoria, compared to only around 1% across the northern states,” the report said.

Emissions in the national electricity market, accounting for about 80% of Australian use, hit a record first-quarter low at 30.4m tonnes of carbon dioxide equivalent, 4% lower than a year earlier.

The March quarter jump in wholesale prices may have a way to run. Aemo said outlooks were influenced by the closure timing of plants in NSW and the delayed return of major units on outage including Callide C4 and Swanbank E in Queensland.

Higher fuel costs were also expected, particularly in NSW where elevated prices extend into 2025. Future prices in the state rose $51/MWh in the quarter to $131/MWh, the highest among the states, and exceeding the level hit in Victoria after the Hazelwood brown coal-fired plant shut in 2017.

By contrast, Queensland 2023 prices are at $108/MWh, South Australia’s $78/MWh, while Victoria’s were the lowest among the mainland states at $61/MWh.

In Western Australia, operational demand rose 5.9% from March 2021. “Extended high temperatures contributed to the [WA market] recording its second-highest maximum operational demand of 3,980MW on 19 January 2022.” That was just 26MW shy of the record set in February 2016.