State-owned power networks have spent up to A$20 billion more than was needed on the electricity grid, and households and businesses in New South Wales, Queensland and Tasmania are paying for it in sky-high power bills.
A new Grattan Institute report, Down to the Wire, shows that electricity customers in these states would be paying A$100-A$400 less each year if the overspend had not happened.
The problem is that state governments, worried about blackouts and growing demand for electricity, encouraged the networks to spend more in the mid-2000s. But the networks overdid it, and now consumers are paying for a grid that is underused, overvalued, or both.
The grid includes high-voltage transmission lines that carry electricity over large distances, as well as low-voltage poles and wires that connect to homes and businesses. Networks are built to cope with those times of highest demand for electricity. Yet the growth in the value of network assets has far exceeded growth in customer numbers, total demand, or even peak demand.
Demand for electricity did grow rapidly in the early 2000s, but since then it has slowed substantially as more and more households have installed solar panels, and appliances have become more energy efficient. Networks may have overbuilt because they expected that demand would continue to grow.
Yet the overbuilding has occurred almost exclusively in the public networks. Why would government ownership lead to such high costs?
There are two main reasons. First, investment in electricity networks boosts state government revenues because public networks pay a fee to the state to neutralise their lower borrowing costs (as well as the dividend they pay to the state as the owner). Second, a government-owned business might come under political pressure to prioritise goals such as reliability or job creation over cost.
Of course governments worry about reliability – they cop the blame if anything goes wrong. In 2005, the NSW and Queensland governments required their network businesses to build excessive back-up infrastructure to protect against even the most unlikely events. Reliability did improve a bit in some networks, but at significant cost: on average, customers got an extra 45 minutes of electricity a year at a cost of A$270 each.
State governments should take responsibility
Successive state governments in NSW, Queensland and Tasmania are responsible for overinvesting in their networks and, in NSW and Queensland, for setting reliability standards too high.
State governments can’t turn back the clock but they can still fix the mistakes of the past. And they should, because if they don’t, consumers will be paying for decades to come.
Households and businesses that can afford to buy solar panels and batteries will reduce their reliance on the grid. Meanwhile, those left behind – including the most vulnerable Australians – will be stuck with the burden of paying for the grid.
In Down to the Wire we recommend that where network businesses are still in government hands, the government should write down the value of the assets. This would mean governments forgoing future revenue in favour of lower electricity bills. For recently privatised businesses in NSW, a write-down could create more issues than it solves, so in those cases the state government should refund consumers the difference through a rebate.
At a time when governments are concerned about energy affordability, NSW, Queensland and Tasmania have a real opportunity to do something about it. They should seize it.
How to prevent this happening again
There will always be pressure to spend more. At the moment, concerns about South Australia’s reliability could very well lead to further investment in network infrastructure.
Policymakers must also deal with the risk that, in future, parts of the network may no longer be needed. The grid may need to be reconfigured as new technologies emerge, some communities go off-grid, and new energy sources arise in new locations.
For now, consumers bear this risk: they are locked into paying for assets whether or not they are needed. In future, the risk should be shared between consumers and businesses; this would encourage businesses to avoid overbuilding in the first place and instead consider alternative solutions.
With the focus on reliability right now, governments are at risk of repeating mistakes of the past. The truth is that Australia already has a very reliable grid.
On average across the National Electricity Market, consumers experience less than two-and-a-half hours in unplanned outages per year. Reducing that by a few minutes of supply each year is very expensive. Politicians typically value reliability more than consumers, but ultimately it is consumers who foot the bill.
But for most Australians, the most visible impact of this crisis has been their ever-increasing electricity bills. Electricity prices have become a political hot potato, and the blame game has been running unchecked for more than a year.
Electricity retailers find fault with governments, and renewable energy advocates point the finger at the nasty old fossil-fuel generators. The right-wing commentariat blames renewables, while the federal government blames everyone but itself.
The truth is there is no silver bullet. No single factor or decision is responsible for the electricity prices we endure today. Rather, it is the confluence of many different policies and pressures at every step of the electricity supply chain.
Four components make up your electricity bill. Each has contributed to this increase.
