Wholesale electricity costs are expected to rise between 5% and 15% a year until 2018-19 in most states and territories, while demand remains flat, the Australian Energy Market Commission says in its annual report on household price trends.

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,” Pierce said.

The AEMC annual report on 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.

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The last gasp

The closure of the Hazelwood power station in Victoria will lead to wholesale price increases in most states, the AEMC has predicted. The report estimates 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 solar and wind on the rise and coal-fired generators retiring, means electricity flows and wholesale prices are changing, Pierce said. “This is leading to greater variation in residential bills depending on where you live, and how much electricity you use.”

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The run up

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,” Pierce said.

Gas is back

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,” he 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.

Future increases gas prices will push up input costs for generators and lead to higher costs in the wholesale electricity market, he said. “The report says gas prices are expected to remain flat but this is a volatile sector.”

Network costs, which make up about half of a residential electricity bill, are expected to increase slightly across most jurisdictions, although there is some uncertainty due to the legal challenge of distribution network revenues in NSW, the ACT, South Australia and Victoria.