CHOICE membership

Electricity Price Increases


#1

There is a very good article on the ABC News website today regarding the rise in electricity prices.


It clearly illustrates that from 1980 to the present time, All Prices have risen by just over 400% whilst Electricity Prices have risen by just under 900%.
What a disgraceful rip-off.


#2

The Weekend Australian also had some interesting commentary on the recent price increases…based on and reading between the lines in the ACCC report.

Something that was interesting is the cost component of renewable energy which has been used by many groups pre-ACCC report only were the direct costs (RECs, subsidies etc) and not the indirect costs of premature closure of coal-fired energy nor the shift to less reliable supply. The real cost is substantially more than previously thought.

When I get a chance, I plan to read the ACCC report as one can’t trust the spin often found in the public domain.


#3

The Exec Summary points mostly to deregulation and that allowed prices to rise outside of the requested rises both at a production/network level and at a retail level (with that also being labeled as having confusing terms etc).

Some of the blame came from the way RET was used to encourage renewables growth but I think it was more about that the production could be there but there was no backup in case of failure. Something like the SA experience where the Battery now kicks in but before there was no “storage”.

Then it taps the way LNG or NG have had limits placed on both price and availability particularly because of sales to overseas and the reduction of ability to explore and use new fields.


#4

Blind Freddy might catch up, but maybe not. The government seems to be starting a dizzying spin to boot. The only problem with the quote is that is what business is about, profits not customers. Re-regulation anyone?


#5

Nine.com.au has an article today advising that Scott Morrison has stated that he is open to a Royal Commission into the power companies.

Let’s hope that it does happen as it is certainly sorely needed.


#6

This might not be good news for the (state) governments as most of the price increases have resulted from the government’s manipulation of/interventions in the electricity industry and/or government profiteering through the investment in the predominately government owned electricity network to cater for a N-1 outage event and peak demands (which optimum design is based on a low frequency high demand event occurrence).

Wonder if this is more about politicking with the states rather than achieving higher reliability, lower consumer cost electricity.


#7

I suggest that is your opinion but is not inclusive of all the relevant facts. The evidence is that the states have sold off infrastructure, often under direct or indirect pressure from Canberra or just their government of the day’s ideology; the states declared there would be competition and utilities, like any industry, could be trusted so few oversights were required; there is some evidence the multiple parties now taking profits at each level add an unnecessary cost burden; the retailers do nothing but concoct complex and usually obscure pricing to make it as hard as possible to compare offers; the prices to the end consumer are high.

It is more likely the problem we see in our billing is a lack of government intervention or oversight, not because of it.

I for one have never minded an over engineered (gold plated?) grid that could serve the worst case loads and that was reliable. FWIW we had an 8 hour 25 minutes power out in suburban Melbourne because of the high quality of our infrastructure and related maintenance whereby ‘efficiency’ squeezes both - an overhead line went down.


#8

Not opinion…

Click on the operator to see the owner.

Victoria has divested its transmission and distribution networks. SA has partially diverted interests in transmission but SA government is still the biggest shareholder. SA has divested its distribution network.

NSW, TAS, NT and QLD both distribution and transmission networks are 100% government owned corporations.

Some of the interconnectors between states (Qld -NSW and Vic -SA) have also been commercialised/divested.

The recent government inquiry on pricing found that the most significant contribution to power price increases was from network provider charges. As these are mostly state governnent owned and costs increases have been through the regulated operating and maintenance charges negotiated with the AER (5 years network resets which established cost and price structures.).

One mustn’t get confused with generation which has been mostly sold off by the states, with exception oossibly of Queensland which is still majority governnent owned.

The Commonwealth government (Abbott government from memory), provided incentives for the divestment of the electricity networks to allow cash injectiion to the State coffers, but no State is yet to take up/ took up this offer.

This is the ACCC report which outlined where price impacts occurred:

The ACCC found network charges had the largest contribution to consumer electricity prices. Refer Figures A and B in the Executive Summary.


#9

Mostly is correct, but going through the list shows quite a few non-government operators with off-shore companies having good representation, even when only as partnerships with whomever.


#10

There are some as outlined in my previous post, but are minor compared to the total distribution and transmission network asset value.


