The Australian Energy Market Commission says the average Australian's electricity bill will rise by $78 from mid next year, with a new report blaming the renewable energy target and the closure of coal-fired power stations for the price hike.
The AEMC's annual report on household price trends looks at what is driving changes in the underlying cost components of household electricity bills. It analyses the competitive market sectors of wholesale generation and retail, the regulated networks sector, and price implications from government environmental policies.
AEMC Chairman John Pierce said the report shows the retirement of coal-fired generators will increase residential electricity prices in most places.
"Prices are likely to rise in most parts of Australia over the next two years, but expected to fall slightly in South East Queensland and Tasmania," Mr Pierce said.
Wholesale costs are estimated to increase by between 5 per cent and 15 per cent each year over 2015/16 to 2018/19 in most states and territories, while demand remains flat.
The closure of the Hazelwood power station in Victoria will lead to wholesale price increases in most states, the reports says, estimating the national average residential bill will be $78 higher in 2018/19 due to Hazelwood retiring, compared with Hazelwood continuing to operate.
The report also shows significant variation in wholesale prices across the states.
"The changing generation mix, with more solar and wind entering the market and coal-fired generators retiring, means that electricity flows and wholesale prices are also changing. This is leading to greater variation in residential bills depending on where you live, and how much electricity you use," said Mr Pierce.
The report found a range of factors will drive wholesale electricity costs over the longer term.
"Wholesale electricity costs are a key driver in customer bills. These costs are increasingly connected with the mechanisms used to achieve emissions policy objectives – that is, how the energy sector will contribute to the emissions reduction target set by the government as part of the Paris commitment," said Mr Pierce.
System security costs will also increasingly drive wholesale costs.
"Having more renewable non-synchronous generation affects the technical characteristics of the electricity system. We can expect that additional services will be needed to manage system security, potentially impacting retail prices over the longer term," Mr Pierce said.
Electricity prices are also affected by the price for gas through gas-fired power stations, which are expected to play a larger role in the market in the future.
"Any future increase in the price of gas will result in higher input costs for generators, flowing through to higher costs in the wholesale electricity market," said Mr Pierce. "The report says gas prices are expected to remain flat but this is a volatile sector."
Network costs, which make up around half of a residential electricity bill, are expected to increase slightly across most jurisdictions, although there is some uncertainty due to the current legal challenge of distribution network revenues in New South Wales, the Australian Capital Territory, South Australia and Victoria.
Mr Pierce said price trends would affect individual households differently depending on how each consumer uses electricity, and how willing they are to switch to a better energy deal where market offers are available.
"No two households use energy in the same way. Knowing how much power you use and when, will be the key tool in controlling electricity costs in the future," Mr Pierce said.
Reforms are underway in most jurisdictions to give consumers greater control over how they manage and use energy:
From 1 July 2017 network businesses will be required to structure their prices to better reflect the consumption choices of individual consumers. This aims to give consumers price signals about the cost of using electricity in different ways and at different times, so they can make more informed energy choices.
New rules to open up competition in metering come into force from 1 December 2017 and will give consumers more opportunities to access a wider range of new energy products and services with real time information about their energy use.