This briefing paper provides an overview of wholesale and retail electricity prices in New South Wales and more broadly in the National Electricity Market. The specific causes of electricity price movements over recent years are discussed, as are consumption and supply forecasts.

This is the first of a series of companion briefing papers related to gas, water and renewable energy sources.

The National Electricity Market

New South Wales is part of the National Electricity Market (NEM) which spans Australia’s eastern and south-eastern coasts and comprises four other interconnected states (Queensland, South Australia, Victoria, and Tasmania).

The NEM commenced operation as a wholesale spot market for electricity in December 1998. There are over 100 registered participants in the NEM which collectively supply approximately nine million customers, accounting for $11.4 billion worth of electricity trade in 2012–13. [2]

Generators and retailers trade electricity in the NEM through a gross pool managed by the Australian Energy Market Operator (AEMO).

The Australian Energy Market Commission (AEMC) is responsible for reviewing, amending and expanding the National Electricity Rules which govern the operations of the NEM.

The enforcement of these rules, in addition to the economic regulation of electricity transmission and distribution networks, is the responsibility of the Australian Energy Regulator (AER). [2.1]

Wholesale electricity prices

Prices across most NEM regions peaked between 2006 and 2008, largely driven by supply constraints, when drought constrained the availability of water for hydro generation and cooling in coal generation.

Declining electricity demand and the rising uptake of renewable generation (particularly wind and solar) contributed to historically low spot electricity prices in 2011−12.

This trend reversed in 2012–13 as average electricity prices more than doubled in most NEM jurisdictions. According to the AER (2013), the higher prices partly reflected carbon pricing, as well as supply constraints in mainland NEM regions, stemming from plant closures.

With the exception of the cyclical spike in January and February, prices have trended down over the past 12 months, affected largely by relatively subdued demand growth in the NEM.

As at June 2014, South Australia had the highest average spot price in the NEM at $54.4/MWh; it was followed by Queensland ($50.9/MWh), New South Wales ($49.7/MWh) and Victoria ($49.2/MWh). [3]

Between 2004–05 and 2009–10, there was an escalating trend of extreme price outcomes in the NEM. During that period, the number of 30 minute prices above $5000 per MWh peaked at 95 events in 2009–10. The incidence of extreme prices has since fallen sharply. [3.1]

Market participants commonly manage their exposure to forward price risk by entering into hedge contracts that lock in firm prices for the electricity that they intend to produce or buy. In Australia, two distinct financial markets support the wholesale electricity market: over-the-counter markets which involves direct contracting between counterparties; or the exchange traded market, in which electricity futures products are traded on the Australian Securities Exchange (ASX). [3.2]

NERA Economic Consulting (2013) estimated annual wholesale energy costs out to 2015-16. In the zero carbon price scenario, prices for New South Wales, Queensland and Victoria rise in each year of the modelling period, albeit at a lower price than if the carbon tax was still in place. [3.3]

Retail electricity prices

As at March 2014, the ABS electricity price index was highest for Brisbane (134.8) and Melbourne (128.5), followed by Sydney (123.5), Perth (116.4) and Adelaide (115.3). Sydney has experienced the highest rate of growth in retail electricity prices over the last decade, with the index more than doubling since June 2004 at an average quarterly rate of 2.5 per cent.

Until 1 July 2014, the Independent Pricing and Regulatory Tribunal regulated retail electricity prices in New South Wales. In response to a report released by the AEMC in 2013 (which found that competition was effective in NSW electricity markets), the NSW Government removed retail electricity price regulation.

Retail electricity prices have risen significantly over the past five years. The AER concluded that network costs were the key driver. The carbon price also contributed, leading to price increases of 5 to 13 per cent in 2012−13. [4]

According to the AEMC (2013), residential prices in most jurisdictions are expected to either increase at a rate less than inflation or decrease over the next three years from 2012/13 to 2015/16. Residential market offer prices in New South Wales are forecast to decrease, on average, by 0.7 per cent a year for the three years from 2012-13 to 2015-16. [4.1]

Electricity Consumption

As at the end of 2012-13, in total New South Wales consumed the most electricity when compared to the other more populous States in Australia at 74 TWh. Growth in electricity consumption has slowed over the last decade or so across all of the States, except Western Australia, relative to their respective longer term trends. Electricity consumption in New South Wales remains virtually unchanged in 2012-13 as it was in 2002-03.