The biggest culprit has been the network component – the cost of transporting the electricity. Next comes the retail component – the cost of billing and servicing the customer. Then there is the wholesale component – the cost of generating the electricity. And finally, the government policy component – the cost of environmental schemes that we pay for through our electricity bills.
Each component has a different tale, told differently in every state. But ultimately, this is a story about a decade of policy failure.
Network costs form the biggest part of your electricity bill. Australia is a big country, and moving electricity around it is expensive. As the graph above shows, network costs have contributed 40% of the total price increase over the past decade.
The reason we now pay so much for the network is simply that we have built an awful lot more stuff over the past decade. It’s also because it was agreed – through the industry regulator – that network businesses could build more network infrastructure and that we all have to pay for it, regardless of whether it is really needed.
Network businesses are heavily regulated. Their costs, charges and profits all have to be ticked off. This is supposed to keep costs down and prevent consumers being charged too much.
That’s the theory. But the fact is costs have spiralled. Between 2005 and 2016 the total value of the National Electricity Market (NEM) distribution network increased from A$42 billion to A$72 billion – a whopping 70%. During that time there has been little change in the number of customers using the network or the amount of electricity they used. The result: every unit of electricity we consume costs much more than it used to.
There are several reasons for this expensive overbuild. First, forecasts of electricity demand were wrong – badly wrong. Instead of ever-increasing consumption, the amount of electricity we used started to decline in 2009. A whole lot of network infrastructure was built to meet demand that never eventuated.
Second, governments in New South Wales and Queensland imposed strict reliability settings – designed to avoid blackouts – on the networks in the mid-2000s. To meet these reliability settings, the network businesses had to spend a lot more money reinforcing their networks than they otherwise would have.
Third, the way in which network businesses are regulated encourages extra spending on infrastructure. In an industry where you are guaranteed a 10% return on investment, virtually risk-free – as network businesses were between 2009 and 2014 – you are inclined to build, build, build.
The blame for this “gold-plating” of network assets is spread widely. Governments have been accused of panicking and setting reliability standards too high. The regulator has copped its share for allowing businesses too much capital spend and too high a return. Privatisation has also been criticised, which is slightly bizarre given that the worst offenders have been state-owned businesses.
The second biggest increase in your bill has been the amount we pay for the services provided to us by retailers. Across the NEM, 26% of the price increase over the past decade has been due to retail margins.
This increase in the retail component was never supposed to happen. To understand why, you must go back to the rationale for opening the retail sector to competition. Back in the 1990s, it was felt that retail energy was ripe for competition, which would deliver lower prices and more innovative products for consumers.
In theory, where competition exists, firms seek to reduce their costs to maximise their profits, in turn allowing them to reduce prices so as to grab as many customers as possible. The more they cut their costs, the more they can cut prices. Theoretically, costs are minimised and profits are squeezed. If competition works as it’s supposed to, the retail component should go down, not up.
But the exact opposite has happened in the electricity sector. In Victoria, the state that in 2009 became the first to completely deregulate its retail electricity market, the retail component of the bill has contributed to 36% of the price increase over the past decade.
On average, Victorians pay almost A$400 a year to retailers, more than any other mainland state in the NEM. This is consistent with the Grattan Institute’s Price Shock report, which showed that rising profits are causing pain for Victorian electricity consumers. Many customers remain on expensive deals, and do not switch to cheaper offers because the market is so complicated. These “sticky” customers have been cited as the cause of “excessive” profits to retailers.
But the new figures provided by the ACCC, which come directly from retailers, paint a different picture. The ACCC finds that the increase in margins in Victoria is wholly down to the increasing costs of retailers doing business.
There are reasons why competition might drive prices up, not down. Retailers now spend money on marketing to recruit and retain customers. And the existence of multiple retailers leads to duplications in costs that would not exist if a single retailer ran the market.
But these increases should be offset by retailers finding savings elsewhere, and this doesn’t seem to have happened. History may judge the introduction of competition to the retail electricity market as an expensive mistake.
So far, we have accounted for 65% of the bill increase of the past decade, and neither renewables nor coal have been mentioned once. Nor were they ever likely to be. The actual generation of electricity has only ever formed a minor portion of your electricity bill – the ACCC report shows that in 2015-16 the wholesale component constituted only 22% of the typical bill.
