ElectricityPrices


The above graph shows wholesale electricity prices by month in the National Electricity Market, which covers the Eastern States.  Solid lines are the 24-hr averages, dotted lines the average price from 7am to 10 pm on weekdays.  Although prices are reasonably stable for most of the time, there are notable peaks when the the price of wholesale electricity is much higher than the retail price.  
The effect of this problem on retail electricity prices was discussed in Ellen Fanning's excellent article The Hidden Cost Of Infinite Energy:
"So at the moment, if you run your two-kilowatt split cycle air conditioner for four hours on a hot afternoon that uses, say, eight kilowatt hours of power at say 20 cents - that's about A$1.60 cost to you. Say $2. Now if instead you paid the real cost of generating that power at peak times, it would increase to as much as $10, $12 per kilowatt hour. So that would take the cost of running that air conditioning over four hours to $100. Now if we add in the cost of the network it would easily double."

Note that $12 per kWh implies a wholesale cost of $12,000 per MWh.  Sometimes the prices are even higher.  The average price paid by NSW electricity companies per kWh of power supplied by the wholesalers on 1 Feb 2011 between 7 am and 10 pm was $20 ($2,028.49 per MWh), 100 times more than the price it was sold to customers.  The price in Qld was $1272 but only $52 is SA.  When supply cannot meet demand, companies that must meet government-set reliability standards have no choice but to meed their obligations, whatever the cost.   

The benefits from demand management, e.g. turning of appliances using standby power, or air conditioners for 15 minutes in every hour, or running the dishwasher on overnight power, can be achieved only if everyone does them, to avoid the price spikes and the significant expense of firing up and bringing additional generators into service, and upgrading transmission and distribution lines to cope with the demand experienced on perhaps 40 hours per year. Significant costs have been incurred maintaining and expanding the capacity of the distribution system so that 51% the average Australian electricity bill is to cover the cost of electricity poles and wires.  

Like air pollution or greenhouse gas emissions, the need to pay excessive costs for peak electricity is another example of market failure.  Consumers are not charged for the costs they impose on the system when the planned supply cannot meet demand.  An individual company acting alone to install time of use meters would incur substantial cost, but gain little benefit if it still had to pay elevated market prices because other companies failed to take similar measures to reduce peak demand.
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