Wholesale price hikes force up electricity bills by another 9.5% in Victoria

AGL has announced a 9.5% hike in retail electricity prices for Victorians from 1 January 2018.

The below Herald Sun article outlines the move:

  • Default electricity tariffs are set to jump an average 9.5 percent from January 1
  • Average household, annual bills will rise by about $140
  • Key rivals EnergyAustralia and Origin Energy recently foreshadowed new year default power price hikes of 14.4 to 14.9 percent

This is the first price rise since the closure of Victoria’s Hazelwood power station back in March.

The article goes on to quote AGL’s Chief Customer Officer, Melissa Reynolds, noting the price rise reflected a large wholesale price increase and fully took into account some network cost reductions.

So let’s take a quick look at the wholesale price and whether this claim by AGL holds up under a simple analysis.

In Victoria, the average wholesale cost this year (2018 financial year to date) is $93.27 per MWh (www.aemo.com.au).

The chart below is taken from data on AEMO’s website and shows:

  • FY17 the average – $66.58
  • FY16 average – $46.14
  • FY15 average – $30.35

The current average annual wholesale price has more than tripled since 2015. The jump in average price from FY17 to FY18 was $26.69.

The closure of Hazelwood power station removed 1600MW of low cost, baseload capacity from the mix in March, which was largely replaced by gas generators and imports from NSW, Tasmania and South Australia.

Gas use in Victoria for power generation has roughly doubled since Hazelwood’s exit, yet gas still accounts for less than 10% of our energy generation mix.

In short, replacing Hazelwood with gas is costing 40% more.

Meanwhile, the generation cost of brown coal-fired power hasn’t changed much. It’s still less than $40 per MWh so that increase in wholesale margin is almost all pure profit to the brown coal generators, of which AGL is the largest.

Passing on the wholesale cost

The wholesale cost increase of $26.69 per MWh, when converted to kilowatt-hours, is 2.669 cents.

AGL’s standing offer to residential customers is 23.16 cents per kWh. A 9.5% increase adds 2.2c, bringing the total to 25.36 cents.

Passing on some network cost reductions, and the 9.5% increase in AGL’s retail price seems reasonable.

It would appear that AGL is simply passing on the increased wholesale cost after all.

Clearly, this doesn’t address the underlying cause of the price rise; increased reliance on high-priced gas and intermittent wind and solar.

What does this mean for ECT?

As investors may recall from our past announcements, we’re currently conducting a Feasibility Study on the deployment of a commercial scale demonstration plant in Victoria.

Now, this plant won’t be big enough to fuel a large power station, so it can’t directly bring down wholesale electricity prices. What is can do is displace high priced gas for businesses that need industrial scale heat, which may indirectly take a little pressure off gas prices.

What’s more, the Coldry plant will be zero-emissions itself. Unlike traditional briquette plants, the Coldry process uses waste heat and doesn’t need to burn coal to generate heat to dry the coal. No other process can claim this.

Further, this scale Coldry plant under consideration doesn’t step on the toes of wind or solar, because neither wind or solar are suitable for industrial scale thermal applications. We’re only competing with gas and biomass such as wood chips (which can be limited in availability).

Further down the track, Coldry could enable the deployment of a new high efficiency, low emission coal power station, but decisions on that will depend greatly on government energy policy settings and the wholesale market price at the time. Additional non-power applications include hydrogen production, steel making, fertiliser, char, activated carbon and a range of high-value hydrocarbon liquids.

Meanwhile, we should expect further increases in our gas and power bills in coming years.

Read more below…

 

Electricity prices to increase, but some customers to be shielded

Herald Sun ($) | Tuesday 5 December | KAREN COLLIER

VICTORIA’S biggest energy retailer is the latest to confirm plans to push up power prices in the new year…

Source: AGL Victorian electricity prices to rise from January 2018 | Herald Sun