How We Can Fix Australia's High Energy Prices

Gavin Mooney

This is the third post in a series looking at the hot topic of Australian power prices. In this post, we’ll look at what can be done about the high power prices in Australia.

In Part 2 we found that cause of the price increases over the last decade could be attributed to the following bill components:

  1. Network charges (41%)
  2. Retail costs and margins (24%)
  3. Wholesale costs (19%)
  4. Green schemes (16%)

A lack of national energy policy?

Many have blamed the current problems on the lack of a national energy policy. In its submission to the Finkel review, chairman of the Australian Energy Market Commission (AEMC) John Pierce stated that the energy sector “has suffered from a long vacuum around national, co-ordinated policy decisions. This has resulted in pervasive uncertainty which makes it difficult for business and consumers to invest – and undermines the reliability of power supply.

Increased supply of reliable energy is needed and this should ideally be selected based on price rather than targets or incentives. I doubt we will see rational investors queueing up to support a new coal-fired power station.

Absence of clear policy is almost certainly a contributor to supply side issues and rising wholesale prices but ACCC chairman Rod Sims said focusing solely on investment uncertainty ignored a “hell of a lot” of other factors.

In his September 2017 National Press Club address, Mr. Sims presented a diagram showing a number of issues to address to make electricity more affordable. The issues are aligned with how much each part of the value chain has contributed to electricity price increases. What is interesting is how widely this list differs from much of the current popular and political debate around energy affordability in Australia.

1. Network

The network cost, the largest component of residential energy bills and the greatest contributor to price rises over the last decade, is probably the thorniest one to address.

Past decisions about network investment are mostly locked-in and will weigh on electricity prices for years to come unless there is a significant change in the funding model.

Network companies submit funding requests to the energy regulator every five years and the regulator determines how much they are allowed to invest, which effectively determines how much they can charge consumers for delivery of electricity. The network companies have traditionally been allowed to appeal any parts of the regulator’s decision that they didn’t like, with no downside risk.

The appeals process has tended to be very successful: according to the regulator, appeals against its decisions between 2008 and 2013 resulted in network company revenue increases of approximately $3.5 billion. This appeals process, known as the Limited Merits Review, was abolished in August this year.

The only other way to reduce network costs under the current funding model would be to reduce the size of regulated asset bases, as suggested in the Finkel Review. But it is unlikely network companies would support any reconsideration or write off of their asset values. This could become increasingly problematic if grid defection (where consumers disconnect from the power grid and become self-sufficient in energy) increases, as the overall network costs would then be shared between fewer end consumers.

2. Retail

The problem here is around consumers not being aware that better offers exist. Consumers can be made more aware of price comparison tools as well as options available to them for managing financial hardship.

Following a meeting with the Prime Minister in August, eight energy retailers have agreed to contact customers who have reached the end of their discounted plan and outline what alternative offers are available. They also committed to developing simpler fact sheets and comparison rates so that consumers can more easily compare the offers available on the market.

In the UK market, there are now third party switching services like Flipper that automatically switch consumers onto the best deal throughout the year. Customers don’t pay Flipper unless they are saved at least £50 per year. Services such as these have the potential to bring huge benefits to Australian consumers.

3. Wholesale (generation)

Currently there is insufficient competition in wholesale markets as well as a high degree of vertical integration with the largest retailers (“gentailers”). More generation capacity is needed, preferably from non-vertically integrated new entrants and in the regions where supply shortfall is most likely (New South Wales, Victoria and South Australia).

Large-scale renewable energy projects will diversify ownership and reduce wholesale prices. This is already starting to happen, with prices forecast to fall steeply in 2018-2022 due to the entry of 6,000MW of renewable energy capacity.

4. Gas prices

To lower the wholesale cost of electricity, the cost of gas needs to be addressed.

As we showed in Part 2, the price of gas is increasingly determining the wholesale price of electricity. Prime Minister Malcolm Turnbull managed to convince the gas producers to supply enough additional gas to the domestic market to cover a predicted shortfall this summer. This will likely avoid price spikes but to lower the cost, more generation capacity is needed.

