AER releases report into high prices in NSW wholesale electricity market

Short-term fuel issues and longer-term market challenges have combined to cause sustained high prices for wholesale electricity in NSW.

In its first report to the COAG Energy Council under its new wholesale market monitoring powers, the Australian Energy Regulator (AER) has found that while competitive pressure on wholesale prices has fallen, there is no evidence to suggest that prices are being driven by rebidding close to dispatch or physical or economic withholding – behaviours more usually associated with the exercise of market power. However, further work is needed to understand the impact of changing market features.

AER Chair Paula Conboy said there has been a ‘step change’ in NSW wholesale electricity prices since October 2016 with NSW generators offering a larger proportion of their capacity into the market at higher prices over longer periods than they have previously done.

Ms Conboy said average monthly prices have hovered around $80-$110/MWh for every month since summer compared to around $30-$65/MWh in previous years.

“The current sustained nature of high wholesale prices in NSW is not being driven by extreme price events, but rather fuel costs and supply issues unique to NSW and structural change across the entire National Electricity Market,” Ms Conboy said.

With NSW generation dominated by black coal, rising coal prices have affected the costs of generators who are purchasing coal under short-term contracts. This has been exacerbated by problems with coal supply affecting all NSW coal fired generators, that now appear to be easing.

Ms Conboy said that while these supply considerations explain, at least in part, the higher offer prices in NSW, there are reduced competitive pressures in this market.

“We have found the closure of Hazelwood power station in Victoria is having an impact on electricity imports into NSW and increased the output of generators in NSW, and that increased gas costs and hydro preserving water for summer has reduced the competitive pressure gas and hydro generators can place on coal generator’s offers. These are issues which require ongoing analysis.”

Monitoring of the NSW wholesale market will continue during 2018 as part of the AER’s first comprehensive review of the national wholesale electricity market, to be released in December next year. A report into the impacts of the closure of the Hazelwood power station will be released in March 2018.