We generally try to be apolitical in the articles and insights we share in our newsletter. However, given our focus on renewable energy and the energy transition, and the fraught nature of the political debate around this issue, it is impossible not to be drawn in on occasion.
With that health warning, as thoughts turn to 2025, I wanted to share a few thoughts on how lagged are the impacts, if any, of our politicians.
The reality of energy markets is that prices are determined via a computer controlled five minutely auction run by AEMO. Politicians don’t set wholesale prices. Markets and physics do. These markets are driven by supply and demand.
In the short term, demand is largely driven by the calendar and the weather. Demand is higher on weekdays than on weekends. It is higher at 7 o’clock at night when we all want to cook dinner, than at 3am when we are all (hopefully) asleep. Demand is higher when it is unusually hot or cold. While there are a range of longer-term influences on demand such as electrification or the establishment (or shutting down) of heavy electrical industries (such as aluminum smelting or data centers) the reality is that these effects largely occur gradually over years or decades.
In the short term, supply is also heavily constrained. You can’t build a new gas plant today because electricity demand is expected to be high this afternoon. There is a merit order, in that some plants, such as wind and solar are essentially free to operate, while others burn fuel (or use up dam water) that has a value.
Furthermore, for both renewables and baseload generators, there are also availability considerations that have material impacts on supply. For wind and solar, this depends on whether the sun is shining (or, on some days, generation might be much lower than expected because of cloud or rain).
For traditional baseload, an established reality is that these projects break down. They are not available 100% of the time. Plants break – sometimes with no notice – and can be offline for extended periods during repairs. Uncertainty regarding plant availability existed before there were renewables and has been built into the design of the system. The very design of the NEM has been formulated to pay peak prices to those plant who are able to dispatch during periods of peak demand (and those plant who cant, earn lower average prices, “penalising” them for not generating).
The point of all this, is that in the short term the price of electricity is not determined by the munificence of the energy minister of the day, but by luck. Was the weather favourable? Did we have the right amount and the right types of supply to be able to meet demand? Did break downs (of generating plant or transmission lines) occur more or less frequently than usual? Did they occur at inconvenient times?
The reality is that if a minister did have an impact, it was the minister 3-10 years before. It takes 2-3 years to build a wind/solar/gas generator. It takes 5-10 years to get a new transmission line approved (both in environmental and regulatory approvals) and then designed and constructed. It was the minister 3-10 years before who will have helped shape the investment and regulatory environment that will have underpinned the investment decisions by a wide range of, largely private sector, counterparties whether to build new generation or not.
I make these points in the context of looking to 2025 and beyond, which is inherently looking beyond the next Federal election.
I think that the next energy minister – that is the minister after the next election – whether that is a returned Labor minister or a member of the LNP – is likely to be able to claim credit for a fall in wholesale electricity prices. 4.2 GW of new generation has been commissioned in the last two years and a further 12 GW is currently under construction or due to start construction soon and will start generating over the next year or two. Given that no coal plants are scheduled to close in the next three years, this means there will be a meaningful net increase in supply over the next three years.
The laws of supply and demand suggest that this will, with luck, lead to lower prices. That’s a good thing for consumers and energy users.
The note of caution in this note, is that when we get to the next election and beyond, politicians are likely to claim they have much greater influence over electricity prices than they do. Sure, they can provide short term subsidies – but that money has to come from somewhere.
To have a real effect on electricity prices, politicians need to create a regulatory and investment environment that allows new supply to come online at low cost.
This takes time.
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