The price of electricity is a hot topic in Australia right now, sparking acrimonious debate over who is to blame, not only in the murky world of Australian politics but also in online discussion groups and forums. I wanted to look past the polarized media headlines and try to dig out some facts for myself, and I have found it to be a complex and fascinating question with no clear single answer.
There is too much information for a single post, so this will be published in three parts as follows:
- A look at power prices in Australia compared to the rest of the world
- An explanation for the high power prices in Australia
- A look at what can be done about the high power prices in Australia
Is it really that expensive?
Yes, but it’s complicated.
To calculate a single value to represent the price of energy in an entire state or country, we need to make assumptions about what sort of retail offer consumers are on, what proportion receive concessions, the average annual household consumption, and the load profiles, which affect the price paid for customers on time of use tariffs.
Taxes vary from country to country and may or may not be included in the comparison. Excluding taxes means that the comparison shows the prices paid to the electricity industry, whereas including them means the comparison shows the actual prices paid by consumers.
There are also different ways to compare the data and not all of them present Australia as the most expensive in the world, but it’s right up there.
For example, this snippet from the Finkel Review, using data from the IEA’s Energy Prices and Taxes report shows that Australia ranks in the top ten at market exchange rates but is close to the OECD average at purchasing power parity (PPP) which is generally considered a fairer comparison. Analysis from CME Australia and MarkIntell in 2016 showed that, exclusive of taxes and at market exchange rates, Victoria, South Australia and New South Wales came out most expensive of all. However, when taxes were included, Denmark and Germany took the lead, joined by Italy and Portugal when PPP rates were used.
Nonetheless, in July 2017 the big three energy retailers in Australia increased their prices by up to 20% with South Australia and New South Wales hardest hit.
This has left South Australia with the most expensive electricity in the world, according to analysis from MarkIntell. Three times more expensive than the US and 50% more expensive than the UK. (It should be noted that South Australia Treasurer Tom Koutsantonis challenged these calculations, saying they were based on old data and “fundamentally flawed” assumptions.)
Another detail to note is that part of any electricity bill will include a supply charge to connect to the network, which is fixed regardless of how much energy is consumed. Therefore the more energy a household uses, the more the fixed supply charge is diluted and this brings down the cost per kWh. So the c/kWh comparison above favours countries such as the US where annual consumptions are higher (about twice as much as Australian households).
The cost of energy is now a major concern in Australia
The World Economic Forum Global Risks 2018 report put energy pricing as the leading concern for businesses operating in Australia within the next 10 years. Australia was the only country to rank energy price as its major concern. And according to a Choice survey, electricity bills are still the household cost item that concerns Australian consumers the most.
What is particularly disappointing for many Australians is that we used to have some of the cheapest electricity in the world. CME Australia director Bruce Mountain stated that when the National Electricity Market was formed in the late 1990s, Australia had the lowest retail prices in the world along with the United States and Canada.
So just how much have prices risen?
Various different figures have been mentioned recently, such as “183% in the last two decades” from senior researcher David Richardson or 72% from 2003-2013 from this government article or around 100% from 2006-2016 from a recent Australian National University report.
To get a clearer picture, the Consumer Price Index (CPI) from the Australian Bureau of Statistics provides objective data all the way back to 1980. The figures for the electricity component of the CPI, available on the Australia Bureau of Statistics website are plotted on the graph below and show a substantial increase, in particular in the last decade.
So we’ve confirmed that power prices in Australia are indeed among the most expensive in the world. Next, we need to establish why they have risen so much, in a country with vast coal and gas reserves and huge renewable energy potential. This will be covered in Part 2, stay tuned!
For more on energy as a resource in Australia, see Is South Australia The Epicenter Of Energy Innovation?