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Electricity and gas prices: why you're paying more

Date

Bruce Robertson

Power bill increases are due to gold-plating of the system and international pricing.

Power bill increases are due to gold-plating of the system and international pricing. Photo: Michael Mucci

An energy crisis is rapidly unfolding in the Australian electricity and gas sectors that will rival the oil shock of the 1970s.  That shock to our energy-intensive economy originated in global changes in the energy industry. The great energy crisis of 2015 will not be caused by an external shock but, rather, it is a uniquely domestic problem caused by dramatic energy policy failure.

Energy in Australia is rapidly becoming unaffordable for industry and domestic consumers.  In a country that is one of the world's largest exporters of energy, with abundant cheap coal and gas,  it is lamentable that we face high domestic prices.

We have seen a doubling of electricity bills over the past six years.  Rising network costs caused the lion's share of the increases.  Wholesale gas prices will see an even larger rise over the coming two years as the industry moves to world parity pricing.

Industry groups and business leaders have not been shy of commenting on the dire consequences  of high energy costs for their businesses.  Industry after industry has felt the effects: some have downsized and many have closed.  

The social impacts of spiralling prices for electricity and gas cannot be overstated.  Many in our society cannot afford these price rises that bear no relationship to inflation or wages growth.

Meantime, the industry has been busy building poles and wires infrastructure to cope with a supposed increase in peak demand. 

Peak demand has not, however, increased by a large amount. It has decreased by a large amount.

The result is that, in one analyst's view, around half of the expenditure - $22 billion over the past five years -  was unnecessary gold-plating of the network. 

Large writeoffs will come to the electricity industry as power lines to closed smelters and factories around the nation are decommissioned. 

In the coming five years, despite falling demand, some network companies are looking to grow spending and assets.  All this growth in a market that is rapidly shrinking.

Increased spending combined with falling demand will see prices resume their relentless rise after a short-term reprieve from the scrapping of the carbon tax.

Layered on top of the over-investment in grid infrastructure is technological change.  Technological change is rolling over the electricity industry and will be transformational.  Solar power is, like the internet, a truly disruptive technology. The media and retail industries were at first dismissive of the internet and resisted change.  This proved to be a costly mistake.  Solar will change the whole model of the way we generate, store and use electricity.  There simply will be less need for grid infrastructure as many people generate their own power.

This is already occurring and many in the financial world are warning of the changes that will beset the electricity industry.  In late May, Barclays Bank downgraded the entire electric sector of the US high-grade corporate bond market, stating that it sees long-term challenges to electric utilities from solar energy.  Technological change is coinciding with unprecedented investment in the network, much of this investment may ultimately prove to be useless as the entire model of generation and consumption changes.  

The changes in the electricity industry that have driven up prices domestically are mirrored in the gas industry.  Policy failure is at the heart of rises in the domestic gas price.

Historically, the east coast gas market enjoyed  relatively cheap gas, sourced from Bass Strait and the Cooper Basin in South Australia.  It was a domestic market shielded from world pricing.  The advent of the coal seam gas industry in Queensland saw the need to construct export gas terminals in Gladstone.  The government, unlike other governments around the world, allowed unfettered access to global markets. The building of the export gas terminals will see the prices for gas rise inexorably towards world prices.  Indeed wholesale gas prices are widely forecast to more than double to match international prices.

In Western Australia, to shield domestic consumers from high gas prices, the government enacted a domestic gas reservation policy.   This keeps prices low for domestic consumers.  Likewise in the US, consumers benefit from low domestic prices as export licences are hard to come by.  The cheap gas benefiting the domestic market in the US has been hailed as one of the reasons for the recent recovery of manufacturing in that nation.  On the east coast of Australia consumers and industry have no such protection and the consequences of this can already be seen in the rapid deindustrialisation of our nation. 

Looking globally, the explicit government policy of high domestic gas prices is a radical one.  The east coast of Australia is an exception to the generally adopted policy of cheap domestic energy.

Many in the gas industry are calling for the rapid development of environmentally suspect coal seam gasfields in NSW to counter higher prices.  This policy simply will not work as prices on the east coast are now linked to world prices.  No amount of domestic production will change this dynamic.

The great energy crisis of 2015 will rapidly change the nature of the Australian economy from a diversified resilient economy to a very narrow high-cost economy reliant on just the mining and fossil fuel industries for growth.  The pursuit of such a narrow vision for Australia is not in the nation's best interests.

Bruce Robertson is a financial analyst who lives on a farm on the mid north coast.

Paul Sheehan is on leave.

117 comments so far

  • Electricity prices aren't too bad. No need for whinging.

    Let's face it, we're already the world's largest per capita polluters. We've each got eight plasma TVs, a couple of fridges, we love outdoor heating, everything is air conditioned, and we've got a bunch of cars per family for good measure. Energy prices can still go substantially further north and we'll be just fine. If things get really bad, we might even have to start wearing jumpers in winter.

