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Why Australians are getting a raw deal on electricity prices

If there’s logic behind the way Australian energy markets work, at first glance it’s hard to fathom. Increases in power bills have previously been justified by our increasing demand. But as energy demand…

Governments need to step in and make sure consumers are considered in electricity pricing. earl what i saw 2.0/Flickr

If there’s logic behind the way Australian energy markets work, at first glance it’s hard to fathom. Increases in power bills have previously been justified by our increasing demand. But as energy demand in Australia drops prices continue to rise. This raises numerous questions. Is the type of demand changing? Is there the right type of investment in the network? Are the right energy market mechanisms in place?

In 2012-13, residential electricity prices increased by 14%, continuing a trend of double-digit increases going back to around 2007. This is a clearly a problem for homes and businesses and, therefore, for our political leaders.

The largest component of the price increase has come from costs imposed by the network distribution businesses, and yet these are regulated monopolies. The power to change rests with the regulators and, therefore, with governments. Yet, these monopolies, facing very little price or volume risk, make outsized profits. Why hasn’t the government done more to prevent this?

Grattan Institute issued a report in December, 2012: Putting the customer back in front: how to make electricity prices cheaper. This report drew four conclusions:

  • The allowed profits exceed reasonable levels, given the low level of risk these network distribution businesses face.
  • Costs are being incurred to achieve unjustified levels of reliability - our electricity system doesn’t need to be as reliable as these business are telling us.
  • The process of five-yearly reviews does not reflect the changing dynamics of the industry.
  • Government-owned businesses are on average significantly less cost-efficient than their privately-owned counterparts.

The report made four recommendations that have the potential to deliver savings to consumers of around $2.2 billion per year, a saving to the average domestic customer of $100 per year. These are:

  • Align allowed equity and debt returns with the risks faced by the businesses.
  • Give regulators, rather than state governments, the power to set reliability standards.
  • Where governments own the businesses, they should address poor governance or privatise.
  • Capital forecasts should be revised in line with changing demand forecasts.

In December, the Council of Australian Governments and the Standing Council on Energy and Resources (SCER) developed and moved to implement an electricity market reform package. This package is intended to strengthen regulation, empower consumers, enhance competition and innovation and balance the network investment interests of owners and consumers.

The Implementation Plan extends over 2013 and 2014 and puts considerable emphasis on strengthening the power and resources of the regulator (the Australian Energy Regulator, or AER).

It seems that expectations now rest heavily on the way the regulator responds to the various changes in its direction, powers and resources.

In March, 2013, the Australian Energy Market Commission - the rule maker - published a report on future electricity price trends. It estimated that nationally, the aggregated distribution network price will increase by 6% annually, from 2013 to 2015. This compares with an 11% increase between 2012 and 2013. These increases are estimated to represent 81% of the increase in residential retail prices.

The key questions now are will these reforms and price reductions be delivered and are they enough?

There has been criticism that the regulator has been too timid in its prior regulatory decisions and has tended to err on the side of investors. For example, in assessing the appropriate risk premium that businesses could earn, the regulator leaned towards encouraging investment rather than containing costs. The end result has been excessive returns for investors.

It will be important to assess the results of changes by looking at delivered outcomes, and not the actions and processes that are set up. The critical outcome will be the reported profits of the businesses - they should align with the risks faced. Savings of around $400 million per per year could be expected in coming years.

The communiqué from the last meeting of the Standing Council on Energy and Resources contains very little language to suggest it plans to be accountable to consumers for delivering them a better system. The current level of business ownership by state and territory governments and the challenges of delivering outcomes through federal processes would seem to work against what is and should be achievable.

Given the delivered outcomes over the last few years in terms of price increases for consumers and profits for shareholders, we should probably be seeking a much better result than the 6% price rise the Australian Energy Market Commission is estimating.

Although regulation is needed to ensure that companies have incentives to invest, recent decisions have disadvantaged the public. Governments need to take a more pro-active role in ensuring that changes are made and the benefits are delivered. It is time to restore the balance, and we should not be patient.

These issues will be discussed at a public seminar in Sydney on April 22 at the University of New South Wales. The discussion will be led by Andrew Reeves, Chair of the Australian Energy Regulator (AER), who will outline what regulatory agencies are doing to address the problem. He will be joined by a panel of experts chaired by Professor Mary O'Kane – Chief Scientist and Engineer, New South Wales.

Join the conversation

16 Comments sorted by

  1. Rex Gibbs


    I assessed the electrical distribution physical overhead distribution infrastructure for the Telstra/optus original cable broadband rollout for Brisbane and Adelaide. 228,000 poles with an independent team of engineers and technicians working for me

    There are 3 drivers for the costs to consumers.

    Firstly the original maintenance programs for both State run distributors was pretty much - when it falls down or burns out then fix it. It was an unsexy part of the generate transmit and distribute…

    Read more
    1. Peter Lang

      Retired geologist and engineer

      In reply to Rex Gibbs

      Rex Gibbs,

      Thank you for an excellent comment. I like hearing from engineers with real experience in the industry.

      What policies would you suggest should be implemented to minimise grid costs over, say, the next one to four decades (pick your time frame)?

      Regarding costs of solar PV, did you see this excellent, recently published paper, by Melbourne engineer and consultant Graham Palmer;
      "Household Solar Photovoltaics: Supplier of Marginal Abatement, or Primary Source of Low-Emission Power?"

      Using his method and incorporating some of the costs he mentioned but did not include in his abatement cost estimate, I calculate the CO2 abatement cost with PV in Melbourne is $600/tonne CO2. It would be little different in the other capital cities. Given that the main justification fort renewable energy is CO2 abatement, this shows what a bad investment of taxpayers and consumers money is mandated and subsidised renewable energy.