Western Australia (13,199 kWh/capita) and Queensland (12,743 kWh/capita) have the highest levels of electricity consumption per capita, followed by New South Wales (10,037 kWh/capita). [5]

According to forecasts by the AEMO (2014), growth in electricity consumption in the NEM is forecast to remain relatively subdued over the next few years (increasing by 0.4 per cent annually between 2013-14 and 2016-17).

New South Wales electricity consumption is forecast to increase at an average annual rate of 0.36 per cent between 2013-14 and 2033-34, with growth expected to be constrained due to reduced large industrial forecasts. [5.1]

When compared to the other Australian States and Territories, New South Wales ranked fourth in terms of household electricity consumption, consuming on average 133.7 kWh per household per week.

New South Wales ranked third in terms of household electricity expenditure, spending on average $31 per household per week. [5.2]

Electricity Supply

Most electricity dispatched in the NEM is generated using coal (55 per cent of generating capacity), gas (20 per cent), hydro (17 per cent) and wind technologies (5.4 per cent).

As at April 2014, 68 per cent of generation capacity in New South Wales came from black coal generation; the majority of the remaining generation capacity came from hydro (17 per cent) and gas (12 per cent). [6.1]

Electricity generation trading rights in New South Wales are now split between the government entities Macquarie Generation (28 per cent) and Delta Electricity (12 per cent), and the private entities Origin Energy (26 per cent) and EnergyAustralia (17 per cent).

New South Wales has relatively high fuel costs, making it a net importer of electricity. Imports reached a ‘peak’ in 2010-11 in which they represented 12.8 per cent of regional energy consumption. [6.2]

Price signals in the wholesale and forward contract markets for electricity drive new investment in the NEM. From the start of the NEM in 1999 to June 2013, 13 850 MW of registered generation capacity (around 1000 MW per year) has been added to the NEM.

Between 1999-00 and 2012-13, South Australia had increased its capacity by 71 per cent, while Queensland’s capacity was 59 per cent higher. New South Wales and Victoria, on the other hand, have had more subdued growth in generation capacity, increasing by 21 and 16 per cent respectively to the end of 2012-13.

According to the AEMO (2014), committed projects total 1,165 MW of capacity, with expected commissioning between July 2014 and January 2016. [6.4]

For the first time in the NEM’s history, as a result of decreasing operational consumption, no new capacity is required in any NEM region to maintain supply-adequacy over the next 10 years.

From the AEMO (2014) analysis, it was found that more than 7,500 MW would need to be removed from the market to affect supply-adequacy in 2014–15. Even by 2023-24 between 1,100 MW and 3,100 MW of capacity could still be withdrawn from New South Wales, Queensland, and Victoria without breaching the reliability standard. [6.5]

Profile of the Retail Electricity Market

AGL Energy, Origin Energy and EnergyAustralia jointly supplied 77 per cent of small electricity customers in 2012-13. As at the third quarter of 2013-14, these three retailers accounted for 91 per cent of customers in New South Wales.

Switching activity between retailers by customers in New South Wales and South Australia rose in each of the past few years, with rates in 2012−13 being the highest recorded in each state. [7.1]

In October 2013, the AEMC released its final report reviewing competition in New South Wales retail energy markets. The Commission found that competition was delivering discounts and other benefits to small consumers in the New South Wales retail electricity markets.

In response to these and other recommendations, the NSW Government has removed retail price regulation from 1 July 2014. This means that IPART no longer sets electricity prices for regulated customers. [7.2]

For a benchmark low income household that receives energy bill concessions electricity costs accounted for between 2.9 and 7.9 per cent in 2012−13.

The number of residential electricity customers in New South Wales with debt stood at 111,514 in the March quarter of 2013-14; with the average size of that debt at $542 per customer, down from $655 in September 2013-14.

Rising electricity prices has led to an increase in the number of residential disconnections, particularly in New South Wales where the number of residential electricity disconnections has risen by 64 per cent between 2009-10 and 2013-14.

New South Wales currently has the largest number of customers on hardship programs, at 19,787 in the March 2013-14 quarter; this is 21 per cent (or 3,404 customers) higher than in the September 2013-14 quarter. [7.3]