In the past year, however, wholesale prices have really increased. In 2015-16, households paid on average A$341 a year for the generation of electricity – far less than they were paying in 2006-07. But in the past year, that is estimated to have increased to A$530 a year.
Generators, particularly in Queensland, have been engaging in questionable behaviour, but it is the fundamental change in the supply and demand balance that means higher prices are here to stay for at least the next few years.
The truth is the cost of generating electricity has been exceptionally low in most parts of Australia for most of the past two decades. When the NEM was created in 1998, there was arguably more generation capacity in the system than was needed to meet demand. And in economics, more supply than demand equals low prices.
Over the years our politicians have been particularly good at ensuring overcapacity in the system. Most of the investment in generation in the NEM since its creation has been driven by either taxpayers’ money, or government schemes and incentives – not by market forces. The result has been oversupply.
Up until the late 2000s the market kept chugging along. Then two things happened. First, consumers started using less electricity. And second, the Renewable Energy Target (RET) was ramped up, pushing more supply into the market.
Demand down and supply up meant even more oversupply, and continued low prices. But the combination of low prices and low demand put pressure on the finances of existing fossil fuel generators. Old generators were being asked to produce less electricity than before, for lower prices. Smaller power stations began to be mothballed or retired.
Something had to give, and it did when both Alinta and Engie decided it was no longer financially viable to keep their power stations running. Far from being oversupplied, the market is now struggling to meet demand on hot days when people use the most electricity. The result is very high prices.
A tight demand and supply balance with less coal-fired generation has meant that Australia increasingly relies on gas-fired generation, at a time when gas prices are astronomical, leading to accusations of price-gouging.
Put simply, Australia has failed to build enough new generation over recent years to reliably replace ageing coal plants when they leave the market.
Is it renewable energy’s fault that coal-fired power stations have closed? Yes, but this is what needs to happen if we are to reduce greenhouse emissions. Is it renewables’ fault that replacement generation has not been built? No. It’s the government’s fault for failing to provide the right environment for new investment.
The current predicament could have been avoided if we had a credible and comprehensive emissions reduction policy to drive investment in the sector. Such a policy would give investors the confidence to build generation with the knowledge about what carbon liabilities they may face in the future. But the carbon price was repealed in 2014 and replaced with nothing.
We’re still waiting for an alternative policy. We’re still waiting for enough generation capacity to be built. And we’re still paying sky-high wholesale prices for electricity.
Green and gold
Finally, we have the direct cost of government green schemes over the past decade: the RET; the household solar panel subsidies; and the energy-efficiency incentives for homes and businesses.
They represent 16% of the price increase over the past 10 years – but they are still only 6% of the average bill.
If the aim of these schemes has been to reduce emissions, they have not done a very good job. Rooftop solar panel subsidies have been expensive and inequitable. The RET is more effective as an industry subsidy than an emissions reduction or energy transition policy. And energy efficiency schemes have produced questionable results.
It hasn’t been a total waste of money, but far deeper emissions cuts could have been delivered if those funds had been channelled into a coherent policy.
The story of Australia’s high electricity prices is not really one of private companies ripping off consumers. Nor is it a tale about the privatisation of an essential service. Rather, this is the story of a decade of policy drift and political failure.
Governments have been repeatedly warned about the need to tackle these problems, but have done very little.
Instead they have focused their energy on squabbling over climate policy. State governments have introduced inefficient schemes, scrapped them, and then introduced them again, while the federal government has discardedpolicies without even trying them.
There is a huge void where our sensible energy policy should be. Network overbuild and ballooning retailer margins both dwarf the impact of the carbon price, yet if you listen only to our politicians you’d be forgiven for thinking the opposite.
And still it goes on. The underlying causes of Australia’s electricity price headaches – the regulation of networks, ineffective retail market competition, and our barely coping generators – need immediate attention. But still the petty politicking prevails.
The Coalition has rejected the Clean Energy Target recommended by Chief Scientist Alan Finkel. Labor will give no guarantee of support for the government’s alternative policy, the National Energy Guarantee. Some politicians doubt the very idea that we need to act on climate change. Some states have given up on Canberra and are going it alone.
