There is active debate in Australia about electricity prices and how they are influenced by increasing amounts of renewable electricity generation and coal generation closure. Some contend higher renewable generation is associated with higher electricity prices and so the solution to higher prices is to return to greater coal-fired electricity generation. Others suggest renewables reduce prices and so the solution to higher prices is to expand renewable generation.
Price comparisons are complex not least because customer markets are diverse (e.g. households versus businesses, big households versus small households, engaged customers versus disengaged customers). In addition, prices can be measured in many different ways (e.g. wholesale versus retail, before or after taxes) and the electricity value chain is long and complex. It is difficult also to objectively untangle the various factors that affect wholesale and retail prices. Recognising these difficulties, this report responds to four questions:
- Has the rise of renewable generation caused household prices to rise or fall in other countries that have pursued renewable electricity generation?
- Do renewable subsidies explain Australia’s high electricity prices?
- Does the increase in renewable electricity generation in South Australia explain why their prices are higher than in the rest of Australia?
- Are customers better off if subsidies are directed to extending the life of existing coal fired generating plants or promoting greater renewable generation?
To answer these questions we examine first the academic literature on the impact of renewable generation on prices in Australia and in other countries. We then examine household electricity prices (and their constituent elements) in those countries in Europe (Denmark, Germany, Italy and Great Britain) with the highest prices and where renewable generation has grown rapidly. We then compare their prices to the prices paid by households in Australia’s contestable retail markets. Finally, we develop an econometric analysis of the South Australian data to identify how South Australia’s prices have been affected by renewables and coal generation closure.