#11

I found those figures interesting as it shows the few retail dollars have increased, but those are non-productive except to fund advertising and billing schemes. I am inclined to compare increased margin as ‘extra dealer profit’ in the world of vehicle sales. One gets nothing for the donation.

I guess it depends on what one is inclined to want to demonstrate or prove, and it is a multivariate issue. However costs of infrastructure are dependent on wages and materials and one gets some wire and pylons or pits and tunnels (plz forgive the frivolous description). Generation has its own costs including plant and fuels. Increased profit margin is comparatively interesting in its importance in the equations.

As I read the report I still do not conclude the problem is because of government profiteering, but because of at one level, government trust in lightly regulated free market forces, and at another, ideological support for vested interests, which I can now equate to your manipulation of/interventions in the electricity industry.


#12

It is worth reading the annual financial reports of the government owned network companies.

For two examples…in transmission, NSW Ausgrid had an operating profit of $316M for the six months to December 2017 (last reporting period available), Qld Powerlink had an profit of $201M for 2016/17 etc. When one adds the state government distribution network profits which go directly into the state coffers as a dividend, the return to State government runs into the billions.

These billion(s) are paid for by the consumers of electricity, including household consumers.

If one looks at the total windfall per capita, the additional financial burden to the consumer is significant and runs into many hundreds of dollars.

As most networks are government owned and operated, should they be turning such significant profits when in fact all Australians own these networks being a taxpayer and citizen?

There is argument that these profits/dividends reduce taxes and levies which would have otherwise needed to be increased/applied to provide the same level of government service. So it could be argued, reducing the network electricity costs to consumers may result in consumers experiencing higher government charges elsewhere…thus creating a false saving/economy.


#13

Yes, there are enough numbers around that the motivated can “prove” just about whatever they want.

My interest is primarily in the changing technologies but it seems to me that issues with the electricity market stem mostly from the involvement of the private sector.

The only market that I’ve studied in depth is telecommunications. There, the rot set in when the telecommunications commission was restructured into a corporation. From that point, it was all downhill. Increasing commercialisation followed, with declining levels of service and performance. The final nail in the coffin was privatisation.

As a nation (and states), we probably need to look at whether market mechanisms are appropriate - and when. What should government just run for the public good (common wealth, if you like)? Of course, convincing some that market capitalism isn’t infallible might be a bit of a task. :wink:


#14

Some laissez faire capitalists really do believe that the theory works in all situations, others just say it does to support the rent seekers and those who have got a spot in a cosy oligopoly where competition is not too strenuous.


#15

The telecoms industry is very different to the electricity industry. One should look at the facts associated with the industry before passing judgement.

The ACCC report is worth reading as it outlines the contributions to the cost increases between 2007/08 to 2017/18.

These direct increases being:

  • $0.04 (↑35%) from network charges
  • $0.028 (↑22%) from wholesale electricity charges
  • $0.016 (↑20%) from environmental charges and subsidies; and
  • $0.008 (↑7%) from retail costs
  • $0.014 (↑16%) from retail margins

Now if one looks at the owners of the various parts of the electricity industry, the owners of the networks is predominately government (the commercial owners of the interconnectors, SA distribution network, part of SA transmission network or the Victoria network would not have undue influence of the whole of the network charges). Government is also responsible for the environmental charges and subsidies imposed on the sector. These contribute to about 55% (or about $0.07) of the price increases since 2007/08.

The other main price increase factors are wholesale electricity charges and retail margins (and to a lesser extent the retail costs). While these number appear to be significant, their own individual components are less than CPI/inflation. It could be argued that these increases are reasonable increases due to higher costs driven by wages and inflation (noting that wage growth in the sector has been significant, particular in the early half of the decade). The electricity sector has also had one of the higher wage increases in recent years while other sectors there has been little or no real wage increases.

Looking further into wholesale electricity prices to determine if the commercial sector has resulted in higher wholesale prices, one needs to understand that Queensland’s generation is principally state government owned. There are some private sector investment on gas and renewables, however; the gas players historically have only entered the markets when there is high demand on the network resulting in high pool prices.

