By Lance Hoch Oakley Greenwood director and Rohan Harris Oakley Greenwood principal consultant.
Residential electricity prices, which had been fairly stable in real terms across the National Electricity Market (NEM) from the mid-nineties through to about 2006, began increasing significantly in 2007 in some jurisdictions and in 2008 in others.
By 2012, after four to five successive years of increases that in several jurisdictions were 10 per cent or more annually, electricity prices had become a topic of national political concern. In much of the media commentary about these increases, network charges – the costs included in consumers’ bills for the physical delivery of electricity and related services – had been identified as the main cause of the increases (‘networks’ refers to both electricity transmission and distribution companies).
To investigate this further, Oakley Greenwood (OGW) assessed how the components of the annual electricity bill of an average (annual consumption of 4000kWh) residential electricity customer in Victoria, who does not have off-peak electric water heating, have changed from 1995 through 2013. The average annual bill was calculated based on all of the market offers that were available within each distribution area in each year.
We then calculated a statewide average annual bill by weighting the results in each distribution area by the number of customers in that distribution area. We used the market offers within each distribution area because figures from the Department of State Development, Business and Innovation for 2012 indicate that significantly more residential consumers in Victoria purchase their electricity under a market offer as compared to a standing offer contract.
As can be seen in Figure 1, the annual bill of the average Victorian residential electricity consumer on a single rate tariff using 4000kWh per year has increased by $442 (in 2013 dollars) from 1995 to 2013, which represents an increase of 44.2 per cent. However, the different components of the bill have not changed at the same rate over that timeframe.
More specifically: Although the cost of all network-related services (which includes the cost of the Victorian Government’s smart meter program and solar feed-in tariff) increased by $15 in the 1995-2013 period, the cost of ‘standard’ network-related services actually declined by $122 in real dollar terms over the period, a reduction of 24.7 per cent (‘standard’ network services include all the costs associated with physically transporting electricity from generators to end-use consumers).
This reduction has been fully offset. However, by the introduction of two initiatives by the Victorian government: (a) the mandated rollout of smart meters; and (b) the premium feed-in tariff. The costs of both of those programs are recovered through charges that affect the network portion of consumers’ bills. These programs have added $137 in costs to the annual bill of the average residential customer by 2013. In this report we have separately identified only those government policies that relate to smart meters and greenhouse gas emissions reductions because a number of these have been introduced in recent years and have had a material impact on customers’ bills.
In practice, electricity prices are affected by government policies in a number of other areas, including other environmental, health and safety, and other issues: The cost of (a) the wholesale electricity purchased by the retailer for the average residential customer, (b) the other operating costs incurred by the retailer in serving the customer, and (c) the costs of policy initiatives charged through the retail portion of the bill increased by $295 in real dollar terms between 1995 and 2013.
However, the costs associated with government policy-related programs recovered through the retail portion of the bill noted above account for about two-thirds ($198) of that total $295 increase. By contrast, the cost of wholesale electricity and retail services account for only one-third ($97) of the increase.
Figure 2 shows increases in network related costs, including policy-related costs that are recovered in the network portion of the bill, have accounted for 3.4 per cent of the cost increase. Meanwhile, increases in the cost of electricity from the wholesale market for residential customers, other retailer services and the policy-related costs that are recovered in the retail network portion of the bill have accounted for 66.9 per cent of the bill increases in the period.
If the costs of the government policy-related initiatives associated with improved environmental outcomes, energy efficiency and advanced metering are combined, however, it can be seen they have actually been the most significant cause of the increases (accounting for 75.8 per cent of the increase between 1995 and 2013).
It must be remembered, however, that it is a primary function of government to identify and enact policies and programs that achieve governmental objectives, and deliver benefits to society.
Furthermore, in many cases, the costs associated with implementing a policy or a program will be largely incurred upfront while the benefits accrue over time. The AMI rollout is a good example of this.
This analysis does not take into account these timing issues, nor does it take into account the indirect impact those policies may have had on other parts of the value chain, for example, the impact the Large-scale Renewable Energy Target scheme may have had on lowering wholesale wholesale electricity prices.
Finally, it is also important to note that the composition of the residential electricity bill – and the factors that affect how bills change in time – differ from state to state. We are hoping to publish an expanded study that applies this same methodology to the rest of the states later this year.