Analysts say a worsening drought may drive up wholesale power prices, acting as a potential launching pad for a royal commission by a government focused on cutting electricity costs.
Energy Minister Angus Taylor has outlined his ambition to drive down power costs amid a forecast rise in wholesale prices, but there are concerns a price rise driven by the drought may be used to launch a royal commission.
“I will allow nothing to get between me and bringing down prices. No distraction, absolutely nothing,” Mr Taylor told 2GB's Alan Jones earlier this week.
The Australian Energy Market Operator has listed drought as an immediate threat for the upcoming summer, as it reduces water available for hydro generation and for cooling thermal power plants.
One industry expert said a drought could drive up prices, which could act as motivation for government intervention.
“Droughts drive up prices due to the hotter and drier weather which impacts the efficiency of coal plants and water for hydro operations,” he said.
“They will end up using more gas, which will increase prices.”
He said if the government decides to implement a royal commission on the back of more price rises it will make sure it will find "dirty laundry".
“If you have a witch hunt then you’re going to find a witch,” he said.
“The challenge is in what you’re trying to prove as you can’t put the blame solely on retailers for the price rises as there are a number of contributing factors. Haven’t the Finkel Review and the ACCC report already gone over this?
Until recently, wholesale prices had been on a downward trend but the change in government, a failed energy policy and potential drought ahead have led to an increase.
Morgan Stanley utilities analysts Rob Koh said droughts had previously driven up wholesale electricity prices.
“The utilities sector has so far not been impacted by [the drought] but it is something worth monitoring,” Mr Koh said.
“In 2008, we actually had a rise in wholesale prices associated with three or four years of below average rainfall when both the hydro plants had less fuel – less water in the dams – and there were also restrictions on cooling water for thermal plants.
“The Bureau of Meteorology (BOM) has a 50 per cent probability (roughly double the normal chance) of an El Niño event for this coming summer which will be hotter and drier and therefore we have seen some of the forward curve move up a little bit to reflect the higher risk for prices.”
NSW has had the driest winter since 1965, with the state now declared to be fully in drought.
BOM forecast below average rainfall for the season ahead, while water levels in Snowy Hydro largest dam, Lake Eucumbene, fell to 18 per cent capacity compared to 35 per cent last year.
ERM Power chief executive Jon Stretch said if there were a royal commission it would be open to discussing the market with the government, however, “whether that merits considerable spend by taxpayers on a royal commission is debatable".