Electricity prices – someone always pays

By Cameron O’Reilly, Executive Director Energy Retailers Association of Australia

One cannot fail to notice that the upward movement of electricity prices is becoming a hot topic right across the country. As a topic it has moved from the business pages to the tabloids and talk back radio. That is not likely to be a formula for sensible decision-making.

The frequent question is how can prices be going up so much even before we have an emissions trading scheme? In most, if not all cases, network investment is the major driver, at least for now. Once we do have a price on carbon, the wholesale cost of electricity will take us on a similar upward spiral.

In NSW, the major tabloid newspaper, TheDaily Telegraph, embarked on a populist campaign involving a petition to block proposed rises over three years stemming from a price determination by the state regulator, the Independent Pricing & Regulatory Tribunal (IPART). To be fair to IPART, it was placed in an invidious position of trying to look forward three years into a very uncertain future and had to make estimates about the wholesale price impacts of the proposed Carbon Pollution Reduction Scheme (CPRS). With the decision to delay the CPRS untill 2013, energy price increases were reduced by more than a third to around 20 per cent, but TheDaily Telegraph is still complaining.

The state regulator also had to pass on large network increases in NSW that were separately awarded by the Australian Energy Regulator (AER). As such, while IPART makes the decision on NSW retail prices, it does so against a backdrop of a retail price that is 40 per cent wholesale electricity cost, which it can only estimate through a theoretical model, and 45-50 per cent network charges over which it has no control.

Therein lies the folly of state governments persisting with retail price regulation when we have a national market. It may be convenient to stand behind a state regulator and then exhibit surprise or even outrage when that regulator simply tells it as it is, but it is the height of folly to try and interfere in that process.

That became apparent in Queensland in 2008 when the State Government directed the local regulator, the Queensland Competition Authority (QCA) to change its methodology in response to a draft price determination the Government feared was too high for political tolerance. The net result was a messy court case between the regulator and the main retailers, where the court found the regulator had erred. Comments from the government in response to the most recent draft determination on prices from the QCA indicate they failed to learn their lesson.

If anyone needs a lesson in the consequences of attempting to suppress price signals in electricity, they need go no further than Western Australia. In a process that involved both sides of politics, a decade long freeze took place in Western Australian retail prices at a time when the wholesale price of electricity was soaring in response to gas prices (most WA generation is gas fired). The consumers in WA were protected from true price signals and indeed the real cost of electricity in WA fell over the decade in the order of 30 per cent (see above graph).

It was only when the Western Australian Government sought to restructure its state-owned electricity industry into separate retail, generation and network companies that some transparency was introduced into the consequences of the tariff freeze. The Office of Energy in WA commissioned a study that found that household and small business retail electricity prices were below cost reflectivity to the order of 80-100 per cent.

As a consequence, the state-owned generation company, Verve, has having to be subsidised to the tune of hundreds of millions of dollars as it sold wholesale electricity to the main retailer, Synergy, way below the cost to produce. As the Energy Supply Association of Australia (esaa) noted, WA consumers had been living in a “fool’s paradise” of low electricity prices, made possible by higher taxes to pay subsidies to the generator.

Now the truth has become apparent, the current Barnett Government is left with responsibility for implementing what are necessary and painful increases to get prices back to cost reflectivity and the subsidy to Verve wound back.

In the latest manifestation of this need for catch-up price rises the Western Australian Government had to announce that from 1 April household electricity prices would have to go up by 7.5 per cent and then by another 10 per cent on 1 July. This will still leave prices a long way below cost reflectivity.

All of this is occurring before we have a price on carbon, so there is a lot more pain to come. But unless governments allow these price signals to come through, necessary investment will not occur and reliability will be challenged.

In the end the ERAA believes the only sustainable way forward is to abandon the idea that regulators can set prices and try to create competitive markets that discipline prices and reward the consumer for shopping around. To date, only Victoria has taken this sensible path.

In recognition of the regressive impacts of electricity price rises, transparent government concessions for vulnerable customers will have to be beefed up and real consideration will have to be given to energy efficiency and demand side measures.

Suppressing price signals is not the answer and never will be if we want a reliable electricity system. Just ask the Western Australian Government.