We’ve been here before and we know how this story ends. Crisis wasted.
The International Energy Agency (IEA) may be underestimating Australian household energy bills by 25% because of a lack of accurate data from the federal government.
The Paris-based IEA produces official quarterly energy statistics for the 30 member nations of the Organisation for Economic Cooperation and Development (OECD), on which policymakers and researchers rely heavily. But to provide this service, the IEA relies on member countries to provide it with good-quality data.
Last month, the agency published its annual summary report, Key World Statistics, which reported that Australian households have the 11th most expensive electricity prices in the OECD.
But other studies – notably the Thwaites report into Victorian energy prices – have reported that households are typically paying significantly more than the official estimates. In fact, if South Australia were a country it would have the highest energy prices in the OECD, and typical households in New South Wales, Queensland or Victoria would be in the top five.
A spokesperson for the federal Department of Environment and Energy, the agency responsible for providing electricity price data to the IEA, told The Conversation:
Household electricity prices data for Australia are sourced from the Australian Energy Market Commission annual Residential electricity price trends report. The national average price is used, with GST added. It is a weighted average based on the number of household connections in each jurisdiction.
The Australian energy statistics are the basis for the Australia data reported by the IEA in their Key world energy statistics. The Department of the Environment and Energy submits the data to the IEA each September. Some adjustments are made to the AES data to conform with IEA reporting requirements.
But it is clear that the electricity price data for Australia published by the IEA is at least occasionally of poor quality.
The Australian household electricity series in the IEA’s authoritative Energy Prices and Taxes quarterly statistical report stopped in 2004, and only resumed again again in 2012.
Australia is also the only OECD nation not to report electricity prices paid by industry.
This year’s reported household average electricity prices are almost certainly wrong too. The IEA reports that household electricity prices in Australia for the first quarter of 2017 were US20.2c per kWh.
At a market exchange rate of US79c to the Australian dollar, this puts Australian household electricity prices at AU28c per kWh. Adjusted for the purchasing power of each currency, the comparable price is AU29c per kWh.
By contrast, the independent review of the Victorian energy sector chaired by John Thwaites surveyed the real energy prices paid by customers, as evidenced by their bills. In a sample of 686 Victorian households, those with energy consumption close to the median value were paying an average of AU35c per kWh in the first quarter of 2017. This is 25% more than the IEA’s official estimate. At least part of this difference is explained by the AEMC’s assumption that all customers in a competitive retail market are supplied on their retailers’ cheapest offers. But this is not the case in reality.
Surveying real electricity and gas bills drastically reduces the range of assumptions that need to be made to estimate the price paid by a representative customer. Indeed, as long as the sample of bills is representative of the population, a survey based on actual bills produces a reliable estimate of representative prices in retail markets characterised by high levels of price dispersion, as Australia’s retail electricity markets are.
Pointing to a reliable estimate of Victoria’s representative residential price is, of course, not enough to prove that the IEA’s estimate is wrong. It could just as easily mean that Victorians are paying way more than the national average for their electricity.
But the idea that Victorians are paying more than average does not stack up when we look at the state-by-state data, which suggests that Victoria is actually somewhere in the middle. Judging by the prices charged by the three largest retailers in each state and territory, Victorian householders are paying about the same as those in New South Wales and Queensland, less than those in South Australia, and more than those in Tasmania, the Northern Territory, Western Australia and the Australian Capital Territory.
The IEA can not reasonably be blamed for the inadequate residential data for Australia that they report, and the nonexistent data on electricity prices paid by Australia’s industrial customers. The IEA does not do its own calculation of prices in each country, but rather it relies on price estimates from official sources in those countries.
An obvious question that arises from this is where Australia really ranks internationally if we used prices that reflect what households are actually paying.
This is contentious, not least because prices in New South Wales, Queensland and South Australia increased – typically around 15% or more – from July this year. We do not know how prices have changed in other OECD member countries since the IEA’s recent publication (which covered prices for the first quarter of 2017). But we do know that prices in Australia have been far more volatile than in any other OECD country.
Assuming that other countries’ prices are roughly the same as they were in the first quarter of 2017, our estimate using the IEA’s data is that the typical household in South Australia is paying more than the typical household in any other OECD country. The typical household in New South Wales, Queensland or Victoria is paying a price that ranks in the top five.
