The Real Drivers of Continuing Power Price Increases
Posted: 08 Jan 2014
On Monday the chair of the Australian Competition and Consumer Commission said that electricity consumers would be paying lower electricity prices if electricity networks were privatised. The ACCC’s Rod Sims’ comments were part of broader remarks where he called on the government to sell off assets to deliver savings for consumers across the board. But his remarks have hit at the heart of the debate over what is driving the increasing cost of electricity that households are paying right around the country.
It’s hardly news that electricity prices around Australia are on the rise. The problem is that getting to the bottom of just what is behind the vastly higher bills that most households currently face can be difficult. It’s also a topic that is becoming increasingly contested in Australia’s political debate.
Renewables and the carbon tax
A few weeks ago Prime Minister Tony Abbott got stuck into the issue, saying that the Renewable Energy Target (RET) is being investigated by the government, due to renewable energy driving up electricity prices. Mr Abbott made the remarks in a press conference where he spoke about improving the prospects for Australian industry and he added that Australia should be, “an affordable energy superpower.” The Prime Minister continued: “Let’s make the most of the comparative advantages we’ve got and cheap energy – affordable energy – ought to be one of our comparable advantages.”
Mr Abbott’s commitment to bring down electricity prices through the abolition of the carbon tax are also well known and was one of his key commitments made during the 2013 election campaign. However it’s hardly a sure thing that simply abolishing the carbon tax will deliver the promised 9% decrease in electricity price and a 7% drop in gas price. In November the ABC Fact Check site investigated Mr Abbott’s assertion and bluntly concluded: “The precise figures Mr Abbott used in his claim are pure speculation.”
Since assuming office, the Coalition Government has also released a document purportedly presenting, “The facts on electricity prices.” While the carbon tax is framed front-and-centre in the document as a driver of electricity price rises, the document clearly indicates that grid expansion and renovation costs are to blame. The fact sheet states that network costs are the, “biggest factor driving up the cost of electricity.” The government electricity price fact sheet attributes this to the ageing electricity grid, increasing electricity demand and the peaky nature of Australian electricity in demand – caused by householders returning home from work and switching on appliances, in particular air conditioners to cool down a hot home.
On closer examination though, not all of these justifications for the big increase in grid costs really stack up. The roughly 6pm peak in summer electricity demand has been known for some time, but this is showing signs of turning around. Mike Sandiford, the director of the University of Melbourne’s Energy Institute, has been plotting peak demand and has observed that the trend appears to be that the peak is actually dissipating. There are probably a number of causes of this.
Thrifty homeowners may be being more judicious in their use of air conditioners in light of the high electricity prices, better insulation can keep homes cooler and modern energy-efficient appliances could simply be requiring less power from the plug. Solar PV, with a whopping 3 GW now installed nationally, could also be playing a role in this – particularly installations that have some panels facing west to capture rays from the setting sun. What it all means is that Australia’s electricity demand may be becoming less peaky, and certainly not more so.
Sandiford also plots gross demand, not just at the peak times and he’s observed that while electricity demand grew by steadily by 2% each year across the major east-coast grid (the NEM) up until 2008, that has turned around. “We are on the verge of our 12th straight season where demand has reduced on the year before,” writes Sandiford – for The Conversation site. He labels the trend as a “profound de-electrification,” with demand falling each year, not rising. And if Sandiford’s observations are correct, what’s the need then for all these additional poles and wires that even the government admits are the primary driver of Australia’s electricity prices?
Electricity grid expansions certainly have been labelled as excessive by some in the past, including by the Gillard government. The former government termed the phrase the “gold plating” of the grid to describe this over investment.
Electricity grid operators are largely state government owned enterprises and receive a set return-on-investment for the grid works they undertake. If, as the federal government’s electricity price fact sheet claims, these will exceed $45 billion over the current regulatory period, they are set to make big profits indeed.
Which brings the ACCC’s calls for privatisation of electricity networks back into the frame. ACCC chair Rod Sims was unequivocal in his claims earlier this week. “There is no doubt in my mind that energy prices, particularly in NSW and Queensland, would now be lower had the private sector owned those network businesses rather than them staying in the public sector.”
Perhaps state governments would have investigated more thoroughly applications for costly grid expansion works if the locked-in returns were flowing to private companies rather than back into their coffers? Maybe the cost of grid expansion projects would’ve been more tightly controlled? Certainly Sims believes the private sector would’ve have saved consumers money and put a break on electricity price hikes: “I don’t think there is any doubt about that.” Some energy market observers, specifically those who advocate renewable energy, have gone so far as to argue that the grid assets need to be written down in value, therefore reducing the money coming out of consumers’ pockets to pay for them.
Either way while renewable energy and the carbon tax are being characterised by some as the drivers behind rising electricity price, grid expansions and the state-run companies behind them appear far more likely to be holding the smoking gun.
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