Fact Sheet > ELECTRICITY PRICES THE FACTS. Electricity Prices > August 2010

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1 ELECTRICITY PRICES THE FACTS Costs of living issues are featuring strongly in the current federal election campaign, including the prospect of higher electricity prices. While cost of living pressures are real issues for many Australians, there have been some false or misleading claims about the impact on prices, especially household electricity prices, of action to address climate change. Below is some background information which aims to set the record straight. Some key facts include: In the last twelve months both parties have twice supported renewable energy legislation, critical for a clean energy future, but which increase power prices. Power prices are increasing for a number of reasons and causes, but the main driver is the increased investment in network infrastructure, like poles and wires, with over $42 billion to be invested over the next five years. Decisive action on energy efficiency could lower energy bills by helping households and business manage their energy use and reducing avoidable expenditure on electricity infrastructure. As yet neither major party has announced energy efficiency policies that could help people manage their bills. The current state of uncertainty in climate policy will cause electricity prices to rise by as much as 13% by This will cost the economy, for no social or economic benefit, up to $2 billion in Action on pollution and climate change does not need to come at the expense of energy affordability. Strong energy efficiency policies could deliver financial savings to households and businesses worth $5 billion by Current Situation On average Australian households spend less than 3% of their disposable income on electricity bills, or approximately $17.23 per week, according to the most recent Household Expenditure Survey prepared by the Australian Bureau of Statistics. However, as a proportion of total disposable income low income households tend to spend approximately twice as much as high income households. 1 Recent media reports have highlighted the fact that retail electricity prices are expected to rise significantly over the coming years, with or without action on climate change. For example, in NSW the regulator has approved retail price Page 1 of 6

2 increases of 20-42% over the period In Queensland the regulator has approved a retail price increase of around 13% for the current financial year, which comes on the back of around a 12% increase for period These price rises are almost entirely caused by replacing aging electricity infrastructure and expanding infrastructure to meet spiraling peak demand. These price rises are set to occur irrespective of whether a price tag on pollution is introduced. Work by the CSIRO has shown that even with strong action on climate change, overall energy affordability for Australian households is expected to improve over the coming decades. 4 In other words, in coming years households will be spending a smaller proportion of their income on electricity, as incomes grow at a faster rate than energy costs. What is driving these price increases? A typical energy bill is made up of three key components: network charges (the amount paid to transmission and distribution companies to supply the energy), energy costs (the amount paid to electricity generators) and the retail costs (the amount that goes to the energy retailer). In NSW and Queensland network charges account for close to half of the total amount paid by the typical electricity consumer (49% in NSW and 47% in QLD), with a smaller fraction covering energy costs and retail costs. 5 In both NSW and Queensland the increase in power bills is largely due to increased network charges, accounting for more than 80% of the price increase in NSW and 61% in Queensland. 6 Rising network charges is largely a result of increased spending on electricity grid infrastructure to meet the needs of a growing population and increased demand for power. It is estimated that more than $42 billion will be spent on network infrastructure over the next five years in Australia. 7 This money will be spent by transmission and distribution companies, which then pass it through to consumers as a charge in their electricity bill. Rising network charges also reflects a greater emphasis on the supply-side rather than managing demand through investments in energy efficiency and distributed generation options (e.g. cogeneration and small scale solar). Figure 1 shows the relative contribution of these factors to rising electricity prices in NSW. Page 2 of 6

3 Figure 1: Expected average cumulative increase in NSW electricity prices over the period (nominal %) 8 What is the expected impact of the national 20% Renewable Energy Target? There has been bipartisan support for Australia s 20% Renewable Energy Target, with both Labor and the Coalition voting in favor of the target twice in the past 12 months once in 2009 to pass the original legislation, and a second time in 2010 to pass some crucial amendments. Achieving Australia s 20% Renewable Energy Target will see retail electricity prices increase by approximately 4% over the period For the typical household this amounts to approximately $0.8 per week, or less that $41 per year over the period By passing the RET legislation, both major parties have implicitly supported these costs increases because the benefits in the form of reduced pollution and clean energy investment far outweigh the costs. What impact would there be from a price on pollution? The rise in electricity prices expected over the coming years will happen irrespective of whether a carbon price is introduced. As explained above, these price rises are being driven primarily by the massive investment (over $42 billion) in network infrastructure that is already locked in for the next five years. Page 3 of 6

4 Introducing a price tag on pollution will lead to higher electricity costs. Indeed, it is this price signal that will help Australia to de-couple its economy from polluting energy sources in two key ways. Firstly, by making high polluting energy sources more expensive, which clean energy sources become relatively cheaper and hence more competitive. This means investors will have an incentive to invest in clean energy options rather than polluting sources. Secondly, a price-tag sends a signal to consumers that they should be looking for ways to reduce their energy use in order to save money. Putting a price-tag on pollution does not necessarily mean that consumers will be worse off. To the contrary, putting a price on pollution has the potential to raise billions of dollars of revenue, which can be used by the Government to offset rising energy costs by funding energy efficiency programs, reducing taxes and increasing welfare support for low-income families. According to Treasury, if the Carbon Pollution Reduction Scheme (CPRS) had been introduced it would have increased household costs of living by approximately 1.1% over its first two years, including through increased electricity bills. 10 With this in mind, the Government had proposed to provide financial assistance to ease the burden on low- and middle-income households. Under the proposed CPRS the Government made allowances to fully offset all low-income households, with around 90% of these households receiving 120% of the overall projected cost increase associated with the CPRS. The Government estimates that approximately 97% of middle income households would have also received some level of compensation, with around half being fully compensated. 11 What role can energy efficiency play? Well designed energy efficiency initiatives can play a major role in keeping household energy bills low. Work by CSIRO has found that even modest improvements in energy efficiency are likely to outweigh the adverse affordability of high carbon prices and associated increases in energy prices. 12 In NSW and Victoria, where mandatory energy efficiency schemes are in place it is estimated that households will save on average up to $45 per year. 13 Global experience indicates regulatory impact statements typically underestimate the benefits of these types of scheme. The UK s Energy Efficiency Commitment (now called the Carbon Emission Reduction Target) has been running for 16 years. The latest evaluations found that retailers were being 23 per cent more cost-effective then assumed, the scheme saves households money Page 4 of 6