It should also be remembered that these prices are after excise and sale tax. Taxes on electricity supply in Australia are low by OECD standards – so if we use pre-tax prices, Australian households move even higher up the list.
There are serious question marks over Australia’s official electricity price reporting. Policy makers, consumers and the public have a right to expect better.
Australia’s residential electricity prices are amongst the highest in the world so it’s not hard to see why customers have been up in arms about high prices.
Comparing the charges for electricity retail services in Australia and in other countries, we find Australia’s charges are much higher. The difference is particularly stark when comparing retailer charges in New South Wales with those in Denmark, Germany, Italy and Britain which have the highest electricity prices in Europe.
Residential electricity prices in Canada and the United States are typically less than half those in Australia and so the situation in Australia is even more damning in that comparison.
The prime minister’s recent request to the ACCC to review the retail end of the electricity market will put this part of the industry under the spotlight. This request follows the Victorian government’s appointment of a panel to review the Victorian retail energy market.
But rising concern about retail markets is not unique to Australia. In Britain, retail energy markets have received prime ministerial attention for many years. In what the British government described as the most significant review of its industry in the 30 years since privatisation, their Competition and Markets Authority concluded that significant changes needed to be made, although some ex-regulators disputed their estimates of the problem.
These reviews indicate changing attitudes in government. The Australian Energy Markets Commission reviews Australia’s retail energy markets every year and has consistently concluded that they are working well. Similarly, the Independent Pricing and Administrative Tribunal advised the New South Wales government last year that their retail energy market is working well. Evidently the Commonwealth and Victorian government are now seeking a second opinion.
How Australia’s electricity retail market is set up
The business of retailing electricity is really finding out what customers want and then offering deals that meet those requirements. More specifically, it’s the business of procuring electricity and network services, acquiring retail customers, selling to those customers and then metering, billing and collecting revenue.
Analysis of regulatory filings shows that around 6.5 million of Australia’s 10 million households and small business customers (those in New South Wales, South Australia, South East Queensland and Victoria) can choose their retailer. These four deregulated markets are dominated by three retailers that also own sufficient generation to supply those customers.
After more than a decade of retail competition, the three big retailers typically still supply at least 80% of all customers in each regional market. While in some of the regional markets, customers can choose amongst 24 retailers, the new entrant retailers have invariably grown their customer base slowly, if at all, despite powerful incentives to the contrary.
Social services organisations, customer advocates and some independent energy economists have long voiced concerns about retail energy markets. Their concerns centre on the amount that the retailers’ charge, that customers are not happy and that electricity is becoming increasingly unaffordable.
The Grattan Institute recently published a blunt critique that went one step further. It suggested that not only are retailers charging a great deal, but that this is explained not by high costs but by excessive profits.
Competition and consumer choice
The official reviews in Australia hitherto have taken the line that if customers don’t engage in the market they can’t complain. But electricity is complex and customers need skill and a great deal of effort to reliably evaluate the market.
Why would it be so hard and expensive for new entrant retailers to attract customers if they were not loyal? Therein lies an explanation for Australia’s incumbent retailers’ apparently extraordinary profits.
Andy Vesey, the chief executive of Australia’s largest electricity retailer AGL described the retail market as one that penalises customer loyalty. While such candour is admirable, even hardcore market economists question the effectiveness of a market in which retailers profit most from their most loyal customers.
The issue is non-trivial: in its cost of living surveys, customer advocate Choice has found that electricity prices are consistently the top cost of living concern for households. Electricity poverty payments to deal with affordability problems, are understood to now be costing state governments several hundreds of millions of dollars each year.
While it has been a long time coming, the ACCC’s review in addition to the Victorian government’s review, is to be welcomed.
A great deal of effort will need to be made to get to the heart of the matter. Retail energy markets are complex and the amount that a retailer charges a customer for its services is not known for certain – it has to be estimated by subtracting the charges for network services, wholesale production, metering and environmental charges from the customer’s actual bill.
Not only do customers’ bills differ greatly but the components of the bill differ greatly for different customers and so obtaining reasonable estimates of retailers’ charges across the industry requires effort and care.
