What are the key factors driving the dramatic increase in energy prices in Australia?
 
The dramatic increase in energy prices in Australia is driven by a combination of economic, political and weather-related events. These include increasing global cost of fossil fuels, supply chain disruption and a significant increase in demand. Certainly, the Russia – Ukraine war has brought instability to the global energy market, exacerbated further by the reluctance of OPEC to increase its oil production due to “uncertainty that surrounds the global economy and oil market outlooks”.
 
Are there more things that could be done to stabilise prices?
 
Stabilisation is hard to achieve in a short term, but it should be possible to reach medium to long term. 
 
Retailers buying electricity from the wholesale market and selling it to businesses and households are facing a challenging task of managing the risk of highly volatile prices. When energy prices spike, the retailers pay higher prices on the spot market to purchase the power they need. Consumers pay a fixed price for power, regardless of spikes, but since the wholesale price spikes occur frequently in the current turbulent market conditions, the costs get eventually passed on to consumers. 

If retailers were able to effectively mitigate the risks of extreme price fluctuations, we would be able to see a stabilisation in energy prices. However, since there is a delay between the time of a decline of wholesale prices and the time of a reduction of the electricity bill, low prices cannot be easily achieved in a short term, but hopefully in the medium- to long-term.
 
Another strategy to lower energy prices is the introduction of more renewable generation. The savings from generators will be passed down to retailers and finally to consumers, as outlined by the Prohibiting Energy Market Misconduct laws.
 
To what extent can the move to renewable energy help bring prices down?
 
In the medium- to long-term, moving to renewable could certainly lead to a reduction of energy prices. However, the transition stage from moving from fossil-fuel generation to renewables suggests setting up significant infrastructure, including hydropower developments and battery storage, which is time-consuming. If we wait until a sufficient share of intermittent renewable energy generation is reached, energy prices will continue to rise. Thus, when going through this transition stage, it is imperative to set up a short-term strategy to ensure sustainability of the sector, which could include investment in the dispatchable generation.
 
How can people change their behaviour/appliances/energy sources to save energy this summer?
 
Where possible, one could switch to “green energy”, i.e., start using power generated from renewable sources such as the sun, wind, water and waste power, rather than coal or gas. In other words, installing solar panels on your roof is one of the most efficient ways to save energy and reduce your energy bill in the long term. Other suggestions include switching off appliances when they are not in use, choosing energy-efficient appliances, switching to LED lights and efficient use of air conditioners (i.e., controlling them remotely by an app where possible), etc.
 
Do you have any concerns that have not been sufficiently recognised/are not being discussed?

Although the increasing energy prices are mainly driven by the increasing global cost of fossil fuels, inflation and other factors discussed above, it is possible that electricity generators take further advantage of the situation by price gouging in the National Electricity Market (NEM). Similar to the oil markets where large companies are making windfall profits due to recent price increases of oil, energy generators are trying to make excess profits by overbidding on the wholesale market, which results in a significant rise of energy retail prices. Government should take some action to prevent such scenarios as it clearly impacts other productions and adds to the inflationary pressures.

With an increasing penetration of renewables, investment in technologies that support and complement wind and solar generation is the key to ensuring prices remain low in the future. This requires a flexible system to accommodate the variability of wind and solar, and in turn smooth out price volatility. The focus should be on investment in storage technologies such as batteries and pumped hydro which can respond fast during high demand periods, intra- and inter-state transmission capacities to ensure effective sharing of energy resources, and fast-start gas generation units. Changing the market design where consumers can participate directly in the spot market can also be a more cost-effective approach than just relying on more dispatchable generation capacity. Policy changes to support the transition underway in the NEM should occur in conjunction with policies aiming to enhance competition. Finally, it is crucial to ensure that climate change and energy policies are appropriately aligned to allow for a smooth transition with minimal impact on electricity security, reliability, and affordability disruptions, while maximizing emissions reductions.   

What are the key factors driving the dramatic increase in energy prices in Australia?

The setting for the current period of elevated prices is the closure of coal-fired generation, with one consequence being an increased reliance on gas-fired generation. This has left the National Electricity Market (NEM) with greater exposure to gas prices, because gas is more often the price-setting marginal generator in the NEM.

In addition, there may be insufficient gas storage facilities in Australia to handle the extreme volatility in demand for gas from gas-fired generators, forcing gas-fired generators to buy gas on the spot market, which follows the international gas price. In this context, when international gas prices spiked on geopolitical events (Russia’s invasion of Ukraine), these prices flowed through to gas-fired generation costs and electricity prices in the NEM.

