Electricity Prices Fall

Electricity prices to fall

Saturday, May 7, 2011

Staff Writer: Colin Dunstan

Author of: Cyclic Heat to Work Conversion Systems: Elegant Simplicity and Beauty in Mathematics (Read more...)

The carbon tax debate in Australia is simply a distraction that stands in the way of changes to energy supply that will lower the cost of electricity.

Reducing the Price of Electricity

All electricity users are being asked to pay for $1.5 billion investments that are planned to sit idle for all but 200-400 hours a year.

No carbon tax is incurred by idle power stations. The interest charges on these idle investments are a far greater contribution to rising electricity costs than the carbon tax.

Understanding the Peak Demand for Electricity

The graph below is created from the Australian Energy Market Operator data for electricity demand and price in NSW through January and February 2011. In this period of 59 days the wholesale price of electricity was nearly always between $20 and $50 per megawatt-hour. This is 2 - 5 cents per kilowatt-hour. The retail price is about 20 cents per kilowatt-hour. The demand was also below 12,000 megawatts throughout virtually the entire period.

However, on just 8 occasions demand exceeded 12,000 megawatts and on 3 of these 8 occasions demand peaked above 14,000 megawatts.

On only 7 occasions the wholesale price of electricity exceeded $50 per megawatt-hour or 5 cents per kilowatt-our. On each of these 7 occasions the price jumped to well in excess of $1,000 per megawatt-hour or 100 cents per kilowatt-hour, and on 2 of these 7 occasions the price rose above $10,000 per megawatt-hour or $10.00 per kilowatt-hour!!!

This seems to explain the reports above -

1. That AGL expects to make a profit by investing $1.5 billion in a gas-fired power station that it plans to operate for only 200 to 400 hours each year.
2. That retail electricity prices will double from 2008 to 2015 due to network costs caused by increased peak demand.

Chasing Shadows with a Negligible Impact on Energy Prices

A carbon tax of $40 per tonne of CO2 will add nearly 4 cents to the cost of each kilowatt-hour of electricity from a coal-fired power station and about half that amount to each kilowatt-hour of electricity from a gas-fired power station.

What of the Major Impact on Energy Prices?

The peaks in demand for electricity and the resulting extreme increases in price that follow are yet to be explained. In the U.S., Enron became quite effective in manipulating electricity supply and price. There is no reason to believe that manipulation of demand would not be equally effective for the deliberate manipulation of price.

No matter what the unexplained cause of these extreme and rare market failures, two things are clear:

1. They are the reason that retail electricity prices are set to double from 2008 to 2015.
2. Assisting up to half a million disadvantaged households across Australia with home visits to assess their energy use will have absolutely no effect on the cause of these price increases and will be of very limited benefit to disadvantaged households.

However on understanding the reasons for these unusual peaks in demand and extreme leaps in electricity prices, it is possible that electricity prices could fall - even with a carbon tax - by simple changes that ensure energy is delivered more cost-effectively.

For instance:

• Identify a small number of large electricity consumers that use electricity during peak demand periods and for purposes that gas could be substituted. Some examples include enterprises that heat large quantities of water, space heating, cooking meals and industrial-scale food processing.
• These electricity consumers could switch to gas and avoid the need for $1.5 billion power stations that sit idle for most of each year.
• The capital equipment these energy consumers invest in - to use gas - will be used throughout the year.
• No enterprise will be sitting on huge capital investments that are under-utilised.

The result - electricity prices can fall.