Fairly evaluating retailers’ offers and how much of their offers are explained by the retailers’ charge, is the place to start. Then finding out what customers are actually paying, and what retailers’ costs and profit margins are, is essential in assessing the nature and extent of market failure.
The reviews will need to cover tricky ground in assessing the economies of scale in retailing, and the value to electricity retailers of also owning electricity generation businesses that supply them. The extent to which high customer acquisition costs provide an advantage to the dominant incumbent retailers who don’t incur those costs unless they are seeking to expand their market share must also feature in the analysis.
There is reason to be hopeful about the ACCC and Victorian government reviews. Done well, they can allow sunlight into this part of the industry. As they say in regulatory circles, sunlight is the best disinfectant.
Whether you’re a boatie or not, everyone realises the importance of keeping the water on the outside when you go sailing or fishing. The less leaky the boat, the less you have to rely on devices like bilge pumps to stay afloat.
What does this have to do with houses? Well, Australia’s homes are notoriously “leaky” – allowing the uncontrolled flow of heat into and out of the building. Our answer has been to put in more and more pumps, in the form of air conditioning. This is often promoted as a feature, rather than an indication of a poor-quality building!
This creates problems for everyone.
We all know that some houses are hotter than others in heatwaves, and that well insulated and designed homes cost a lot less to operate throughout the year because they don’t rely heavily on air conditioners or heaters to provide comfort.
Pumping heat from one place to another takes a lot of energy, which makes air conditioners particularly power-hungry appliances. The more leaky the house, the more heat needs to be pumped out. On hot days, when lots of aircon units are operating at the same time, this creates a challenge for the electricity infrastructure.
It costs money to build an electricity network that can handle these peaks in demand. This cost is recovered through the electricity unit cost (cents per kilowatt hour). We all pay this cost, in every electricity bill we get; in fact the cost of meeting summer peak demand accounts for about 25% of retail electricity costs. This is more than twice the combined effect of solar feed-in tariffs, the Renewable Energy Target and the erstwhile carbon tax.
This means that people living in houses that are built to handle their local climate are effectively subsiding those who live in poorer-quality buildings and relying solely on the air conditioning to stay cool. Perhaps even less fairly, those who struggle to afford air conditioning and have to cope with overheating are also paying this subsidy via the electricity they do use. All this is because many people still live in leaky, poor-quality buildings.
Does this mean that air conditioners are evil and should never be used? Of course not – there is a role for very efficient air conditioners (heat pumps) in extreme weather events. But it does raise some interesting questions. Can we design and build homes that are great to live in and don’t cost the Earth to run? And, if so, why aren’t these homes the norm, rather than the exception?
You get what you ask for
The good news is that comfortable, quality homes that put minimal strain on the electricity grid are certainly possible. What’s needed is a combination of design that takes account of the local climate, appropriate building materials and quality construction practices. Some homes consume less than a quarter of the energy of their contemporaries in the same climate – it’s just frustrating that they aren’t more common.
In the past, the housing industry would say that it’s simply building the homes that people want – that Australians are mainly interested in size and location, not energy performance. Recent research, however, seems to indicate that the perspectives of real estate agents and other property practitioners could be limiting how, or if, they promote energy efficiency and other sustainability features to potential clients.
Are Australians still mesmerised by the surface bling of granite benchtops, a theatre room, or automatic gadgets? Are we starting to consider weightier issues such as operation costs, resilience and comfort? Or are we waiting until the first heat wave or the first electricity bill to realise just how good or poor our purchase decision was?
Some savvy buyers – before they sign a contract – are starting to ask about insulation, but not the more fundamental questions, like “how hot does this room get?” or “can I afford to run this house?”.
The housing sector seems to assume that if you don’t explicitly ask for something, it is not important to you. They also seem to assume that the building regulations set the standard – despite the fact the building regulations are minimum requirements, not best practice for comfort and value.
Some also actively lobby for lower standards, arguing that energy efficiency has “questionable benefits” and that requiring information to be passed on to consumers is an “unnecessary burden”.
