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File photo of wind turbines seen behind electricity wires at the Infigen Energy wind farm located on the hills surrounding Lake George, near the Australian capital city of Canberra, Australia<br>Wind turbines can be seen behind electricity wires at the Infigen Energy wind farm located on the hills surrounding Lake George, near the Australian capital city of Canberra, Australia, in this May 13, 2013 file photo. China’s state-owned enterprises are targeting Australia’s energy sector, attracted by a privatisation push and policy U-turn, after last year’s leadership coup ushered in a warmer regulatory climate.
The Frontier Economics report floats the idea of substantial regulatory intervention to stop the electricity market becoming even more concentrated. Photograph: David Gray/Reuters
The Frontier Economics report floats the idea of substantial regulatory intervention to stop the electricity market becoming even more concentrated. Photograph: David Gray/Reuters

Renewables will drive 'steep decline' in wholesale electricity price in Australia – report

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Exclusive: Frontier Economics’ modelling commissioned by government says 6,000MW of renewable capacity entering market will reduce prices in 2018-20

Modelling commissioned by the Turnbull government as part of its efforts to back in the national energy guarantee says renewables will drive the first wave of price reductions under the policy. It also floats substantial regulatory intervention to stop the electricity market becoming even more concentrated.

The work by Frontier Economics, obtained by Guardian Australia, says a steep decline in wholesale electricity prices forecast between 2018 and 2022 is due to the entry of 6,000MW of renewable capacity which has already been incentivised by the existing renewable energy target.

It also acknowledges that the policy, which imposes new reliability and emissions reduction guarantees on energy retailers and large energy users from 2020, could also lead to further market concentration in states like South Australia.

The assessment notes that in order to meet their obligations under the Neg, electricity retailers can either contract for supply externally, or integrate vertically with generators, which could be more “cost-effective than external contracting”.

It notes this is a factor particularly in South Australia “where a high degree of concentration and vertical integration already exists”.

The work floats three heavy-handed options for market intervention by state participants in the national energy market:

  • New restrictions on which parties in the national electricity market can own, control or operate new generation.
  • Restrictions on which parties can be electricity retailers.
  • Restrictions on which parties can be both a retailer, and own, control or operate generation.

It suggests restrictions on generation ownership could be achieved by specifying limits about who can own generation capacity after a particular date, or imposing market-share limitations.

The work notes that the Australian Competition and Consumer Commission has already raised substantial concerns about the level of vertical integration and market concentration in the national electricity market.

On the price impacts of the new policy, Frontier predicts there will be a “steep decline in wholesale prices” from 2018 to 2022 “due to the committed entry of almost 6,000MW of renewable capacity across the national electricity market” – capacity which is not linked to the new policy.

It says the new reliability requirement will “initially” lead to more competitive bidding from coal and gas, which will reduce prices if the guarantee is implemented, compared with the business-as-usual scenario.

It says the market will become oversupplied between 2021 and 2022, before the ageing New South Wales coal plant, Liddell, leaves the system, reducing supply once again.

Frontier says if the guarantee is in place, bidding from existing dispatchable plant will be more competitive than in the business-as-usual scenario.

It forecasts household power bills between 2020 and 2030 would be in the order of $120-a-year lower, in today’s dollars, than under a business-as-usual scenario, if the policy applied across the national electricity market.

Wholesale electricity prices would be 23% lower than business-as-usual between 2020 and 2030, on average.

The Turnbull government on Wednesday released a summary of the modelling in an effort to increase pressure on the states to sign on ahead of talks this Friday with state energy ministers.

The national energy guarantee requires cooperation from the states, because legislation to implement the policy it is required in each state, but some of the Labor governments, particularly South Australia, have been hostile.

While the expectation in Canberra is the states on Friday won’t stand in the way of further work being undertaken on the guarantee, which will keep the policy development process moving, South Australia is continuing to signal publicly that it does not support the policy.

The South Australian energy minister, Tom Koutsantonis, said the Frontier modelling showed the Turnbull government policy would “guarantee a longer lifeline for coal, more market power and more profits for existing generators”.

“Essentially the national energy guarantee is a guarantee for higher prices in South Australia,” he said. “There is nothing here for South Australia.”

The Victorian energy minister, Lily D’Ambrosio, said the federal energy minister, Josh Frydenberg, “is more interested in briefing newspapers than Coag partners”.

“We won’t commit to a political fix for Malcolm Turnbull – we will deliver an energy policy that ensures Victorian families and businesses get the affordable, reliable and clean energy they deserve.”

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