Domestic power bills have risen substantially across Australia over the last decade, and they are expected to increase further in coming years. Find out why, and what we can do about it.
So what are we actually paying for? According to a fact sheet published by the Department of Environment and Energy, there’s more to it than just flicking a switch.
Simply put, we pay for four main things in our bills.
Generating electricity (wholesale power)
The cost of actually generating energy – whether from renewable energy, coal or gas – is almost a quarter of the cost of the average bill. This is known as the wholesale electricity price.
The wholesale price of power has risen in the last couple of years due to a couple of factors. First, the rising cost of gas has increased the cost of power produced by gas power plants.
Second, several old and inefficient coal power plants have closed in South Australia and Victoria.
As not enough has been invested in new power generation over the last decade, increased strain is being felt across the entire electricity network. With less electricity supply in the market after the closure of the coal plants, this has pushed up prices for the time being.
Poles and wires (the grid)
Australia has one of the longest electricity networks in the world.
The cost of the poles and wires that carry the electricity from power plants to our homes and businesses is passed through to us in our power bills.
Keeping our poles and wires well maintained and building new parts of the electricity network is not cheap. These costs can make up as much as half of our power bills. According to the Australian Competition and Consumer Commission, poles and wires were responsible for 48 per cent of the average residental electricity bill in 2015-16.
Electricity company administration and marketing costs
This part of our bill covers the cost of maintaining customer databases and billing processes at electricity retail companies, as well as marketing to win new customers.
Information from Origin Energy in 2016 suggested that these costs made up about 15 per cent of the average bill in New South Wales, while a recent study by the Australian Competition and Consumer Commission into electricity prices across the National Electricty Market found that electricity company costs accounted for about a quarter of the average residential electricty bill.
Analysis from the Grattan Institute in 2017 says this component of the average power bill has been one of the biggest causes of recent price rises. A recent bipartisan inquiry into Victorian power prices found that competition in the state among energy retailers had not delivered value for consumers.
This is the smallest component of the average bill. It includes the cost of meeting the national Renewable Energy Target, as well as the ongoing costs of rooftop solar power support schemes. The cost varies from state to state. According to a recent inquiry into power prices by the Australian Competition and Consumer Commission, the cost of environment schemes makes up about 7 per cent of the average bill.
Why are prices rising?
A variety of different factors are contributing to price rises. Some of these include:
- A lack of national energy policy beyond 2020. This means that business does not have the necessary certainty to invest in the new infrastructure needed to replace the old power plants which are retiring
- Rising network costs were a big factor in price rises from 2007-2014, but have since fallen
- Increased charges by energy retailers for winning and billing customers
- The export of gas reducing the amount of gas available for local companies, which makes it more expensive. In some cases this means Australian gas is cheaper to buy in Japan than it is back home
- The retirement of large old coal-fired power stations with not enough new power generation to replace them
- Game playing by power plant operators in the wholesale electricity market and not enough competition to help reduce prices
- Complicated consumer information which makes it hard for people to easily understand the options they have available and make smart choices to reduce their bills.
These issues were highlighted in a recent speech given by Jonathon Hunyor, CEO of the Public Interest Advocacy Centre.
Some relief is on the way. Renewable energy can relieve some of the burden from consumers. The unprecedented increase in the amount of renewable energy projects and investment in Australia will add more supply to the electricity system and reduce the strain caused by the closures of coal plants. But it won’t happen immediately – many of these projects are still being built or planned.
We currently have an opportunity in this country to act on an issue that is affecting all of us with a clean and reliable solution from renewable energy and energy storage. With long-term and effective bipartisan energy policy, we can ensure this happens smoothly after 2020. It would be a waste to let it pass us by.
Is the Renewable Energy Target driving up power bills?
Opponents of the Renewable Energy Target often claim that the target is forcing up the price of power. However, analysis from energy market experts ROAM Consulting found that Australian households would pay over half a billion dollars more for power in 2020 without the Renewable Energy Target in place, and up to $1.4 billion more per year beyond that.
Modelling conducted by ACIL Allen as part of the Federal Government’s Renewable Energy Target review found that the average household electricity bill would be lower in the future with the target in place than without it.
This is because less renewable energy generation means we need more gas, which the Australian Energy Market Operator (AEMO) forecasts to increase in price by 48 per cent over the next 20 years. A variety of energy sources also means more competition in the electricity market – and as in any market, competition helps keep prices down.
A recent report by the Australian National University showed that between 2006 and 2016, electricity price rises were highest in the states with relatively low levels of renewable energy and a high reliance on gas and/or coal generation (136 per cent in Queensland, 118 per cent in Victoria and 109 per cent in New South Wales). In contrast, South Australia, which now generates almost half of its energy from renewables, experienced a far lower electricity price rise (87 per cent) over the same period.
What can we do to combat rising electricity prices?
In addition to retaining the Renewable Energy Target, the best thing we can do to combat rising electricity prices is to reduce or better manage ‘peak demand’.
Peak demand refers to the small number of times each year when very high amounts of electricity are used – usually the hottest few days of summer. As we build more houses and install more air-conditioners, the demand for electricity on these very hot days goes up, and we need to build more power plants to avoid blackouts.
These new plants come at a considerable cost to consumers, even though they might only be used for a few hours a year (over the whole of 2012, the electricity network experienced peak demand for less than 40 hours). Energy policy experts generally agree that building additional power plants specifically to meet the small number of peak demand periods every year is the most expensive way to deal with the issue.
So what’s the solution? Clean energy sources like co-generation, tri-generation and solar can help reduce strain on the electricity network during peak demand times. And energy efficiency measures can also make a big impact in reducing peak demand.
The increasing uptake of rooftop solar panels is already playing a major role in managing peak demand on hot summer days. The technology’s growing contribution was particularly evident during the January 2014 heatwave – the Energy Supply Association of Australia acknowledged that rooftop solar probably stopped Victoria from hitting a new record for network power use on a single day.
There is also substantial scope for different types of ‘smart’ power demand management to help reduce peak demand. These can include remotely cycling air-conditioners on and off, more widespread use of energy storage and a system that charges different rates for power use during peak periods.
By better managing peak demand, we can reduce the need to build expensive extra power infrastructure and help ease the pain of residential power prices.
- AEMC Residential Electricity Price Trends, December 2016
- AEMO National Gas Forecasting Report for Eastern and South-eastern Australia, December 2016
- Bloomberg New Energy Finance
- BREE, 2013, Australian Energy Technology Assessment 2013 Model Update
- N Harmsen, ABC News, South Australian power bills to increase by $115 after Hazelwood power station closure, December 2016
- B Phillips, ANU Centre for Social Research, Research Note: Household Energy Costs in Australia 2006 to 2016, February 2017
- Roam Consulting, RET Policy Analysis, April 2014
- Threat to energy support now shifts to bush fires and storms, ESAA media release, 17 January 2014.