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Australia / Press Releases
Burnt Out: COVID-19 Hastens the Demise of Fossil Fuel Industry

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by James Caldwell
Aug 23 2020

The COVID-19 pandemic is expected to have a long term impact on Australia’s electricity sector. Government lockdown and social distancing restrictions aimed at containing the virus have significantly altered Australia’s electricity demands, and contributed to a decline in wholesale electricity prices. The decline in prices is eroding the viability of coal-fired power stations. At the same time, investment in next-generation renewable generators continues to rise.

‘The closure of businesses across the economy has contributed to a sharp downturn in electricity demand from commercial markets. At the same time, growth in the number of Australians working and studying from home has contributed to a strong upswing in electricity demand from residential customers,’ said IBISWorld Senior Industry Analyst James Caldwell.

The upswing in demand from residential customers is unlikely to offset the decline in demand from commercial markets, largely due to the increasing prevalence of small scale residential solar energy systems.

‘Electricity demand fell by an estimated 4.1% in 2019-20, relative to 2018-19. Close to 2.0% of this decline is attributable to the outbreak of COVID-19, while the other 2.1% is attributable to the increasing uptake of small-scale solar energy systems,’ said Mr Caldwell.

Good news for consumer energy bills

Falling demand for electricity generation has driven a sharp decline in wholesale electricity prices over the course of the pandemic, to their lowest levels in five years. Wholesale electricity prices make up approximately one-third of consumer electricity bills, with the remaining costs covered by network charges. Declining wholesale electricity prices are expected to flow through to reduced prices at the retail level, driving a 15.1% decline in revenue for the Electricity Retailing industry in 2019-20.

A sharp decline in the price of fossil fuels has reduced operating costs for firms in the Fossil Fuel Electricity Generation industry. The deterioration in global economic conditions in 2020 has led to a sharp contraction in demand for coal and gas, driving steep declines in the prices of these commodities. The average price of electricity generated from black coal is expected to decline by 40% over 2019-20, with electricity generated using natural gas falling by an estimated 50%.

However, these firms have been unable to convert this trend into greater profit margins, due to a need to drop prices to remain competitive with the Wind and Other Electricity Generation industry, the Hydro-Electricity Generation industry and the Solar Electricity Generation industry.

Overall, profit margins in the Fossil Fuel Electricity Generation industry are expected to decline as operators struggle to cover their costs amid a prolonged period of lower wholesale prices. Australia’s coal powered electricity generators are on average over 30 years old, making them prone to breakdown and expensive to maintain. Consequently, their ability to turn a profit is reliant on high wholesale electricity prices.

Despite the decline in commodity prices reducing input costs for fossil fuel electricity generators, these operators are still unable to provide electricity at prices below those of renewable generators, as renewable electricity generation does not require the purchase of fuel,’ said Mr Caldwell.

Renewables in a recovering economy

The share of electricity produced from renewable sources is projected to skyrocket over the next five years, encouraged by lower electricity demand and falling wholesale prices.

‘The falling costs of establishing renewable electricity generation facilities has allowed renewable electricity to account for an increasing share of Australia’s energy mix over the past decade,’ said Mr Caldwell.

Electricity generated from renewable sources is anticipated to account for an estimated 20% of electricity consumed in the National Electricity Market in the current year, up from an estimated 12.6% in 2015-16. These trends are forecast to continue into the future, with an increasing number of renewable generation facilities due to come online over the next five years.

Demand for electricity is expected to grow at a slower rate over the next five years, due to lower immigration, weaker business investment and low consumer spending caused by low discretionary income. Together, these factors are forecast to exert downward pressure on wholesale electricity prices. This trend is likely to hasten the demise of fossil fuel generators, particularly as investment in renewable energy continues to rise. Revenue for the Fossil Fuel Electricity Generation industry is projected to decline at an annualised 0.3% over the five years through 2024-25. In contrast, revenue in the Solar Electricity Generation industry is forecast to rise at an annualised 14.1% over the same period.

IBISWorld reports used to develop this release:

For more information, to obtain industry reports, or arrange an interview with an analyst, please contact:
Jason Aravanis
Strategic Media Advisor – IBISWorld Pty Ltd
Tel: 03 9906 3647