    So ignore the whinging. It's just Aussies doing what we do best.

    Commenter
    Montague H. Withnail
    Date and time
    June 30, 2014, 12:32AM
    • You must move in different circles to a lot of poorer Australians. In my town i know of pensioners , young families , low income earners who cannot afford heating bills and go to bed early just to keep warm. They don't have more than one cheap telly and no air-con. Your "argument" is a classic case of generalising from too few examples. Yes , there are whingers - mostly middle class , but there are a lot more battlers. Please go and have a good look around the poorer suburbs and country areas with your eyes open. Or you could ask the numerous charities trying to help the strugglers manage. You could even donate to them seeing you're comfortable .

      Commenter
      Daniel
      Location
      rural NSW
      Date and time
      June 30, 2014, 6:03AM
    • Aussies are also gullible ignorant selfish fools that just can't get enough of right wing lies and media propaganda.
      Don't ya know ITS THE CARBON TAX!! How funny this was not mentioned at all.

      Aussies are happy singing and dancing, dismissing and ignoring our responsibility to the environment, since we've cheated the world community by not putting a price on carbon.
      We happily sell coal and gas but take no responsibility for the GHG emissions. A bit like cigarette companies their products link to cancer.

      At least we have a government that is committed to keeping us ignorant and stupid. With 1 metre sea level rise already banked in due to man made emissions, those smug liberals with their waterfront properties will be screaming for government protection once they're denial has stopped.

      Commenter
      Tadd
      Date and time
      June 30, 2014, 6:44AM
    • Tadd - could you enlighten us as to when those "banked 1 metre sea level rises" are due to take effect ?

      But yes, the author did seem to play down any impact of the carbon tax. Which is odd given the general consensus was that energy prices went up almost 10% because of it.

      It also begs the question of why people aren't discussing the nuclear option. There's a great article by a couple of UQ guys this morning about out natural competitive advantage in the entire nuclear industry, it almost seems like a no-brainer.

      Commenter
      Hacka
      Location
      Canberra
      Date and time
      June 30, 2014, 7:10AM
    • In The Greens world the solution is:

      A. Wear a jumper

      B. Don't complain

      Commenter
      SteveH.
      Location
      You're just another mouth for me to feed.
      Date and time
      June 30, 2014, 8:16AM
    • Hacka

      When are you moving to Fukushima or Chernobyl to take advantage of the benefits of nuclear power. I believe their reactors came with a lifetime guarantee.

      Commenter
      Good Logic
      Date and time
      June 30, 2014, 8:28AM
    • @Tadd & Hacka - it >IS NOT< the carbon tax. What a full-scale myth. It was the gold-plating that was done - which is why my Victorian electricity bills went sky-high. And the proof is on my bills.

      Commenter
      Jump
      Date and time
      June 30, 2014, 8:34AM
    • Hacka

      Other components that have led to increase energy costs in particular electricity were network costs at 51 per cent, wholesale generation at 20 per cent, and retail and customer service at 20 per cent and then the CT at 9% and with the CT compensation was provided to many households and businesses so the CT had minimul impact

      However to be fair all energy options should be on the table though I dont support Nuclear .

      Commenter
      Buffalo Bill
      Location
      Sydneys Northshore
      Date and time
      June 30, 2014, 8:38AM
    • Don't worry Hacka .. sea levels are not rising. Time to buy your water front properties now .... just bring the sand bags she'll be right.
      It's time for one term Toned Abs to tell us there is nothing wrong through sacking of more scientists or researcher.
      The Carbon Tax had hardly any effect on energy prices ... the sad fact of the matter is that energy companies were already bracing & preparing for the impacts. The impacts, ironically being a drop in energy consumption. So the energy companies had to shift their paradigm from ever increasing energy consumption to less usage energy model... of course with higher prices to compensate the change.
      Energy prices went up before & after the carbon tax .... Modelling came out saying that prices would drop if we kept taking action on this issue with renewable forms of energy.
      Hacka keep paddling ... someone might believe you.
      Prices have gone up again even with the mantra of the LNP removing the CT. So ... are the energy companies quickly getting a little grab in before the repeal? This latest rise .. must be the CT ... hahah what a joke!
      If energy prices didn't rise, we would find it strange. Such is the joke of our growth system.

      Commenter
      Yuppy
      Location
      Yuppy Ville
      Date and time
      June 30, 2014, 8:48AM
    • SInce power generation by burning crap is a declining industry I think we should just give some of our business mates a monopoly on the poles and wires delivery system instead so they can make oodles of money at our expense by charging whatever they want. What is it with all these people circumventing the whole fossil fuel industry by generating their own energy? Don't they understand how capitalism works?

      Commenter
      GOV
      Location
      Sydney
      Date and time
      June 30, 2014, 9:27AM

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