Are there more things that could be done to stabilise prices?

Decoupling domestic gas prices from international prices is one way to disconnect high international energy prices from the domestic market. Price caps for gas sold in the domestic market could work if they are above the cost of production and gas producers are compelled to deliver gas to domestic users.

However, this policy isn’t straightforward to implement, and there may be unintended outcomes for investment in gas production. Alternatively, large-scale storage, such as grid-scale batteries and pumped hydro energy storage, can substitute for gas in the NEM, but batteries don’t have the same scale and both remain relatively expensive.

To what extent can the move to renewable energy help bring prices down?

Renewable energy can help to bring costs down by reducing reliance on gas. However, renewable generation’s main effect is on the use of coal-fired generators. In fact, in some future low-carbon energy scenarios that have been modelled, gas plays an increased role in firming a massive roll-out of renewable generation, which could increase prices or at least dilute the benefits of greater amounts of renewable generation. That said, there are no silver bullets and the power system does and will always rely on a diversity of generation to mitigate risks and reduce overall costs.

How can people change their behaviour/appliances/energy sources to save energy this summer?

The cheapest energy is the energy you don’t use, and as a society, we should be trying to reduce our per-capita energy use. So energy efficiency measures, such as insulation, sealing up leaky windows, and drawing curtains during the hottest times of the day can have a large impact. If you have rooftop solar, use appliances at times when you are generating your own power. For example, use a timer to run dishwashers or washing machines during the day.

Do you have any concerns that have not been sufficiently recognised/are not being discussed?

A major driver of costs in power system is meeting peak demand, and a disproportionately large amount of the total cost of our power system is to provide a level of reliability above 99%. To reduce overall costs, at times of peak demand, power network companies (PowerLink in Qld) and power system operators (AEMO) may call on customers to voluntarily reduce their energy use so that the system is not overwhelmed. This can be as simple as turning up the temperature on your air conditioning, not running the dryer or dishwasher during peak times, or using the BBQ rather than the electric stove or oven.

The price that retailers pay for electricity is typically set by the high-cost marginal generators (coal and gas). The dominance of coal generation in the past guaranteed Australians with not only reliable and secure electricity, but also cheaper electricity bills. The rise in electricity prices in the last decade follows the ineffective alignment between climate change and energy policies. As a result, coal generators exited the market suddenly and unexpectedly due to the pressure driven by low-cost, yet variable power from wind and solar generation. A significant proportion of stable and cheaper coal generation are going offline, while gas generation plays an increasing role in supporting the variability of wind and solar generation during high-demand periods. Thus, the market is increasingly prone to changes in gas and coal prices. Indeed, rising gas and coal prices have accounted for much of Australia's electricity price increase in the last decade, with more profound effects in recent years due to the energy price crisis in response to post-covid demand-supply imbalances, and deteriorated further by the Russia-Ukraine war.

To what extent can the move to renewable energy help bring prices down?  

The move to renewable energy can help bring prices down, but not in the short-term. Wind and solar generation contribute to declining electricity prices in Australian states. However, wind and solar generation causes large price fluctuations, namely significant volatility, in the National Electricity Market (NEM), challenging the wholesale markets who have to pay higher prices on the spot market and pass this on the retail markets. The Australian energy market is an interconnected network of state markets that operate as competitive spot markets where supply and demand are matched to determine a price for the required power. Even though the overall effect of renewable energy is a reduction in prices, the impact differs throughout the day. For example, solar generation in NSW positively impacts prices indirectly via the high marginal costs of gas generation replacing the lost output when the sun sets. Traditional generators are required to complement the fluctuations of solar power output, adding more pressure to electricity prices.   
Thus, to materialise the benefits of renewable energy generation in terms of reduced energy cost, it is critical to empower a fast transition with complementary measures. These include a) Investment in storage technologies and interconnectors to manage the significant volatility of renewable energy and the increased solar generation curtailment. b) Gradual but accelerated retirement of coal generation and replacement with fast-start and flexible technologies, such as hydro. C) Adopt effective firming technologies such as a two-sided market allowing supply and demand sides to participate in the dispatch and price-setting process.

The average cost of wholesale electricity prices ($/Mhr) has increased significantly in the last quarter in Australia. Several factors contribute to this increase, including the higher cost of gas and coal (partly due to international situations) and the inherent intermittent nature of PVs and Wind systems. While the cost of renewable energy generation may be less than fossil fuels, PVs don’t help during the evening peak demand, which is primarily met by costly generators.

