Electricity prices are crashing but don't expect cheaper bills anytime soon

The timing couldn't have been more uncomfortable.

After two years of hefty, almost obscene, power price hikes, and the very day after former competition czar Allan Fels delivered a damning report on price gouging, AGL stumped up a stunning half year profit lift.

The fourfold increase in core earnings even took stock market analysts and investors by surprise. They responded with a surge of buying that sent the power company's shares 10 per cent higher.

After last year's huge losses, the Mike Cannon-Brookes backed outfit faced whatever the opposite of a perfect storm is called.

The wholesale price of electricity dropped sharply as coal prices collapsed and more renewables entered the system while AGL, along with the handful of other big integrated generator/retail players in the market, benefited from the huge price increases awarded by the regulator.

Profit margins expanded magnificently, largely thanks to the increased tariffs paid by consumers.

It's highly likely we'll see similar results from Origin and Energy Australia which, between them, control the bulk of our once publicly owned energy utilities.

They generate about 60 per cent of the electricity along the east coast and into South Australia and dominate the retail business, a situation many find uncomfortably concentrated.

When Vladimir Putin decided to invade Ukraine, energy prices globally soared. It was one of the biggest factors that kicked off a wave of inflation across the developed world that has since decimated household budgets and spending power.

Our big power companies were given permission to raise prices — by more than 40 per cent in the past few years — to cover their costs, further adding to the pain for consumers. Even worse, those price hikes directly fuelled inflation readings which, in turn, led to higher interest rates.

But the energy crisis is over and wholesale electricity prices have plummeted as this graph from the energy market operator shows.

With that energy crisis now over, you'd be forgiven for thinking there must be ample room for some retail energy price relief.

But don't hold your breath. Most experts believe that, while the price hikes are done, there is little hope for any significant price cuts.

How your power bill is calculated

Some time next month, the Australian Energy Regulator will announce a draft proposal on this year's power prices.

Electricity pricing is an incredibly complex market. Retailers buy power on five minute intervals but write long term contracts with consumers. Prices can, and often do, swing wildly every couple of minutes.

When coal prices surged in the wake of the Ukraine invasion, retailers were caught off guard.

The subsequent price rises that we've seen in recent years essentially were a delayed reaction to those market movements.

But the cost of generating power has since crashed, the figure upon which the regulator bases what's known as the Default Market Offer — the rate delivered to anyone who doesn't seek a better deal themselves — has barely moved since this time last year.

There are multiple reasons. The biggest is that the regulator tries to anticipate shifts in demand and supply and sets prices accordingly. It has been constantly warning of electricity generation shortfalls into the future as coal generators come off line earlier than anticipated and which are not being replaced by renewable energy quickly enough.

It's not just power generation and a retail mark-up that's incorporated into your bill.

There is also the cost of infrastructure, the poles and wires that deliver power to your house and business. That accounts for a little under half your total bill and the costs for those extra transmission lines has been soaring as renewable energy gathers momentum.

Many large scale renewable plants are located in areas that have never generated power. They are located to maximise energy generation which usually isn't where the old coal fired plants were. And many are having trouble winning community approvals to build those new transmission lines across the country which is holding up the transition.

Coal's last stand

Around the turn of the century, coal was responsible for generating almost 85 per cent of all our electricity. The rest mostly was from other hydrocarbons like oil, gas and diesel.

These days, coal accounts for less than half of our generation and that output is scheduled to drop dramatically in the next decade. But it still is a force.

Gas contributes about 20 per cent of power generation and renewables now deliver about 32 per cent.

The rise of renewables has fundamentally altered the pricing dynamics of electricity generation. Because it requires no fuel, it can be delivered into the market at extraordinarily low prices and still make returns.

That's why it holds the allure for cheaper energy prices into the future.

At peak times, it pushes the spot electricity price to zero and sometimes negative, a disastrous situation for coal generators that cannot shut down.

According to AEMO, in the December quarter around 20 per cent of power was delivered at zero or negative prices, a record high for any quarter.

While renewables, which peak during the middle of the day as solar ramps up, is largely responsible for this, by far the biggest contributing factor to the decline in spot power prices in the final quarter of last year was because of an uptick in black coal fired generation.

And that's because the cost of coal has crashed.

The shift to clean energy may be accelerating but coal remains a powerful force when it comes to electricity prices.

Delayed reactions

Transitions are never cheap. And when it comes to electricity, we are smack in the middle of one.

As Dr Bruce Mountain explained to ABC's Dan Mercer late last year, signing up for a power plan with an electricity retailer is a little like taking a fixed price mortgage with a bank.

You're locking in a price and avoiding the wild gyrations that a volatile market like electricity generation can produce. But sooner or later, an energy crisis will catch up.

While we'll never know the answer, it is reasonable to question whether we may have been better off without the privatisation of a basic utility like power during the past 30 years. Or, at least, whether greater care had been exercised in the sale.

Despite all the regulations, statutory bodies and complexities, the concentration of power within our power supply industry defies all the rules of efficient market operation.

The idea that the biggest power generators have been allowed to become the biggest retailers has been one of the greatest failures in Australian competition policy.

To a large extent, it was driven by the mania of state governments to privatise public assets. In their rush to maximise the short term gain, they were prepared to wave aside any considerations of longer term pain.

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