Electricity price trends

The AEMC publishes an annual report on price trends which looks at what is driving changes in household electricity bills. Understanding these drivers can help identify appropriate policies that enable the ongoing supply of reliable, secure energy at the best price to consumers.

Price drivers in our evolving market

The three electricity supply chain cost components that make up the residential price and affect its trend are:

  • competitive market costs, comprised of wholesale costs and a retail cost component, which account for around 40 to 50 per cent of the price
  • network costs, comprised of transmission and distribution costs, which account for around 40 to 55 per cent of the price
  • environmental and other policy costs, which account for around 5 to 15 per cent of the price.

Longitudinal research

The AEMC has tracked price trends since 2010. 

In previous AEMC price trends reports, network costs (‘poles and wires’) have been the main driver of the changes in estimated residential prices and bills.

Recent reports also observed that wholesale (‘generation’) electricity costs have been at historically low levels, and this was unlikely to be sustained due to changes in the generation mix and generator retirements.

View previous reports:

2016 Residential electricity price trends

2015 Residential electricity price trends

2014 Residential electricity price trends

2013 Residential electricity price trends

2012 Residential electricity price trends

2011 Residential electricity price trends

2010 Residential electricity price trends

Overview of 2016 price trends findings

As foreshadowed, the 2016 price trends report found that wholesale electricity costs are expected to be a major driver of changes in residential prices and bills.

Across most states average wholesale costs are estimated to increase by between 5 per cent and 15 per cent each year over 2015/16 to 2018/19, while electricity consumption remains flat.

Drivers of wholesale electricity costs

Wholesale costs are being affected by the transformation underway in the national electricity market, with two key drivers:

  • the two large generator retirements of Northern (in South Australia) and Hazelwood (in Victoria)
  • the large-scale renewable energy target (LRET) scheme design.

The effects are summarised in the following table.

Effect of generator retirement and the LRET on wholesale electricity markets

Impact of the LRET and generator retirements on electricity prices

The large-scale renewable energy target (LRET) environmental policy requires electricity retailers to source a proportion of their electricity from renewable sources.

The LRET has encouraged more renewable generation into the market, particularly wind, at the same time as coal-fired generators are withdrawing. In South Australia in particular there has been significant investment in renewable intermittent generation driven by the LRET.

  • The LRET directly affects retail electricity prices because the costs of the large-scale generation certificates (LGCs) are recovered through retail prices – making up around 4% of a typical bill, and growing at an annual average rate of around 11%.
  • The LRET indirectly affects retail prices through the effect it has on the level of wholesale prices, the variability of wholesale spot market prices and the related contract market prices:
    • In the short term, wind investment  is adding to supply and suppressing wholesale costs.
    • In the medium term, lower wholesale electricity prices can contribute to earlier retirement decisions for coal and gas generators. This can decrease competition and increase wholesale prices.
    • Increasing the proportion of intermittent generation can increase price volatility as the market responds to high and low periods of supply.
    • More volatility increases the risks and costs to retailers, ultimately increasing retail prices.

In addition to the influence of the LRET, there are other reasons why a generator may be retired. This includes:

  • plant being at or near the end of its life
  • the extinction of a local fuel source or a sharp increase in the cost of that source
  • expected generator’s revenue from the wholesale market no longer covering operating costs
  • changes or an expectation of changes in policy.

Retirements reduce the amount of generating capacity available to meet demand, and therefore generally increase the wholesale cost of electricity. This usually places upward pressure on retail prices as costs are passed through to consumers.

Other drivers of wholesale costs

In addition to the influence of the LRET environmental policy, wholesale electricity costs are now increasingly connected with:

  • the wholesale gas market – the price for gas affects electricity prices through gas-fired power stations.
  • system security – the increased reliance on renewable non-synchronous generation affects the technical characteristics of the system and the ability to supply reliable, secure energy. There is likely to be a need for additional services to manage system security, potentially impacting retail prices over the longer term.

The price trends report also considered the effect that interconnectors - the major transmission lines that can carry electricity across regions - can have on wholesale costs. Interconnectors have an important role in the national electricity market:

  • contributing to reliability of supply as regions can draw upon a wider pool of reserves
  • supporting the wholesale market by allowing electricity to be bought and sold across regions.

However, the effects and costs of interconnectors need to be considered carefully.

Whether there is an overall benefit for consumers depends on the infrastructure cost of the interconnector, and also the effect on competition, for example if an interconnector substitutes for a generator in the importing region which leads to fewer generators competing in the market.

The benefits of interconnectors for system security and reliability need to be weighed up against the added infrastructure cost to consumers, as well as the potential impacts on regional wholesale prices and market competition, compared with other options.

Location of interconnectors in the national electricity market

Key AEMC work to address drivers of wholesale costs

The AEMC is providing advice on the implications of the changing generation mix for wholesale electricity market outcomes through the following key areas of work:

  • promoting system security as the market transitions to new technologies and renewables

See the AEMC’s 2016 Price Trends report for more information.