Centralised and distributed storage solutions could help alleviate the evening peak demand and reliance on the costly peaker plants.

At an individual level, people can help reduce the evening peak demand by shifting the non-essential loads (Dishwasher, water heater, pool pumps etc.) to either mid-day or midnight.

The right incentives for customers to participate in the demand response, including the motivations for customised distributed storage solutions (both community-based and individual battery storage solutions), are necessary to tackle the peak demand and increasing cost of electricity.

Electricity Market prices are based on the bid price for the most expensive generation that is essential for stable operation of the grid. Thus while solar and wind can be low cost the high prices particularly of gas generation can give rise to high generation costs for all consumers.

In August 2021 the prices rarely rose above $120 while for 2022 the prices regularly exceed $400.

Since the overall price depends on the most expensive generator we cannot see price reduction until 1) Gas prices reduce and 2) Storage and renewables expand to the extent that gas is rarely needed.

What are the key factors driving the dramatic increase in energy prices in Australia?

The key factor is the rise in gas price which affects the generation cost.

Are there more things that could be done to stabilise prices?

In general the current pricing in Queensland does not provide any incentive to use power when renewables are available or to penalize when expensive generation is required.  Incentivised demand response will be an essential part of response particularly when the impact of electric vehicles is considered.

To what extent can the move to renewable energy help bring prices down?

Only when the amount of renewables and storage expand to the extent that gas generation is not required will there be overall price reduction.

How can people change their behaviour/appliances/energy sources to save energy this summer?

If you are on a peak demand tariff then precool your building or shift loads to coincide with solar input. Use timers on pool pumps so the middle of the day and use ovens and air conditioners when the solar input is strong.

Do you have any concerns that have not been sufficiently recognised/are not being discussed?

The main issue not visible in the media is that the generation price is set by the most expensive generator and the price advantages of renewable generation is not lowering the NEM pool price.

The anticipated energy price hike is due to the escalating costs of coal and natural gas. The best immediate response by Australian households and business is to future proof their energy bills by installing rooftop solar and to rely on it for powering their homes, businesses and cars for the next two decades.
 
While many of the recently announced government programs to support renewables will only have an impact in the medium term, a review of the National Electricity Market, which was designed in the 1990s to regulate centralised conventional energy generation and one way electricity flow, is necessary and needs to be initiated immediately. The review needs to establish rules for the operation of the smart grid which mainly relies on renewables and connects millions of small as well as large prosumers.

On the key drivers of increasing energy prices in Australia

Complicated, but primarily an outcome of rising international coal and gas prices. This is not the fault of clean energy transition – these prices were already increasing in the second half of last year and the IEA pointed out that the issue was that fossil fuel investment had fallen over COVID-19 (as it must for clean energy transition), the world hadn’t sufficiently invested in new clean energy. Of course, the war in Ukraine since February has greatly exacerbated these global coal and gas prices. There has been some delay in these price rises getting passed through to households and businesses here because of longer-term contracts between retailers and generators. However, many of these are starting to wind up so spot market price increases will be passed through.

You might think that Australia would be ok given that it is one of the world’s largest coal and LNG exporters. However, these high exports actually link local energy market prices to international ones, hence local price rises. It’s a particular issue with gas pricing. Almost all major gas exporters use ‘domestic reservation’ to ensure that local energy consumers come before exports, and at agreed local pricing, even if international prices rise. While Western Australia has this and is just fine, the East Coast has fairly ineffectual measures in place that don’t provide assured local pricing.

Coal and gas prices mostly set electricity prices in the National Electricity Market so households and businesses are seeing both gas and electricity price rises.

Are there more things that could be done to stabilise prices?

Of course. One clear action is to require the major gas exporters on the East Coast to provide sufficient gas for local consumers and agreed prices, as a condition for being allowed to export. Something similar might be needed with coal exports as well, given very high global coal prices at present.

Some energy experts make the point that it's important not to subsidise energy prices in this way because it leads to inefficient gas and electricity consumption here at home – we’d be better off paying the high prices as we’ll be incentivised to reduce its consumption. Another approach then is not to cap prices but instead use the very high profits for the major exporters to compensate energy users, eg. through reduced taxes or fixed payments. The problem here for Australia is that we don’t effectively tax these energy exporters, so we’d have to find the money from elsewhere.

Can the move to renewable energy help bring prices down?

In the short-term, more renewables here in Australia can assist in getting pricing down but it may be of limited help given that coal and gas are still going to mostly set electricity market prices and, as discussed, we are exposed to international pricing.

