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Wholesale electricity prices higher since Hazelwood exit

Wholesale electricity in Victoria and South Australia have risen since the closure of the Hazelwood power station according to the Australian Energy Regulator (AER), with other states in the National Electricty Market (NEM) also affected.
The AER made the findings in a report to the COAG Energy Council under its new wholesale market monitoring powers and in response to a request from Treasurer Scott Morrison and Environment and Energy Minister Josh Frydenberg.

AER chair Paula Conboy said the closure of the ageing power station had reduced competition in the wholesale electricity market, but noted that the report did not identify instances where behaviour normally associated with the exercise of market power significantly affected average prices.

“The impact of the Hazelwood closure has been, and continues to be, significant right across the NEM. In Victoria, average spot prices for 2017 were up 85 per cent on 2016 and up 32 per cent in South Australia for the same period. New South Wales and Queensland were up 63 per cent and 53 per cent respectively.

“High wholesale prices in the NEM are not unprecedented and indeed have been higher in the past, but the 2017 increases were sustained over the year and occurred simultaneously across the NEM,” Ms Conboy said.

The report found that price increases associated with the need to replace Hazelwood’s output aligned with expectations.

“The replacement of Hazelwood’s low cost brown coal generation by higher cost black coal, gas and hydro generation – coinciding with rising black coal and gas fuel prices during the period – was found to be the underlying driver of the wholesale price increases,” said Ms Conboy.
From mid-2017, Victoria became a net importer of energy for the first time in almost 10 years, with increased imports of gas generation from South Australia, and black coal generation from NSW and Queensland.

“Our analysis did not identify instances where bidding behaviour normally associated with the exercise of market power significantly affected average prices, but there has clearly been a lessening of competition which we will monitor carefully.

“While the market response in the short term was as we might have expected, there are longer-term issues that require ongoing monitoring,” said Ms Conboy.

“New investment is critical to putting downward pressure on prices and work is continuing to address energy policy uncertainty for investors through the ongoing development of the National Energy Guarantee,” she added.

Monitoring of the Victorian and South Australian wholesale markets will continue during 2018 as part of the AER’s first comprehensive review of the national wholesale electricity market, to be released in December. Detail of the approach being taken to wholesale market monitoring was also released today and is available at www.aer.gov.au.

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