    2. David Jones


      In reply to Peter Lang


      you have to be making some heroic assumptions to arrive at a figure of $600/tonne.

      Anyone who lives in Melbourne and watches TV will know you can have a 1.5 kW PV system installed for less than $3000. Add in the Government's 15 year renewable energy credit and the total cost might be a little over $4000. This system in Melbourne should generate 2200 kWh/y (lets call it 2000 or 2 MWh/y). Power generation in Vic is dominated by Latrobe valley coal with emissions of way over 1 tonne/MWh…

      Read more
    3. Peter Lang

      Retired geologist and engineer

      In reply to David Jones

      >"you have to be making some heroic assumptions to arrive at a figure of $600/tonne."
      No David Jones, you just have to understand the costs and emission avoided. You don't and you didn't even read Graham Palmer's paper, let alone try to understand it, did you?

    4. Barry White


      In reply to Rex Gibbs

      If the regulator is going to impose its own reliability rating then it will have to assume the insurance risk for when things go wrong.
      This is the Gold Plated maintenance level snarled at by the PM.
      So who carries the can in the next case of bushfire caused by power lines ?

    5. Jonathan Maddox
      Jonathan Maddox is a Friend of The Conversation.

      Software Engineer

      In reply to David Jones

      Don't worry David, Palmer's paper does not say what Lang says it does. What it says is this:

      "This paper ... explores the broader impacts of a high penetration of household PV using Melbourne, Victoria as a reference. It concludes that in a grid dominated by unsequestered coal and gas, PV provides a legitimate source of emission abatement at high, but declining costs, with the potential for network and peak demand support."

      The next sentence says...

      "It may be technically possible to integrate…

      Read more
    6. Peter Lang

      Retired geologist and engineer

      In reply to Jonathan Maddox

      Don't take any notice of Johnathon Maddox, he is disengenuous.

      After you've read the paper yourself, if you are interested, ask questions. Graham Palmer, being cautious, has understated the CO2 abatement cost in the paper using low-end values and not including the costs he indentifies in the paper, including those in Section 5.6 'Voltage regulation'. Here is an extract from that section:

      >"There are a number of remedies to the altered voltage profile due to distributed PV, all with demonstrated…

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    7. Peter Lang

      Retired geologist and engineer

      In reply to Jonathan Maddox

      Most of Maddox's interpretation is wrong. Palmer uses careful wording, which is good. Maddox applies his own interpretation. As I said, he is disingenuous.

    8. Jonathan Maddox
      Jonathan Maddox is a Friend of The Conversation.

      Software Engineer

      In reply to Peter Lang

      Almost every one of the points itemised is a potential benefit to the network of distributed generation, none of them is required at low penetrations, the costs of all of them are falling, and none of them has anything whatsoever to do with abatement of centralised fossil-fuelled generation. If these things become necessary at very high penetrations, we'll buy them -- probably at a fraction of the costs presented here.

    9. Peter Lang

      Retired geologist and engineer

      In reply to Jonathan Maddox

      Jonathan Maddox,

      All baseless assumptions. You have no idea what you are talking about. And the inconsistency in your arguments is mind blowing.

  2. Michael Bell

    logged in via email

    According to the Australian Energy Market Operator (AEMO), electricity retail prices (the price paid by the end consumer) will not continue to rise at the rates mentioned in this article.

    - Average electricity prices, covering both the residential and business sectors, are forecast to increase by approximately 1% per year (on average in real terms) in the medium term in all five NEM regions under a medium economic growth scenario.

    - In the short term, electricity prices are forecast to increase…

    Read more
  3. Garry Baker


    Since the Grattan Institute is officed in Melbourne, then it's worth taking a closer look at the owners of power distributors in Victoria. Say just two of them. SP AusNet, one of the big players. A wholly owned entity of Singapore Power - which in turn is owned by Temasek Holdings - an investment company owned by the Government of Singapore. Energy Australia, (which until recently was named Tru Energy), owns a fair bit of the Latrobe Valley, along with an extensive retail network. They are owned by China Light and Power.

    Yes, it is valid to examine the costs of infrastructure, resources of the regulator, and reforms - but do look around, we don't own much these days, especially the businesses that supply our daily needs. These companies are here for good reason, and first and foremost, profit is their driver. Not affordability for consumers - who may as well have a bar code tattooed on their wallets, whereby the content gets whisked offshore on a regular basis

    1. Peter Lang

      Retired geologist and engineer

      In reply to Garry Baker

      Profit is every companies driver and so it should be. Competition is what keeps prices down and provides "affordability for consumers".

      The more we interfere to distort the market, the worse it will be. This excellent paper explains why 'half way house' intervention like we have in Australia is the worst of both worlds:

      Chatham House, "Electricity - Social Service or Market Commodity",%20Environment%20and%20Development/0610pp_grimston.pdf

  4. Janeen Harris


    As soon as the words carbon tax were uttered the prices of power started to rise at a ridiculous rate. No matter what the industry blames the price rises on, it seems obvious to me that these businesses have made a killing out of the carbon tax.

    1. Jonathan Maddox
      Jonathan Maddox is a Friend of The Conversation.

      Software Engineer

      In reply to Janeen Harris

      The big price rises started circa 2009, the same year that electricity demand peaked. The price hikes were spent mostly on improving network capacity, which appeared desperately necessary at the time. This is not just a blame game, it's traceable expenditure. But several factors, the high prices themselves being a fundamental one, have caused peak demand to decline in the four years since.

      You can see the prices graphed here: