NEM Pricing issues: Fuel costs and NEM prices
The Minerals Council of Australia (MCA) has requested a brief discussion of a number of matters that impact wholesale prices in the National Electricity Market (NEM) regions of Queensland (QLD) and New South Wales (NSW) with a focus on historical prices during 2022.
Members of the MCA are both large fuel suppliers and significant energy consumers.
The discussion is to address the contribution of fuel price and market structure, amongst other factors, to wholesale electricity prices and be supported by historical analysis of outcomes during 2022.
This report analyses the contribution of fuel prices and market structure, amongst other factors, to wholesale electricity prices through 2022 in the NEM.
It shows that high wholesale market prices reflected implied fuel costs that were much higher than the typical long term contract coal prices.
This observation means one or more of the following:
- Generator bids were opportunistically high given the market conditions. This conclusion is consistent with materially lower priced bids either side of the conditions of June and July 2022
- Fuel prices were not represented by typical long term contract prices. This conclusion is consistent with a tiered contract price structure coupled with consumption above lower priced tiers particularly in the critical period of May-June; and
- Generator capacity factors for the year were low and reduced the opportunity for the generators to recover full fixed and variable costs pushing the coal generators up the merit order to such a degree that their bids were structured to be more like those of peaking generators.
Further analysis would be required to assess which alternative(s) best explains the observation.
Any intervention in the interests of customer prices should be directed at customer bill relief. The speed of change-over in generating technology and simplicity of market mechanisms will impact outcomes over the longer term.