Buyer beware – you’re on your own
What does this mean? When buying a used car or a new phone, it’s relatively easy to get the information you need – and there are quite a few consumer protection laws in place. But when we inspect a home for sale or rent, we can see the number of rooms, test the taps and light switches, and measure how far it is to the shops or school or work, but there is a huge amount we can’t see and are not told.
A real estate agent is not acting in the prospective buyer’s interest (or even necessarily in the seller’s). The seller wants the highest price in the shortest time, and the agent wants the biggest commission for the least effort. And contrary to practices in the European Union, no one is obliged (in most parts of Australia) to tell prospective buyers or renters about the home’s running costs.
There have been successes and failures in state government attempts to ensure that home buyers and renters have access to information about comfort and running costs at the time of purchasing or renting. Queensland’s Sustainability Declaration, introduced in 2010, was very short-lived, with an incoming government declaring it “useless red tape”.
These schemes not only make it easier to identify homes that cost less to run, but can also drive demand for energy-efficient renovations and put downward pressure on electricity prices.
The distribution of information about housing in Australia is flawed. Real estate agents, valuers, financiers and electricity industry operators are making decisions based on very little or no information about how the quality of houses impacts on their clients, their business processes and electricity infrastructure investment.
Most importantly, owners and renters are not being informed about the quality of the houses they are buying or renting, and the impacts that particular dwellings will have on their health, comfort and wallets.
What can you do?
So is the housing sector right? Do you care about the quality of the building you live in? What is a sensibly designed and well-constructed house worth to you? What dollar value do you put on your health, safety and comfort? What value is there for your family to able to cope with heatwaves, or to pay off the mortgage sooner because of the money you save on power bills?
You don’t need to wait for government to act. If you are looking at buying or renting a new home or apartment, ask to see the energy certificate for the dwelling. Such a certificate would have been created
as part of the building approval process.
It could also be useful to ask for a thermal imaging report and air leakage report. These are tests the builder can have done to prove his quality of construction.
For existing homes, you can ask the seller for a Universal Certificate, or a copy of their energy bills, or evidence of features they have installed to enhance the comfort of the house (such as receipts for insulation or window tinting).
And next time you’re visiting a friend or neighbour with heat radiating from the walls, windows and roof, and the aircon cranked at full blast, enjoy the nice cool air – because you’re helping them pay for it.
Business here and households here, already we’re paying twice the cost of the US for electricity. – Craig Kelly MP, chair of the backbench environment and energy committee, ABC Radio National Breakfast interview, December 6, 2016. (Listen from 7.38)
Converting 10.44 US cents at A$1/US$0.74 – is the equivalent of 14.11 cents Australia.
So using these sources (in Australian cents) we have 14.11 cents in the USA and 28.72 cents in Australia. Therefore I think to say that “we’re paying twice the cost of the US for electricity” (on average) is pretty much right on the money.
It’s definitely true that Australians pay much more for their electricity than US citizens do (and Australian prices are set to rise even further, according to the Australian Energy Market Commission.
Using OECD data, there’s one measure that says it is twice as much – or at least it was twice as much as recently as 2014. Another measure – a better measure, in my view – shows Australians pay about 50% more than US citizens do for their electricity.
As Craig Kelly notes in his full response, there is significant variation in electricity prices across states and territories in Australia and in the United States, so comparing the two is not a simple matter. The Australian Energy Market Commission’s annual Electricity Price Trends report shows that retail prices in Australia vary from 18.44 c/kWh in the Australian Capital Territory to 29.75 c/KWh in South Australia.
The wholesale price is the cost of generating the energy that is sent to the grid. Retail prices are what householders are more used to talking about. Retail prices factor in extra costs like transmission and distribution (“poles and wires”), retailer margins and other levies (such as Feed-in Tariff and Renewable Energy Target costs). In other words, it’s what we’re paying on our power bill.
Let’s examine the data.
A tale of two measures
The two measures I have used to compare prices in the US and Australia are called “market exchange rates” and “purchasing power parities”. Craig Kelly’s calculations rely on market exchange rates, so we will start with that one.
Market exchange rates simply means converting the price in one country’s currency to that of another country’s currency, as Kelly did. This measure of comparison is more volatile than purchasing power parity exchange rates.
