Power prices forecast to fall over next two years but AEMC warns they won’t last | Australia news

Power prices in Australia rose almost 11% during 2017 but a new forecast says they will fall over the next two years because of the entry of 5,300 MW of new generation capacity into the national electricity market – most of it renewable.

A new assessment from the Australian Energy Market Commission predicts power prices will fall over the next two years, beginning in mid-2018.

But the AEMC, which played a significant role in designing the Turnbull government’s proposed national energy guarantee, says the price reductions won’t last if governments don’t settle an energy policy that provides incentives for investing in dispatchable power.

It points to a rollercoaster effect in the system where the entry of wind and solar generators, which have lower operating costs than coal and gas-fired generators, reduces wholesale electricity prices in the short term but “over time, low wholesale costs mean some gas and coal fired generators may not recover their operating and maintenance costs, resulting in exit from the market”.

If the entry of new renewable generation assets contributes to the exit of coal and gas generators, “it will tighten the supply and demand balance, leading to higher wholesale prices”.

The report finds that, on a national basis, power prices rose by almost 11% in 2017, with the increases driven by high gas prices and reduced supply after the departure of synchronous generators including the Northern coal power station in May 2016 and the Hazelwood coal power station in March 2017.

It predicts wholesale electricity costs will fall in 2018-19 and 2019-20, with a reduction in the order of 12% due to approximately 5,300 MW of new committed and expected generation entering the national electricity market – the majority of which is renewable generation (4,900 MW).

In addition to renewables coming on stream, assisted by the federal renewable energy target, the AEMC says price reductions will be assisted by the return to service of the Swanbank E gas power station in south-east Queensland (385 MW) in early 2018 and by “reduced short-run costs for South Australian gas plants in 2019-20 due to the pass through of certificate revenue related to the energy security target” – which is an initiative of the South Australian government.

The Turnbull government is pushing ahead with its proposed national energy guarantee, which imposes new reliability and emissions reduction guarantees on Australia’s energy retailers and large energy users from 2020, despite pushback from some state governments, and criticism that the new system could lock in coal generation.

The Weatherill government in South Australia has led the resistance to the national energy guarantee but the federal government secured agreement from a majority of state energy ministers to conduct further work on the scheme.

At a meeting of the Council of Australian Governments energy council in late November, a majority of the states agreed that the Energy Security Board should undertake more work on the national energy guarantee, with the detail of the scheme to be considered next April.

That timetable means the meeting of the energy council to consider the nuts and bolts of the Turnbull government’s scheme will happen after the state election in South Australia, due in March.

Energy regulators want governments to press ahead with the scheme and introduce it in the window where electricity prices are coming down – so over the next two years – to help minimise any public resistance to the change.

The public debate over climate and energy policy has been poisoned by a toxic political debate on carbon pricing that has persisted for a decade. Energy regulators see the national energy guarantee as one of the few sensible policy options left to create investment certainty in the energy market.

The AEMC did not assume in its report that the national energy guarantee would be adopted, because governments have not yet signed off and key design features of the scheme remain unknown.

It notes that the guarantee is “a mechanism aimed at integrating energy and emissions policy to deliver a reliable low emissions system at the lowest overall cost”.

It also notes that “some stakeholders have questioned whether the measures outlined in the recommendations will put downward pressure on prices, especially new initiatives related to security and reliability”.

It says that until the final design of the scheme is settled “including the detailed design of any new mechanisms, it is uncertain what impact they might have on prices – upward or downward”.

“In the absence of information or detail about the design, the commission has not included it in the modelling for this report”.