Quick Bites: Power Price Volatility
With all the media attention focused on trade policy and share markets, it’s easy to overlook the significant volatility occurring elsewhere. Take power markets, for example. Over the past month, wholesale power prices across various European markets have fallen substantially. Although electricity constitutes a relatively small part of the Consumer Price Index (CPI) baskets for these countries, declines of this magnitude will help reduce overall inflation. This trend is consistent with the recent decisions by UK and European central banks to lower policy cash rates.
What has driven the sharp fall in power prices?
Prices reflect the forces of demand and supply. In the UK and Europe, the marginal price of power is set by gas. As shown in the next chart, gas prices have declined, mirroring the broader decreases seen in thermal energy prices due to the impact of escalating trade tensions on the outlook for energy demand.
What about Australia? Are our power prices also falling?
Generally, yes, wholesale prices have fallen recently. Gas is a globally traded commodity and, like European power markets, plays a significant role in setting the marginal price of power in Australia. Therefore, the fall in gas prices is reflected in Australian wholesale power prices. However, the decline in prices appears less convincing here. For instance, while NSW and QLD prices have decreased, Victoria’s prices remain broadly unchanged.
Why aren’t prices falling as much in Australia?
The energy market is complex, making it challenging to explain short-term price developments. However, a longer-term look at pricing and the evolution of our power grid (or lack of, I should say) might provide some insight. Below is a long-term price chart of wholesale prices for Australia and the UK. Since 2010, the UK’s average wholesale power price has been approximately £65 per MWh, compared to today’s price of £70. For Australia, the average since 2010 has been about A$70, versus a current price of A$100. In other words, UK prices today are about 8% higher than the long-term average, while Australia’s prices are some 40% above.
At face value, it doesn’t make sense for Australia to have experienced such inflation in wholesale power prices compared to a market like the UK. Not only does Australia enjoy an abundance of thermal energy resources, but it has also invested significantly in renewables, standing out on a per capita basis.
If one word had to summarize the reason for this difference, it would be “policy.” All developed world markets share the common backdrop of growth in renewables at the expense of thermal energy. However, what differs in Australia is the absence of a base load alternative to coal. Much like the UK, which has had its work cut out to decarbonize its grid, it at least has the backup of around 15% of power from nuclear, which plays a crucial role in maintaining grid stability as variable renewable energy grows (now at 50% of power generation). Australia, having decided long ago that nuclear is not the way forward, has overlooked the need for gas to step in as coal plants are retired and renewables continue to grow. Unfortunately, with coal still accounting for about 40% of power generation, the issue of maintaining grid stability in the years ahead remains unresolved.