Using market exchange rates, OECD data show that Australian electricity prices have, in recent years, been approximately twice as high as electricity prices in the US. Recently, the gap has narrowed. In 2015, using market exchange rates, electricity prices in Australia were about 70.3% higher than in the US.
The Australian Energy Market Commission projects that Australian prices will rise even further in coming years.
That broadly supports what Kelly said. But if we use purchasing power parity exchange rates, the data show that Australia’s prices are approximately 50% higher than the US.
Purchasing power parity exchange rates, or PPP, factor in inflation and the cost of living in a particular country, and eliminate differences in price levels between countries. This measure allows a cleaner, less volatile comparison between the US and Australia.
The chart below compares the retail prices of electricity in Australia and the United States when adjusted for cost of living differences using purchasing power parity.
As the above chart of the OECD data shows, household prices of electricity are about 50% higher in Australia than in the US when you use purchasing power parity data.
Why are the prices so different?
As this chart shows, data from OECD indicate there has been a substantial divergence between Australian and American electricity prices since about 2008.
As noted in the preliminary report of the Australian chief scientist Alan Finkel’s review of the National Electricity Market, household energy bills in Australia increased 61% on average between 2008 and 2014.
The main reason for this is the cost of maintaining the electricity network – essentially, the poles and wires that deliver the power. Network costs represent between 45% and 55% of a typical electricity bill. This has been the largest contributor to Australia’s increasing prices over the past six years.
Some observers have said that the “gold-plating” of the network came about because of a regulatory regime that encouraged over-investment in poles and wires. This was been partly driven by an effort to shore up electricity supply and an overestimation of demand.
The Productivity Commission reported that, in New South Wales, network costs accounted for 80% of price rises in 2010-11 and 50% of price rises in 2011-12.
Is it really that simple?
Not really. Energy economics is far more complicated than can come across in Kelly’s quick quote or this short FactCheck.
While the Australian price is higher, this doesn’t necessarily mean the cost is higher: Australians use much less energy than Americans. This is because as prices increase, energy productivity and energy efficiency also tend to increase. In total, most countries actually spend a similar proportion of GDP on energy costs.
This holds surprisingly consistent across a range of countries. For example, Japan has high energy prices, but also has high energy efficiency and productivity. Consequently, it spends practically the same amount of GDP on energy cost as the US.
So prices may be higher for individuals, but that doesn’t mean the economy-wide costs are higher. All that said, Kelly was talking about the prices for individuals and business, so that’s what this FactCheck is focused on.
If we compare Australian and American electricity prices using market exchange rates, Craig Kelly’s comment is correct: Australia’s electricity prices were essentially double those of the United States as recently as 2014. In 2015, using market exchange rates, the US prices were about 70.3% higher.
If we compare the prices using purchasing parity power exchange rates – which I’d argue is the more accurate reflection of the costs of living in each of the countries – Australia’s prices are about 50% higher than the US.
Overall, Craig Kelly’s broader point is correct: Australians pay a much higher price for their electricity than Americans do. – Dylan McConnell.
I agree with the author’s position that purchasing power parity comparisons are less volatile and more representative of the relativity based on actual living costs. It is true Australian households pay a much higher electricity price than Americans.
There’s one important point I’d add. There is a baseline cost of having a house or business connected to electrical supply, regardless of how much electricity is used. This is called the fixed supply cost. The more electricity a household or business uses, the more the fixed supply cost is diluted in the overall electricity bill. This brings down the cost per kilowatt-hours (kWh).
American households use about twice as much electricity as Australian households. According to the US EIA, average US household electricity consumption in 2015 was 10,812 kWh. 2014 data for Australia shows average Australian household electricity consumption was 5,772 kWh (down from 6,819 kWh in 2008. At 25 cents/kWh that is a saving of $307 for Australians for using less electricity over time).
So we would expect Australian household electricity prices to be higher, because an average Australian household uses less electricity and the large fixed supply costs must be spread across a smaller amount of consumption. This raises the cost per kWh. But because Australians use less, their annual bill may be lower.
Further, in recent years, Australian energy retailers have been raising their fixed supply (or baseline) charges. So small users pay much more overall per unit of electricity they use.
Lastly, it’s worth noting that larger businesses often negotiate much better deals on their electricity prices than householders can. – Alan Pears.
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