Amid the finger pointing and theorising about Australia's rising power prices, there's one culprit often missing from the list: China's determined drive to improve its air quality.

Key points: NSW coal generation costs have risen 75pc since 2015, roughly inline with export price movements

NSW coal generation costs have risen 75pc since 2015, roughly inline with export price movements NSW coal generators are becoming increasingly important price setters in the NEM

NSW coal generators are becoming increasingly important price setters in the NEM Renewables growth will push out gas generation, leaving NSW as most expensive power source while cutting industry profits

Sure, the Chinese are still burning coal to generate power and make steel, but they are using higher quality Australian combustible rock rather than their locally mined, higher-ash and more sulphurous product.

While gas has traditionally been seen as the marginal price setter for power generation, black coal, and in particular News South Wales black coal, is an increasingly important benchmark.

There are a couple of dynamics at play including Asia's demand for Australian thermal coal.

The growth of renewable power sources is also having an impact as it pushes expensive gas generation gas out to fringes.

That often leaves NSW black coal generators as the next most expensive power source running, and therefore the east-coast market price setter.

Unlike Queensland generators that source "captive" coal near the power stations, south of the Tweed there is competition for coal being shipped out through the Port of Newcastle, heading largely for Asia and India.

While the NSW fuel price has not followed the export price up directly in lock step, it has nonetheless been heavily influenced by the vigorous competition from offshore buyers.

NSW generators compete on global market

NSW generators are bidding against big importers from Asia for increasingly expensive fuel. ( Supplied )

The NSW generators still manage to get their coal at a discount, thanks to price protection from long-standing contracts, although they will mostly expire by 2022. AGL has some that run through to 2025.

The other significant discount open to NSW generators is they can get by burning lower quality coal.

Japan and China are the biggest markets for the most expensive, cleaner, high-energy, low-ash coal.

South Korea, India and New South Wales chew through the lower grade stuff.

However, since the closure of the Hazelwood power station in Victoria, NSW has been forced to buy more coal above contracted volumes, a lot of which has been at the higher export-parity price.

On figures crunched by energy consultants ITK, while the export price has risen by around 70 per cent between 2015 and earlier this year, NSW's coal fuel cost increased 75 per cent.

Over the same period, Queensland coal generators have enjoyed marginal deflation and now have coal fuel costs around half those of NSW.

Average coal prices and costs of generation

2015 2016 2017 Q1 2018 Average Newcastle export price ($/tonne) $76/t $88/t $115/t $130/t Weighted average NSW fuel cost ($/tonne) $40/t $45/t $58/t $69/t Weighted average Qld fuel cost ($/tonne) $36/t $36/t $35/t $34/t NSW coal generation cost ($MWh) $16 $18 $24 $28 Qld coal generation cost ($MWh) $15 $15 $14 $14

Source: ACCC/ITK

Power prices and generation costs: A quick explainer . Short run marginal cost (SRMC): These are essentially the fuel costs, the cost of the coal or gas that must be burnt (measured in megawatt hours of MWh), but also the wear and tear incurred in turning the unit on. Wind and solar don't have fuel costs.

Long run marginal cost (LRMC): This is an estimate of all of the costs incurred over the life time of an electricity generator divided by its expected production. This includes not just the fuel costs, but the annual fixed costs such as management, and maintenance, the cost of rehabilitating the site at the end of its life and the recovery of the capital investment. As well the costs include the annual finance costs. For wind and solar plants the capital investment is by far the biggest part of costs. National Electricity Market (NEM): Is a "gross pool" of power available to the market. All electricity produced, except behind the meter rooftop solar, has to be sold into the pool and all electricity consumed, except rooftop solar, has to be bought from the pool. Australian Energy Market Operator (AEMO): The regulators runs the market, estimating demand and running continually runs auctions for supply. Generators submit bids at which they are willing to supply into the pool, basically a quantity of power they are willing to supply at a price. Bid stack: AEMO arranges the bids in order of cost (the bid stack), lowest cost first, until the total supply quantity matches estimated demand. The price is set at the price of the last bid accepted. All successful bidders receive the price of the last bid accepted, not the price they bid in at. Half hourly prices set in the pool in this way can be volatile. Source: ITK, ABC News

This shift is important given the structure of the National Electricity Market (NEM) where generators bid into what are effectively auctions every 30 minutes run by the Australian Energy Market Operator.

AEMO arranges the bids into a "price sack". The market price is the last bid accepted.

No generator will make a bid that doesn't cover the most basic "fuel cost", or the Short Run Marginal Cost (SRMC).

"If the price is set below their SRMC they will lose cash by producing," veteran energy analyst and ITK principal David Leitch said.

"If the price is above their SRMC then they will earn a contribution towards covering their fixed costs and maybe making a profit."

How does the price-stack stack up?

For renewables like wind and solar the SRMC is close to zero.

Next up is brown coal in Victoria. However, it is becoming more unreliable and expensive.

Victorian brown coal generation is becoming increasingly unreliable and expensive. ( ABC News: Michael Barnett )

"The coal cost there used to be as low as $2-to-$3 a megawatt hour (MWh), but in our view costs have increased significantly over the past 10 years and not just in the open pit coal mines," Mr Leitch said.

"We think marginal costs in Victoria are perhaps $5-$6MWh."

Queensland coal follows at $14MWh, then NSW coal at $28MWh. At lastly, and most expensively, there's gas.

As Mr Leitch notes, at the current domestic gas price of $9/gigajoule, even an efficient "combined cycle" gas generator has a fuel cost over $63MWh.

Gas sets the marginal price for all generators at $65/MWh under average electricity demand conditions. ( Supplied: NEM Review, ITK )

The average demand over all half hours in the NEM is 20 gigawatts (GW).

It generally bounces around between 15-and-26 GW. On hot days demand pushes up around 35-to-45GW.

But in ITK's base case modelling (19GW), the price settles at $65MWh bid by a gas generators.

"The coal generators and wind and solar also receive $65MWh with the excess over their variable cost going to fixed cost and then profit," Mr Leitch said.

Gas generation under pressure

As the chart above shows, if demand is less than 18GW, say in the evening, then NSW coal becomes the price setter.

The other dynamic is the build-up of supply of renewables pushing gas further along the price stack.

The current pipeline of solar and wind projects sees the capacity of projects with a near-zero cost of fuel expand from 2GW to 8GW in coming years.

If the average demand remains at 19GW, then NSW coal becomes the price setter and gas generation is only cranked up in extreme periods.

The expansion of renewable power will push down prices and industry profitability. ( Supplied: ITK )

In this scenario, the NSW coal is bid in at SRMC and the price is more than halved from $65MWh to $28MWh.

"The industry becomes much less profitable," Mr Leitch said.

"It also illustrates that price can be quite sensitive to small changes in demand and supply because prices are set at the margin."

Chinese impact still has a way to run

China ranks only behind Japan as the biggest importer of Australian thermal coal. ( ABC News: Brant Cumming )

Mr Leitch argues China will continue to be a big player in Australian power prices as long as domestic generators compete for coal supply against exports.

"China is by far the world's largest coal consumer and over the past few years its been emphasising quality over quantity," he said.

"This year in addition, and somewhat unexpectedly its coal-fired electricity output has grown 5 per cent or so.

"This has meant that China wants to buy some Australian coal and that means coal prices are high pushing up costs to NSW generators which then feeds into electricity prices via the bid stack."

For NSW generators it is a race to make money now before increased wind and solar supply starts to push them out of the market.

And for the time being, they are not without considerable market clout.

"So they push out those higher costs with an added margin," Mr Leitch said.