Energy prices have been rising for both households and businesses, leading many to question why their power bills remain high despite the growing share of renewable energy in the grid. Aussies in particular have been feeling the pinch, as the transition to renewables has yet to result in the expected reduction in power costs.
The promise of cheaper power through renewables has been a major talking point in recent years, but the reality appears more complex. A recent working paper from Griffith University’s Centre for Applied Energy Economics & Policy Research provides insights into this issue, highlighting the various factors influencing energy costs.
According to the Energy Council, the cost dynamics behind power bills are influenced by not just the energy mix but also infrastructure, policy, and global market factors.
A Renewables Grid vs. Traditional Energy
The study presents a comparison between a 50% renewable energy grid and a traditional grid powered solely by coal and gas.
The findings reveal that while renewables are the cheapest form of energy, the wholesale costs for a grid dominated by renewables are still higher than the $40/MWh average spot price observed in the mid-2000s, even after adjusting for inflation up to 2025.
Interestingly, reverting to a grid powered by only coal and gas would result in even higher costs.
In fact, the paper notes that coal and gas generation “prove to be surprisingly expensive” when compared to the renewable scenario.
The Cost of the Energy Transition
The shift towards a renewable grid involves significant investments beyond just the cost of generation.
It requires new transmission infrastructure and energy storage technologies, such as batteries and pumped hydro, to support the variability of renewable energy.
This transition is part of a once-in-a-lifetime transformation, but these investments come with a hefty price tag, which has not yet been reflected in lower energy bills.
Governments and industry stakeholders initially believed that renewables would lead to cheaper power, and they “had reasonable grounds for saying so” until recent developments.
Government Expectations and Reality
Governments, regardless of political affiliation, have long championed the transition to renewables, with the promise that it would reduce power bills.
The analysis in the study points out that when governments introduced renewable policies or targets up until 2022, they “had reasonable grounds for saying so.”
The cost of wind and solar generation had indeed dropped substantially, creating the expectation that these technologies would deliver lower energy prices.
However, unforeseen external factors like the Russia-Ukraine war in 2022, rising construction costs, higher interest rates, and supply chain disruptions have caused the costs of renewable energy projects to surge.
These developments have shifted the landscape, making it clear that achieving cheaper energy isn’t as straightforward as once anticipated.
The Rising Costs of Coal and Gas
The economics of coal and gas have changed dramatically in recent years. In the mid-2000s, coal and gas were the cheapest options, but today, their costs have risen substantially.
The price of Newcastle coal is now eight times higher than the long-term supply available in the mid-2000s. Similarly, the price of gas has quintupled due to international supply dynamics and a structural shortage.
Additionally, the costs of building new gas-fired power plants have risen with inflation, but constructing new coal-fired plants has become significantly more expensive due to the need for ultra-supercritical plants, higher construction costs, and stricter environmental regulations.
