Rod Sims’ speech Shining a light: Australia’s gas and electricity affordability problem to the National Press Club certainly established that Australia has a gas and electricity affordability problem which is hurting many consumers and businesses. Electricity prices have more than doubled since 2009 as shown in this graph:
Oddly enough Peter Martin had commented earlier that electricity was not that expensive, and was no more now than it was in 1984 as a percentage of household income, namely 2.9%. It’s just that we have become used to paying less, and are now spending our money on other things. For example, we pay 3.3% on “communication”, a category that encompasses phones and the internet, compared to 1.8% in 1984. And we are now spending 19.6% on rates and mortgage payments, compared to 12.8% back then.
- Combined, the increases in what we are spending on housing and communications are three times what we’re paying for energy.
But it’s hurting, and we don’t like it.
The next surprise is that our bills have grown only by about 50%, because:
- we are using less electricity, partly through more efficient appliances, partly as a reaction to cost
- some of us have installed solar panels
- some of us are getting better than the standard deal.
So the stack of residential bill increases looks like this:
This 50% increase is apportioned as follows:
- 41 per cent is explained by increased charges for the distribution network,
- 19 per cent by increased “wholesale” prices of power generation,
- 16 per cent by the increased cost of the renewable energy target and household solar power incentive schemes,
- 24 per cent by increased retail costs and profit margin.
As Ross Gittins says, reformers thought we would get a large number of players competing vigorously on price. Instead we got large vertically integrated oligopolies, skilled in maximising price.
We’ve also added a layer of retail to the stack. Gittins:
- that 24 percentage points of the overall increase in real power costs have come from the retail level breaks up into seven points for higher profit margins and a remarkable 17 points for higher costs – mainly, I presume, the costs of marketing, advertising and sales people to flog an essential service. Remarkable.
Turnbull, after talking to the retailers, said 2 million consumers should ring up their retailer to get a better deal. Around that time Alinta was hiring 100 people with the aim of taking 25% of the SE Queensland market over two years. If they did what Turnbull asked then contacting a retailer would make contacting Centrelink look like preschool.
Also around that time Peter Martin took a look, and found that most electricity consumers say they’d need to save about 23% of their bill to make switching worthwhile. That’s over $300 pa in Victoria and $400 pa in NSW. Most don’t even want to take a look to see how much they’d save.
- Most also say it’s too complicated to compare offers and plans, a conclusion I reluctantly came to myself, and I’m normally good at these things.
Where this is heading is towards the creation of a basic, no-fuss, no-frills standard offer for those who want to turn on the lights and pay their bills with a minimum of fuss. Indeed this is the central recommendation of the Independent Review into Electricity & Gas Retail Markets in Victoria, August 2017, chaired by Professor John Thwaites. They called it a Basic Service Offer, which would not exclude the provision and choice of other offers, if people want to play the game.
Sims’ stack shows the increase in prices. Thwaites’ stack shows where Victorians’ money is going:
Retail accounts for about 33% of the bill. They say that the profits of the large Tier 1 are greater than the profits of smaller retailers. ‘Costs’ include going door to door to convince people to change providers.
Victoria had a basic, independently determined offer until 2009, when it was removed and the market allowed free play. This is how prices went:
Their conclusion is that competition actually costs the consumer money.
Sims makes a big deal of the increase in network charges. Thwaites finds that, as with retail, network charges have more than doubled since 2009. Sims on local radio claims that privatisation had nothing to do with these rises, citing Queensland and NSW as the biggest offenders when in both cases the networks were in public hands.
Sims blames increased security standards (that is, the 0.002% blackout expectation), deemed excessive, and a relaxation of the rules so that the Australian Energy Regulator (AER) is forced to allow a greater return on equity. NSW were said to have an interest in maximising the value of its transmission assets with a view to selling them.
I would make two points. First, Queensland charges with GST are now around $394 pa including GST, which compare favourably with Victoria’s, which is surprising when you consider a more decentralised state, more challenging topography and weather, and more vigorous tree growth.
Secondly, the charges relate to a return on the value of the assets rather than maintenance costs. Technically this could be fixed by devaluing the assets, but that would be tricky if privately owned.
Generating appears to be contained within the box labelled “Wholesale charge” at $266 or around 18% of the bill.
We have had many articles, such as Ian Verrender at the ABC The truth about soaring power prices: wind and solar not to blame. I did a post back in July It’s gas, not renewables, pushing up electricity prices.
Ben Potter at the AFR says that gas used to set the National Electricity Market (NEM) wholesale price about a tenth of the time. Now it’s a quarter of the time.
So this graph of power plant performance, taken from the Finkel Review, is a bit startling:
You can see why Turnbull and Frydenberg would want to keep Liddell running, apart from it being a busted dud.
There is another stack in Australian Energy Regulator: State of the Energy Market, May 2017 which shows how prices are built up over each 30-minute bidding period:
The initial bid is for the half hour, but then demand and supply are settled in five-minute blocks within that frame for each of the separate NEM pools. However:
- The settlement price paid to generators is the average dispatch price over 30 minutes; all successful bidders are paid at this price, regardless of how they bid.
In the example shown, the settlement price paid to all dispatched generators for the half hour trading interval was about $54 per MWh, being the average of the six dispatch prices for the half hour period.
If a generator has a number of power stations, and one of them gas, the system is subject to manipulation within the rules, and the report actually complains of Queensland government generators doing just that during peak summer periods. However, in a separate AER report we find that five coal plants failed in Queensland heatwave on day of record demand.
There is a story still current, promulgated also by Giles Parkinson who published that article on 18 May, that the Queensland minister wrote to the Queensland generators asking them to change their bidding practices, and that the price fell by 30% as a result. The exact truth is not known, but the letter was written in early June, when the retail price had been settled and was about to be announced by the Queensland Competition Authority, giving a 3.3% increase to residential customers from 1 July and 4.1% to business. The letter was only to Stanwell, not to CS Energy. I suspect it related to forward spot prices for businesses without a contract, but I don’t know.
In any case gas is an issue in dispatchable reserve electricity. Potter gives this graph of generation by energy mix, also from Finkel:
It shows gas and brown coal coming off a bit in favour of black coal and renewables. In the post AEMO sees electricity markets reshaped the forecast 20 years out is that the daily minimum will be lower than today, and the daily maximums higher. In addition the minimum will migrate to the middle of the day.
- So in 20 years time the minimum demand in summer in NSW will be 2,236 MWh in the middle of the day, followed by 15,276 a few hours later.
This is not where we’ll need ‘baseload’ coal, which can only be ramped up by about 100MW each hour.
In an earlier post I highlighted this graph, derived from Finkel:
It shows gas reducing from 6% in 2020 to 3% in 2050, if the Clean Energy Target is implemented.
It appears to totally neglect batteries and pumped hydro, whereas we know that pumped hydro storage ‘could make Australia run on renewable energy alone within 20 years’.
To finish I’d like to post this graph again from Ian McCauley of electricity prices:
The program of privatisation and competition began with Victoria in 1994, but got going with the initiation of the National Electricity Market in December 1998. However, the NEM only became fully operational when AEMO, the Australian Energy Market Operator began controlling by managing the practical balance between consumption and supply, operating within and across the interlinked pools of the NEM. That happened in July 2009.
On the face of it markets based on competition and private gain have not worked out well, but we’ll be offered more of the same, with ad hoc interventions by government to try to make it all work.