We can also reduce our reliance on gas up to 25% through energy efficiency measures and fuel shifting, according to a recent ClimateWorks report.

5. Generator bidding behaviour

A recent report by Schneider Electric into spot prices in NSW indicated that bidding practices by generators, including AGL and Origin, were adding about a $30 premium to spot prices over and above what a fair fundamental value would be. This has led Energy Minister Josh Frydenberg to request an investigation by the regulator into generator behaviour.

The AEMC has now confirmed a proposition to change the settlement period from half an hour to five minutes from 1st July 2021. It is widely believed this will reduce generator gaming of the system, lower wholesale costs and drive investment in fast response technologies such as batteries as well as encouraging consumer participation via demand response.

6. Demand response

A significant chunk of what consumers are charged is to ensure the grid can deliver at peak times, such as on a very hot afternoon around 5pm when people get home from work and turn on their air conditioner. But over the whole of 2012, the electricity network experienced “peak demand” for less than 40 hours.

Instead of building additional generation infrastructure to cope with this, most people agree that reducing demand makes more sense. The uptake of solar panels (and now battery storage) are already helping with this. Energy programs that reward customers who make themselves available to briefly turn off the power at times of stress on the grid are also seen as a key way to better manage demand.

7. The National Energy Guarantee

One of the 50 recommendations in the Finkel review was a Clean Energy Target. The government decided to adopt the other 49 recommendations but not this one. Instead, it has introduced the National Energy Guarantee (NEG). Much is still to be determined about the NEG and there has been a focus on the modelling used and whether it would actually lower energy costs.

At this stage is remains more of an idea than a policy and will likely lead to more policy uncertainty in the short term with at least another 12 months of planning, debate and consideration of the policy. It has also been criticised in its current form for not being ambitious enough and likely bringing about an end to investment in large scale renewable energy.

What can consumers do?

Regardless of industry and government policy, consumers can take steps to reduce their power bills immediately.

1. Start shopping around

A report from the AEMC in July found about 70% of people were not shopping around for the best deals on their power bills, even though this could save households over $500 a year. Further, if consumers allow themselves to slip off their discounted plan onto a standing offer, the cost could be even higher.

The annual cost to households of accepting a standing offer from one of the big three retailers instead of the best offer in the market has been estimated at $830 in Victoria, $900 in Queensland and $1400-$1500 in NSW and SA.

2. Reduce energy consumption

This could be achieved by fitting more efficient LED lighting (government rebates are available and LED replacements for 12v halogen downlights are available for free in Victoria under the VEET scheme), using blinds to cool the house and reduce air conditioner usage, or washing clothes in cold water and drying them on a line. More tips are available online.

Solar panels also help reduce a household’s energy consumption. There are schemes available to help households that cannot afford the high upfront cost or are renting or community schemes for those without a roof.

3. Switch to a time-of-use tariff

Consumers who are able to shift their energy consumption away from peak times (such as evenings) can save money on a time-of-use tariff. This can include running energy-hungry appliances such as dishwashers and washing machines at night.

Battery storage can also drastically reduce peak costs by charging batteries during off peak times (or free of charge during the day if the house has solar panels) and discharging the batteries in the evening to avoid drawing power from the grid.

Wrapping up

Just as there is no single cause of the high energy prices in Australia, there is no silver bullet to resolve the problem. Work is already being done to reduce prices and the effects of these changes should be felt in the coming years.

Read the first two posts in this series: Do Australians really pay the highest power prices in the world? and An explanation for the high power prices in Australia.

Gavin Mooney

About Gavin Mooney

Gavin Mooney is a utilities industry solution advisor for SAP. From a background in Engineering and IT, Gavin has been working in the utilities industry with SAP products for 16 years. After working as a consultant with a number of Electricity, Gas and Water Utilities across the globe to implement SAP’s Industry Solution for Utilities, Gavin joined SAP in 2014. He now works with utilities across Australia and New Zealand to help them simplify, innovate and run better with SAP's latest products. Gavin loves to network and build lasting business relationships and is passionate about cleantech and the fundamental transformation currently shaking up the utilities industry.