Having said that, getting rooftop PV has pretty attractive paybacks for most consumers right now. In the medium to longer term renewables can certainly help get our energy costs down below current levels, and protect us far better from international fossil fuel pricing.  
 
How can people save energy this summer?
 
There are plenty of things that households and businesses can do. Think about rooftop PV if that’s an option. Shorter showers, higher temperature settings on the air-conditioner thermostat can all make a big difference. And if you are buying appliances, look for the more energy efficient ones – they’ll save you money in the long run.

And it won’t hurt to call your local member demanding that the government take action.

On the key drivers of increasing energy prices in Australia

Energy prices increase in Australia because of higher than usual demand for gas from overseas -- in other words, it is driven by the gas export market.  This higher-than-usual demand finds its root in the Ukraine-Russia conflict, which results in a) some supply being constrained and so not available on the global market and b) a desire from the EU to decrease its dependency on Russian gas.  This induces higher global prices, which represents the opportunity cost of Australian producers.  Hence gas prices increase locally.  Because gas is also a critical input in electricity production, electricity prices increase in lock-step. And because coal and gas are (imperfect) substitute fuels for electricity production, coal prices also increase.
 
Are there more things that could be done to stabilise prices?

Yes, some.  Like in Western Australia, the Federal Government can implement a reservation policy.  This policy consists in compelling gas producers based in Australia like Santos, Shell or Origin, to set aside a prescribed quantity of gas to be sold only on the domestic market.  This increases the local supply, which in turn reduces prices.  Of course, such an intervention is distortionary and so some economists and the gas producers do not like it.  However given a high degree of inelasticity of demand, the welfare losses of such a policy are small; instead, it reduces the rents (super-profits) of producers and it is a relief to Australian consumers .  Such a policy can also be made contingent on the price level: when the global price of gas is low, there is no real need for a reservation policy.  

Furthermore, gas is an essential input in many industrial applications beyond electricity, which could be significantly disrupted by these very high, and persistently high, prices. Such disruptions can be very costly (e.g. bankruptcies, transitory unemployment, loss of skills...) as we have seen with the airline and hospitality industries during and after COVID-19 for example.  So it may be wise to limit these costly disruptions, which are not the result of poor economic performance in Australia, by intervening. That is, intervention may halt the propagation of energy price increases in the rest of the Australian economy.
 
The last form of intervention we want to see is a price cap; this will absolutely guarantee that producers prefer selling overseas and so induce an actual domestic shortage.

Can the move to renewable energy help bring prices down?

It does not in the short to medium term.  First, gas may not be substitutable in the production process of some industries, so electricity itself may not be useful.  Second, in the production of electricity, gas is the more expensive technology, so it is the one we use when we must; that is, when there is no sun and no wind.  Hence it cannot be replaced by renewable energy; they are not substitutable and never really compete.
 
How can people save energy this summer?

It is critical to save energy when electricity is the most expensive to produce.  This is when we all return home and the sun sets.  So, people can pre-cool their house, shade their windows to decrease the heat load indoors, and shift their consumption over the day.  In Australia, electricity is the cheapest in the middle of the day, when the sun delivers all this cheap energy.  Run your laundry and your dishwasher then.  Electricity is the most expensive between 6pm and 9pm.  Reducing consumption even by only 10% in that time window can have a dramatic price impact, because that is when supply is so tight and exactly when we need the gas plants to produce.  Demanding a little less of them at that critical time makes a large difference in the price of electricity.
 
I'd like to emphasise the pernicious effects of a price cap, which is absolutely to avoid.

Yes, high energy prices hurt our budgets, but they are also trying to tell us something.

The true cost of non-renewable energy is still too low if we account for climate change costs (externalities). Market prices don’t reflect the externalities and future costs of dirty energy consumption today. Market prices, and market mechanisms, fail to incorporate these costs because energy producers don’t pay the extra climate costs, that should theoretically be subtracted from the revenues of selling dirty energy.

If we start incorporating the true climate costs of non-renewable energy prices, current energy prices will be significantly higher than even the increases we are anticipating over the next year.

Further, such increases in energy prices will make the fixed costs to invest in renewable energy infrastructure attractive. And if we had invested enough in renewable energy infrastructure, then what happens in Russia and the rest of the world, would not be affecting Australian energy prices as much due to the relatively local consumption requirements of renewable energy.

The current energy price shock is also an opportunity to initiate such investments and shield us from energy shocks that look increasing likely in the future due to the climate crisis.