Power prices set to remain high and volatile: Moody's

Australian power prices are likely to remain high and volatile as the market struggles with the withdrawal of base load coal-fired generation, higher gas prices and the growth in renewable capacity according to the credit ratings agency Moody's Investors Service.

Moody's found over the next 12 to 18 months consumers are unlikely to see any respite in their power bills as wholesale power prices are expected to remain above the 2015 average of $40 per megawatt hour (MWh).

The higher and more volatile price reflects the displacement of high cost thermal base load power by intermittent renewable supply.

Moody's vice-president and senior analyst Spencer Ng said the evolving generation mix, coupled with the network's limited interconnection capacity, will restrict the market's ability to respond to supply and demand shocks, leading to increased price volatility.

The problems were recently highlighted by the power crisis in South Australia, where prices soared to $14,000 MWh.

A failure with National Electricity Market's (NEM) interconnector meant based-load power from Victorian thermal plants was not switched through after intermittent wind and cold weather stressed South Australia's electricity supplies.

South Australia currently draws around 40 per cent of its power from wind and solar sources.

Decommissioning of coal reduces ability to absorb shocks

"Net decommissioning of thermal generation capacity has reduced the market's ability to absorb unexpected supply and demand shocks, leading to greater price volatility," Mr Ng said.

Since 2015, a total of 3,645MW of capacity has been withdrawn or earmarked for withdrawal, compared to committed development of just 772MW.

Moody's noted renewables account for virtually all new generation capacity in the NEM since mid-2014, a large majority of it wind.

"We believe withdrawn thermal capacity can no longer generate a commercial return because competing renewable capacity can generate at negligible marginal cost, and will therefore rank ahead in the merit order," Mr Ng said.

More gas power will drive higher, more volatile prices

With coal fading, gas is likely to increasingly become the "swing" generator and this too will support higher prices, at least in the medium term.

East cost gas prices in the NEM have risen by around 60 per cent since 2010.

Mr Ng said further price rises are expected as demand for feedstock gas from LNG export projects in Queensland ramps up.

"Moreover, uncertainty surrounding government policy on the development of unconventional gas reserves could delay the availability of new gas supply," Mr Ng argued.

"Over time, gas prices will also reflect increased gas production costs, as producers become increasingly dependent on less accessible unconventional reserves."

With the three big LNG projects in Queensland consuming around two-thirds of their production for export markets, any outages - either planned or unplanned - are likely to have a significant bearing on short-term domestic gas prices.

Mr Ng said this in turn will drive greater volatility in prices.

"If most of the backup supply comes from relatively expensive gas peaking power stations, electricity prices will increase."

More pressure on coal fired power will lead to closures

However, in the longer term, Mr Ng noted a number of factors that may help keep a lid on price increases, such as the addition of more low-cost renewable generation and the closure of large industrial power users such as aluminium smelters.

"This should put downward pressure on prices," noted Mr Ng.

"Although the market will remain susceptible to price spikes to the extent that new renewable capacity displaces base load thermal generators."

Moody's conclusion is net effect will be more be more closures of coal-fired power as base load generators that are unable to adapt will have to scale back production permanently to avoid losses.

"Most thermal base load generators are designed to maintain a consistent level of production, and require prolonged ramp-up periods after a shutdown," Mr Ng said.

"As penetration of low-cost renewable generation increases, these generators will become less competitive, making it harder for them to sustain operations based on the current market structure."

"Generators that can rapidly adjust output in response to price swings will likely benefit, but those that cannot may no longer be commercially viable."