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National Energy Guarantee will help keep electricity prices down

National Energy Guarantee to keep power prices down

The National Energy Guarantee (NEG) should put downward pressure on electricity prices, but securing additional sources of dispatchable energy is the key to a long-term solution to Australia’s energy needs. This is the finding of KPMG Economics’ analysis of the NEG, issued today.

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The report underlines the importance to the Australian economy of restraining electricity prices. KPMG modelling shows that a 10 percent increase in the cost of electricity generation would hit GDP by 0.24 percentin the short-term and 0.17 percent in the long-term – a short term cost to the economy of $4.2bn and 26,000 jobs, while over the long run each household would see their disposable income fall by $150 a year.

KPMG’s analysis finds that households and businesses have been smart in adapting to soaring prices in recent years – by reducing usage – but while efficient consumption and demand management have a key role to play, ultimately only additional sources of supply will curb pressure on energy prices.

Brendan Rynne, KPMG Chief Economist, said: “The NEG is capable of reducing electricity prices below a business-as-usual (BAU) case - although that outcome is dependent on its precise design features. The NEG, being a market-based solution, will enable electricity retailers to choose the generation mix that optimises affordability, reliability and reductions in carbon emissions.”

The report finds that NSW, ACT, SA and QLD experienced higher than anticipated wholesale electricity costs of nearly 50 percentin 2016/17 compared to the Australian Energy Markets Commission’s original forecasts. This was on the back of a rise of wholesale electricity costs of between 50 percentand 60 percentacross all the southern and eastern states and territories in 2015/16.

The modelling completed by KPMG Economics shows that certain sectors in the Australian economy are especially vulnerable to rising electricity generation costs in the long run. For example, relatively capital intensive sectors like Basic Non Ferrous Metal Manufacturing sub-sector and the Non Ferrous Metal Ore Mining sub-sector are projected to continue to be significantly adversely impacted in the long run.

This is simply because they do not get a significant offsetting benefit from the reduction in real wages in the long run. The relatively large reduction in household consumption in the long run is the key driver behind the entry of sub-sectors like Gambling, Water Supply, Sewerage and Drainage Services, Gas Supply, and Telecommunication Services into the bottom 20 performers.

Brendan Rynne said: “Formalising policy settings for its production, consumption and transportation have long been challenging; this has become even more complex with the overlay of mitigating global climate change. The high price rises in recent years have been very challenging for businesses and consumers, and while demand management is important, the securing of more dispatchable and flexible sources of generation remains a priority to meet our current and future energy needs.

“These will be combined with growth in intermittent renewables sources in the years ahead, as we continue with an orderly transition to an increasing share of renewables.

“Our high-level analysis suggests that the NEG contains the right mechanisms to put downwards pressure on the cost of electricity compared to a BAU scenario. The importance of restraining prices is shown by our modelling of a further 10 percenthike in the cost of generating electricity, which has a serious consequence for the economy, particularly on household consumption.
“Understanding the next level of modelling and the details of the framework following the COAG meeting later this month will be vital for all stakeholders affected by the current challenges being experienced by the energy sector.”

*A dispatchable source of electricity refers to an electrical power system, such as a power plant, that can be turned on or off; in other words they can adjust their power output supplied to the electrical grid on demand. Most conventional power sources such as coal or natural gas power plants are dispatchable in order to meet the always changing electricity demands of the population. In contrast, many renewable energy sources are intermittent and non-dispatchable such as wind power or solar power, which can only generate electricity while their energy flow is input on them.
Source – Energy Education

Further information

Ian Welch
KPMG Communications
T: 02 9335 7765 / 0400 818 891
E: iwelch@kpmg.com.au

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