Does renewable electricity raise or lower electricity prices? There is more to this question than meets the eye: are prices lower before or after renewable subsidies are recovered, how has variability been accounted for, how have changes in network costs been accounted for, and so on and on.
Faced with a complex problem, policy makers often turn to specialists who simulate the future using their assumptions of costs and investments and their characterisation of the power system and market. This sort of thing has a dismal track record in predicting prices and is susceptible to the perception, even if not the reality, that she who pays the piper picks the tune.
An alternative is a data-driven regression that analyses large quantities of historic market data to understand the factors that have driven energy prices in the past. This approach requires few assumptions, and the quality and predictive power of the model is objectively measured. Even if the future is uncertain, we might be able to get a better sense of it by looking carefully at the past.
My colleagues and I used this approach to analyse South Australia’s wholesale prices from July 2012 to July 2018, during which period the annual average wholesale price increased by more than 30%.
There are many potential explanations for this increase: the last coal-fired power station closed in South Australia and two coal-fired power stations closed in Victoria; a greenhouse gas emissions tax came and went; electricity generation from the wind and sun increased by around 70%; while the price of gas climbed by a similar amount.
However, our research found by far the biggest reason for higher wholesale electricity prices in South Australia is higher gas prices. It does not help that so much of South Australia’s gas-fired electricity generation is remarkably inefficient.
Authors: Bruce Mountain, Director, Victoria Energy Policy Centre, Victoria University