Consumers decry cap that lets spot Australian power prices rise to highest in world

Consumer advocates are calling for an overhaul of a market cap that allows wholesale power prices in Australia’s biggest grid to periodically soar to the highest levels in the world. 

Groups including Energy Consumers Australia, which represents small energy users, say households are needlessly paying billions of extra dollars under a cap they claim does little but hurt them. 

The market price cap applies to the NEM, which serves more than 10 million customers along Australia's eastern seaboard.

Under the cap, spot electricity prices can rise to as much as $18,600 a megawatt hour, or $18.60 a kilowatt hour.

Average retail electricity prices are between 30 cents and 40 cents per kilowatt hour, with a typical household using about 17 kilowatt hours a day.

Since 2019, the market cap has risen from $14,500 a megawatt hour and it is set to jump 16 per cent to $22,800 from July next year.

By 2028, it will be almost $27,000 a megawatt hour.

According to the Australian Energy Market Commission, the body which sets the rules in the NEM, a high price ceiling is a key part of its "reliability framework".

That framework aims to ensure there is enough capacity in the market to meet demand at almost all times by providing a "signal" to investors to build new plants when needed.

The higher prices go, and the more often they go higher, the stronger the signal to generators to invest.

At the same time, however, the commission notes the cap is also designed to protect consumers from even more extreme spikes in prices.

But Brian Spak from Energy Consumers Australia says the cap appears to be achieving neither of its objectives.

Mr Spak says the measure is failing to entice new generation capacity, which is being underpinned by government subsidies in almost all instances.

Despite this apparent failure, he says the cap is rising at a steep rate and imposing more and more costs on consumers, who eventually have to wear its effects in the prices they pay to retailers.

"All of the research seems to suggest no, it has not (been providing an incentive for new generation), and it hasn't for a long time," Mr Spak says.

"Since 2012, all of the new large-scale generation that's been built in the national electricity market has relied upon significant support from government.

"It's not being built because of high market prices. It's government support."

According to Mr Spak, the cap is, in effect, the price consumers are notionally willing to pay to prevent a blackout.

He notes that while the ceiling price is rarely reached, the frequency of higher prices in the market — including those above $10,000 a megawatt hour — is rising.

Hours in which spot prices reached those heights shot up last year in particular, as coal plant outages, transmission faults and wind droughts conspired at times to squeeze supply.

Mr Spak says even a few instances of prices at or near the market cap can have an outsized effect on the costs incurred by consumers.

"Even though it happens infrequently, it can still have a meaningful impact," he says.

"Just from 2019 to 2024 … prices above $10,000 per megawatt hour, so this is, you know, fewer than 15 hours a year, have contributed to 10 per cent of the total cost of electricity supply."

Electricity market 'an outlier'

Mr Spak says Australia is also an "outlier" in its tolerance of high wholesale prices.

He notes much of this can be attributed to the design of the electricity market.

The NEM is what's known as an energy-only market, where wholesale prices are allowed to go to very high levels to provide the incentive needed by investors to build new plants.

Most other countries, he says, have a "capacity market", in which generators are paid to be available when required, along with any energy they produce.

Spot prices, however, are capped at much lower levels in capacity markets to reflect the value of the "capacity" payments generators receive.

"Australia is in a certain way a global outlier in the way that the national electricity market is designed," Mr Spak says.

The concerns by ECA and other user groups including the South Australian Council of Social Service and the Justice and Equity Centre come amid a review of the reliability framework.

Carrying out the review is a body known as the reliability panel, which sits under the AEMC and is comprised of representatives from across the energy industry.

In response to questions, a spokesperson for the reliability panel acknowledged the questions raised by Energy Consumers Australia and other groups.

But the spokesperson stressed the market cap and other reliability measures were important parts of efforts to ensure investment in capacity and stability for the system.

"(The) review … will comprehensively examine whether current settings remain appropriate for expected market conditions in 2028," the spokesperson said.

"This review will consider all stakeholder feedback, including concerns raised by Energy Consumers Australia.

"Our analysis shows that ensuring adequate investment in reliable capacity ultimately leads to lower long-term prices for consumers than would otherwise be the case."

Solar glut and a 'missing money' problem

For their part, big electricity companies such as AGL and Alinta support the price cap and its higher trajectory.

In a submission to the review, Alinta insisted the cap still played an "important role in supporting investment in both new and existing capacity".

The company warned that setting the cap too low would make worse what it described as "the missing money" problem.

This refers to the collapse in wholesale prices at certain times — particularly during the middle of the day — when renewable energy led by solar power floods the market.

Retailers, including Alinta, claim the trend is making it harder for them to recover the big costs of building power plants.

They say allowing prices to rise to extremely high levels at other times can help offset this effect.

"While increasing the (price cap) is not a viable solution to the missing money problem, setting it too low will exacerbate it," Alinta wrote in its submission.

"Not only will there be fewer opportunities to recover fixed costs, but there will also be less revenue available in these rarer instances to make participants whole."

Brian Spak from Energy Consumers Australia is sceptical.

He questions whether the price cap is still serving its stated purpose.

Wholesale costs, which make up about 40 per cent of most people's electricity bills, have soared in recent years, he notes, thanks in no small part to bouts of extreme prices.

"Consumers are doing it tough right now," Mr Spak says.

"Electricity bills are high and going higher.

"Often when the market price cap is hit, it's because a transmission line falls down or a coal plant fails.

"And at these times, it's not clear to us what the value of this … global outlier of a market price cap is really providing."