The concept of supply and demand is fundamental to the mechanics of the wholesale market. In the case of energy generation, demand is how much energy is needed and supply refers to how much energy is available for dispatch through the energy network, from energy generators like coal or gas power plants and wind farms.
This supply / demand balance has a corresponding impact on wholesale prices. More on that later…
But first, what are wholesale prices?
Wholesale prices are the prices paid to generators for the supply of electricity on a day-to-day basis.
What are some of the recent influences on wholesale prices?
Wholesale electricity spot prices have reached historical highs in recent years, primarily because of:
- Less supply – The sudden closure of Hazelwood power station in 2017 meant there was not enough time for new generation to be built as replacement, resulting in less generation available to meet electricity demand (a tighter supply and demand balance).
- Increased input costs - Gas and coal prices have been increasing. These input / fuel costs directly impact the cost of supplying electricity.
How are wholesale prices determined?
Electricity from utility-scale generators, including AGL’s generators, is sold on the spot market. All electricity supplied to the spot market to meet demand, is sold at the ‘spot price’. Then, the average spot price over a period of time is the wholesale price.
How does the spot market work?
The spot market was designed to find the lowest cost electricity generation per Mega Watt hour (MWh), by prioritising supply of energy from the lowest bids first.