The Australian Energy Regulator (AER) has released its biennial Wholesale Electricity Markets Performance Report today, with key findings including a decrease in wholesale electricity spot prices since late 2022 due to lower fuel costs, increased renewable generation, and government intervention.
AER Chair Clare Savage said: “However, the market remains unpredictable, with outages, weather variability, and high demand contributing to price spikes.”
“Greater spot price volatility can flow through to higher forward contract prices that then impact household electricity bills," Savage said.
The report evaluates the National Electricity Market (NEM) and provides insights into market dynamics, competitive conditions, and structural changes.
Savage said: “Renewable sources like wind and solar delivered 32% of electricity in the past year. During the day they are increasingly setting prices and leading to negative price periods. But during evening peaks, when prices are at their highest, traditional generators still set the price over 90% of the time.
“From a competition perspective, this influx of renewables is driving a lessening of market concentration during the day while ownership of dispatchable generation remains concentrated and a few large participants are often needed to meet demand.
“Structural reforms and timely investments in dispatchable and renewable capacity are needed to address price volatility, market stability, and competition, to ensure lower costs for consumers and to maintain investment that is essential for the energy transition.”
The report pushes the need for significant capital investment in wind, solar, batteries, pumped hydro, gas-fired generation, and the transmission network over the next decade to replace aging coal and gas plants. This investment is crucial to ensure ongoing competition and efficient market functioning, the AER advises.
A dedicated analysis of the South Australian market in the report reveals an increase in intermittent renewable generation and falling demand. This leads to more frequent negative prices during low demand periods. However, fuel costs, network congestion, participant bidding strategies, and lower wind conditions have maintained prices above pre-2022 levels.
“South Australia's experience offers valuable lessons for the National Electricity Market’s transition,” Savage said.
“These factors have led to new inefficiencies, challenges to competition, and costs that should be addressed in market design reviews.
“The AER is very keen to work closely with the market design review panel next year on all of the recommendations presented in this report to build a market that delivers reliable and affordable energy at the least cost to all Australians as we transition to net zero emissions,” Savage said.
The report also highlights the importance of policy and regulatory reforms to address key risks in the market and to ensure continued competitiveness. The AER advises Energy Ministers on any legislative or regulatory reforms needed to address these risks.
The recommendations come as the Federal Government begins its review of future market settings.