5 and saves the entire UK economy $91 for each tonne of carbon dioxide it abates. 14 The top 200 energy users, mainly in mining and manufacturing, recently found concrete opportunities to save $736 million a year through energy efficiency. 15 Detailed work by ClimateWorks Australia estimated that energy efficiency could save the households and businesses $5 billion a year by ALP policies on tax credits for retro-fitting commercial buildings and mandatory standards for vehicles are welcome but short of possible ambitious energy savings initiatives. The Coalition is yet to announce new energy efficiency policies. Uncertainty about a price tag on pollution will force prices up The truth is that the current uncertainty surrounding climate change policy will actually force electricity prices to increase, with no net benefit to the climate or the economy. According to analysis by economists and energy experts for The Climate Institute s and its business partners (Climate Partners Network), the policy uncertainty will likely increase wholesale electricity prices by around 13 percent by 2020, more than would be the case with decisive policy action. This equates to around $2 billion a year in unnecessary electricity costs in 2020 effectively a deadweight cost as it delivers no benefit to the economy or the climate. 17 According to AGL, the rise in electricity prices stems from investors being uncertain about future carbon prices. This uncertainty sees more investment in open-cycle gas rather than the more efficient combined cycle gas. While opencycle gas would be more expensive to operate if a carbon price comes into place, it is relatively cheap to build. This means investors can re-coup their capital more quickly and minimize their exposure if a carbon price comes into effect. Voters want strong action despite cost of living concerns A recent survey 18 of Australian voters carried out by Auspoll for The Climate Institute found that stronger action on pollution and climate change would gain significant support from soft voters (uncertain about their vote) and those who see themselves as under financial pressure. Those identified as being under financial pressure were also more likely to agree with statements such as our economy is too dependent on energy sources that cause pollution. They showed equally strong levels of concern about the problem and expressed even more concern that action has been delayed. Page 5 of 6

6 ENDNOTES 1 ABS (Australian Bureau of Statistics), 2005, Household Expenditure Survey , Australia, Cat Independent Pricing and Regulatory Tribunal (IPART), 2010, Review of regulated retail tariffs and charges for electricity , Final Report, %20Regulated%20electricity%20retail%20tariffs%20for%201%20July%202010%20to%2030%20 June%202013%20-%20Final%20Report%20-%20March%202010%20- %20WEBSITE%20DOCUMENT.PDF 3 Queensland Competition Authority (QCA), 2010, Notified Electricity Prices , Final Decision, 4 Hatfield-Dodds, S. and R. Denniss, 2008, Energy Affordability, Living Standards and Emissions Trading: Assessing the social impacts of achieving deep cuts in Australian greenhouse emissions, Report to The Climate Institute, June CSIRO Sustainable Ecosystems, Canberra, available online: 5 IPART, op cit; and QCA op cit. 6 Ibid. 7 Prime Minister s Task Group on Energy Efficiency, 2010, Issues Paper, Department of Climate Change and Energy Efficiency, available online: 8 Based on data from IPART op cit. Note, these figures represent the average % increase across all three network business regions. 9 McLennan Magasanik Associates, 2010, Impacts of Changes to the Design of the Expanded Renewable Energy Target, Department of Climate Change and Energy Efficiency, available online: 10 Taken from: Department of Climate Change and Energy Efficiency online material, 11 Ibid. 12 Hatfield-Dodds, S. and R. Denniss, op cit. 13 Department of Primary Industries 2008 Regulatory Impact Statement for the Proposed Victorian Energy Efficiency Target Regulations Department of Primary Industries, available online: data/assets/pdf_file/0018/9135/victorian-energy-efficiency-target-scheme- Regulatory-Impact-Statement.pdf; Department of Environment, Climate Change and Water, 2009, Preparing for the Energy Savings Scheme, 14 Lees, E.W Evaluation of the Energy Efficiency Commitment Report to the Department of Energy and Climate Change. Eoin Lees Energy 15 Eoin Lees Energy, 2008, "Evaluation of the Energy Efficiency Commitment , Report to Department of Climate Change. 16 ClimateWorks Australia, 2010, A plan for a low carbon Australia, published in Climate Spectator, available online: 17 Tim Nelson, Simon Kelley, Fiona Orton and Paul Simshauser, 2010, Delayed carbon policy certainty and electricity prices in Australia, published online: 18 The survey of 1,000 Australians was conducted by Auspoll between 9th and 10th June Page 6 of 6