Energy Bills Set to Drop: Renewables Drive Down Wholesale Power Prices
Good news is on the horizon for Australian households and small businesses, with benchmark power prices anticipated to fall in the coming year. This welcome relief is largely attributed to the increasing integration of renewable energy sources, which are effectively reducing wholesale electricity costs across the National Electricity Market (NEM).
The Australian Energy Regulator (AER) has recently unveiled its draft for the default market offer (DMO) for the 2026-27 period. This DMO acts as a crucial safety net for consumers in south-east Queensland, New South Wales, the Australian Capital Territory, and South Australia. It sets the maximum price that energy retailers can charge consumers who aren’t currently on a more competitive market offer, serving as a vital benchmark for price comparisons across the energy provider landscape.
The proposed draft DMO indicates a notable decrease in annual prices. For households, prices are projected to fall by a range of 1.3 to 10.1 per cent, depending on their specific region. Small businesses are set to experience even more significant reductions, with prices expected to decrease by between 7.6 and 21.2 per cent.
Clare Savage, the chair of the AER, expressed optimism about these figures, stating, “This draft decision points to the potential for some welcome relief for households and small businesses after several years of rising energy costs following Russia’s invasion of Ukraine.” This sentiment follows closely on the heels of Victoria’s default market offer announcement last week, which also revealed a 3 per cent decrease in prices.
The reduction in electricity prices comes as a much-needed reprieve after the significant shock of 20 per cent increases that followed the Russian invasion of Ukraine. Ms Savage elaborated on the underlying reasons for this positive shift: “This last 12 months we have seen a reduction in the need for more expensive gas-fired generation and hydro facilities, as a result of having more renewables and in particular battery capacity in the system.”
The Drivers Behind Falling Power Prices
The downward trend in wholesale power prices across the NEM is a direct consequence of renewables exerting downward pressure on costs, particularly during daylight hours. This anticipated drop was foreshadowed late last year when wholesale prices began to decline.
Alison Reeve, the Grattan Institute’s energy and climate change program director, highlighted the growing importance of battery storage in the electricity system. “It seems like what the drivers were more wind generation, which is cheaper, and then also more batteries coming in,” she explained. “The effect of those batteries is that they reduce the prices at peak times, which means that we’re using less gas and hydro, which were otherwise the most expensive forms of generation.”
However, the extent of price reductions will vary significantly by location. “If you’re in south-east Queensland, they’re dropping by about 10 per cent; if you’re in South Australia, they haven’t dropped very much at all. There’s definitely some real regional effects going on. But I think it’s positive that, overall, we’re starting to see prices moderate,” Ms Reeve commented.
She further noted that south-east Queensland experienced the steepest price hikes in 2022 and 2023, largely due to its exposure to coal prices. The export price of coal was a major determinant of electricity costs during that period. “That’s kind of come off a lot now because coal prices have really dropped a lot,” she added.
The energy mix has seen a notable shift. In 2022, gas constituted 6.6 per cent of electricity production, a figure expected to decrease to 4.5 per cent by 2025. Conversely, coal’s contribution has decreased from 58.3 per cent in 2022 to an anticipated 51.9 per cent by 2025. Despite the increasing presence of renewables, gas and coal continue to play a significant role in shaping market prices.
Climate Change and Energy Minister Chris Bowen emphasised the benefits of renewable energy, stating, “It is no coincidence that energy price reductions are coming as Australia surpasses the milestone of 51 per cent renewable electricity in the National Electricity Market for the first time. That is a direct result of more of the cheapest form of new energy entering the grid.”
Ms Savage drew a distinction between the price surges of 2022 and the current situation. She explained that the 2022 increases were a confluence of domestic and international factors, coinciding with Russia’s invasion of Ukraine. “We saw a rapid increase in international coal and gas prices. We also had quite challenging domestic conditions — we had flooding over summer that led to some coal mines getting wet and unable to produce coal at the time. We had significant flood levels through the hydro facilities, so they were not able to generate in quite the same way, so that combination of international and domestic pressures led to a really quick increase in contract prices in Australia. We haven’t seen that at this point.”
Global Instability and Australia’s Energy Market
The ongoing conflict in the Middle East is already impacting global energy prices, though its precise effect on Australia remains to be seen. The potential closure of critical supply routes for global fossil fuels, such as the Strait of Hormuz, could lead to further price volatility.
Australia, as the world’s third-largest gas exporter, is not entirely insulated from international price fluctuations. The absence of a policy mandating gas reservation for the domestic market means electricity producers often rely on the volatile spot market for their gas supply. The federal government is actively developing a reservation policy, slated to commence next year, which aims to mitigate this exposure.
Alison Reeve of the Grattan Institute noted, “…to the extent that international fossil fuel prices are driving our prices, the more that we’re not using fossil fuels, the more shielded we are from that.”
A New Offer: Three Hours of Free Daytime Power
A significant new initiative set to be introduced from July is the Solar Sharer Offer (SSO). This offer will provide eligible customers in Queensland, New South Wales, and South Australia with three hours of free electricity during the day, a period when solar power generation typically peaks.
Initial concerns about retailers potentially increasing prices outside these free hours have been addressed by the AER. Ms Savage confirmed that the program has been designed to prevent such outcomes. The DMO now calculates the average cost of power across the day, excluding the three hours of free electricity.
Consumers who actively shift their electricity usage to the free daytime period can expect to save money. Those who do not significantly alter their consumption patterns will likely see similar bills to current rates. “That actually helps give that regulated protection to customers that they know that they’re not going to get ripped off in the morning or the afternoon if they decide to go on to a solar sharer tariff, and they can move some of their load. So I think that’s an important principle,” Ms Savage stated.
Furthermore, Ms Savage believes the program will benefit all power customers, irrespective of whether they opt into the SSO. By reducing demand during the evening peak, there will be less reliance on expensive gas, leading to lower power prices across the board. “For everybody that does shift load, it gives bill savings for all of us, right, because we flatten the load profile,” she concluded.