Comparing 2017 (last full year) average pool prices for Queensland with other states where the generators have been privatised, one will see the following:

  • South Australia $108.66 (predominately private generation)
  • Queensland $93.12/MW (predominately State government owned)
  • NSW $81.22 (predominately private generation)
  • Tasmania $75.40 (predominately State government generation)
  • Victoria $66.58 (predominately private generation)

While there is bidirectional flows on the interconnector between the states, the only State which currently relies on imports to maintain the reliability of supply is that of South Australia (using the Vic-SA connector) and from time to time Tasmania (VIC-TAS connector).

It is worth noting that Victoria which generation assets are privatised, has a lower average wholesale price a Queensland which has predominately state owned generation. This generation directly influences the spot price in Queensland.

In relation to the retailers which consumer generally deal with, it may be seen that these are an additional cost to that which may have occurred historically. While these private companies are ‘new’ retail players, the retail costs have traditionally being passed onto customers when the electricity boards or government retail providers provided similar services.

It can be seen from the above that the electricity industry is complex and to blame the partial privatisation of the sector is incorrect, as the most significant cost impacts have resulted from the public ownership of the assets (networks and partial generation).

It is also worth saying that Australia historically has known internationally as running a highly efficient electricity network sector. It has also been known for its reliability or supply and low cost volatility. The later has become more impacted in recent years from the fragmented management of the industry by governments (Commonwealth and State) and the national regulator/operator.


#16

Among prophets of Totalitarian Capitalism, Friedrich von Hayek looms large. Among its scriptures, Hayek’s book, the “Road to Serfdom”. In Hayek though, there are signs of cognitive dissonance.

To quote John Maynard Keynes (in correspondence with Hayek):
You admit here and there that it is a question of knowing where to draw the line. You agree that the line has to be drawn somewhere, and that the logical extreme [total lassiez-faire policies] is not possible. But you give us no guidance as to where to draw it…as soon as you admit that the extreme is not possible and that a line has to be drawn, you are, on your own argument, done for, since you are trying to persuade us that as soon as one moves an inch in the planned direction you are necessarily launched on the slippery slope which will lead you in due course over the precipice.

Yes, there are limits to what government should do. Capitalism also has its limits. To my mind, the true road to serfdom lies through unfettered market capitalism.

We, the people, must decide where to draw the line. At present that line (if it hasn’t been erased entirely) is in an unhealthy place.

So you argue for a single national owner-operator? Sounds like a job for government to me.


#17

I haven’t argued for anything. The whole of the industry needs to be reviewed…maybe the Royal Commission will do this if the government is willing to really look at improving the sector for future generations?

There are benefits of government operating the whole of the network/controlling the industry but past experience has indicated that nationally, this has not been very effective or achieved consumer outcomes.

There are also benefits of a GOC (part owner) or a wholly private company also operating the network, especially if the operating licence ensure the end consumer is protected and the aim is to maximise reliability whist minimising cost. Often private companies are more efficient elephants in the room. More efficient may mean lower cost to the consumer and taxpayer, providing that the consumer’s interest is protected.


#18

My experience differs. Most of what the private sector has messed up was built by the public sector.


#19

Does public good vs free markets restart a circular argument for which there is no agreed exit point and open debate how we got here (entry point).

Our electricity power costs despite doubling from the Howard era through to Turnbull remain around no 9 or 10 spot on our annual household expenses. In the old days you held the local council or the state government to direct account for all things electrical. Now there is such a mire of public and private interests including the Feds it is all “smoke and mirrors” with no one finding a way out.

One of the most pressing issues around electricity supply is the future viability of coal fired generation. Both the future cost and environmental consequences remain clouded in partisan debates. The notion held by some in government that consumers want to secure the future through cheaper electricity may be a convenient distraction from the real issues.

The only positive for consumers in this may be the continued uptake of alternatives including solar PV and battery storage. It is one way that some consumers can drop out of the debate and ensure certainty. In this context it may not be the cost of electricity that is a true concern for consumers, it is the consequence of nothing changing towards a lower carbon future that is of most common interest.


#20

If that’s the argument we make, it might. It isn’t. The argument is where to draw the line.

In my experience, extremes don’t work. Extremes of capitalism don’t work any better than extremes of socialism, libertarianism or any other -ism. What we have is an extreme of capitalism. It doesn’t work very well.

We need to decide where the private sector works best and where the public sector does. I’d argue that the private sector works where there’s effective competition. That rules out things like electricity lines (poles & wires) and probably transformers.