EU Energy Policy Blog

It is a question that is often asked: Who pays how much for electricity and why? The answer, it turns out, is not as straightforward as it may appear. It may not be as complicated, but is akin to asking what is the most expensive city to live in? In this case, the answer depends on where you live within a “city” – center of town, in a suburb, in a high price neighborhood, etc. – how you “live” – for example whether you are renting or owning property and when you bought it – and many other variables – for example the size of the dwelling and its amenities.

Likewise, how much a particular consumer pays for electricity depends on many variables, including the customer class, quantity consumed and the type of contract or tariff the consumer is on. There are taxes and exchange rate issues that further complicate comparisons across countries. None of this, of course, prevents people from trying.

A recent study conducted on behalf of Electricity Users Association of Australia (EUAA) by Carbon + Energy Markets, a Melbourne-based consultancy, concludes that Australian electricity prices are among the highest in the world – a most unexpected result.

And this is before carbon tax that is about to be introduced next month, and before counting the increased costs associated with renewable energy, which are yet to be registered in prices.

It is a remarkable conclusion – and controversial. Its timing coincides with rather pronounced recent price increases in Australia. What makes it surprising is that Australia is blessed with abundant supplies of coal, which it liberally uses to generate over 90% of its electricity. What it does not use domestically, it ships to China and elsewhere, where they never seem to get enough of the stuff. As a visit to the giant export terminal at New Castle, among the biggest in the world, shows, train loads of coal arrive and are loaded into ships that are waiting in line 24/7 to take it away.

With a competitive wholesale market and efficient coal-fired plants, one would expect dirt-cheap electricity prices. Why would it be otherwise? Yet, according to the EUAA study, this is apparently not the case.

To be sure, there are a few places on Earth where juice is more expensive, but according to the EUAA report, which is focused on residential tariffs, 4 Australian states are among the 6 priciest in the world. Only Danish and German households pay higher retail rates.

What is even more surprising is the rapid rise in prices in the past few years, and projections of continued price hikes as envisioned by the Australian Energy Markets Commission (AEMC). Whereas average retail residential prices in the US, EU, Japan and Canada have remained flat or, in some cases, slightly declined for the period 2002-2011, Australian prices have risen substantially and are projected to increase further through 2014, according to AEMC (graph on left).

Part of the explanation, according to the EUAA report, may be the rise of Australian dollar relative to other currencies during the study period. As it happens – surprise – Aussie dollar has lost some of its luster in the past few months and is now trading at parity with the US$. But even after making adjustments in relative prices based on purchasing power parity (PPP), Australian prices still remain high (graph below). So what explains this apparent paradox?

Trying to shed some light on the matter, the Electricity Supply Association of Australia (ESAA), a lobbying group, offers a number of comparisons from different sources, all helpful, yet reinforcing the above-mentioned caveats that the devil, as always, is in the details.

A March 2011 study by the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) lists Italy and Denmark as countries paying the highest industrial and residential prices, respectively, with Korea enjoying the lowest rates in both categories among the countries examined.

The data for some countries appears to be for different years, and there is the issue of taxes and subsidies, which explains much of the variability. In European countries, electricity, like petrol, is heavily taxed, while in South Korea they are heavily subsidized. For large countries like the US, the prices vary widely from state to state and even within a given state, making the country-wide average largely irrelevant.

Another 2011 study by NUS Consulting Group examining a smaller group of countries also ranks the top 11 most-expensive countries to be in Europe, with South Africa and Canada on the bottom of its small sample. NUS does not distinguish among customer classes.

Yet another study published by the International Energy Agency (IEA) in 2011 based on 2010 data shows a similar pattern listing residential European prices to be among the most expensive (graph below). The impact of taxes plus variations in generation mix explains most of the differences.

High European prices are mostly explained by the heavy tax component and generous renewable feed-in-tariffs; low prices in Norway and Canada are mostly explained by availability of plentiful and cheap hydro in the resource mix. Korean prices are artificially low – compared to Japan – due to government subsidies, and so on. There are many explanations for the price variations.

ESAA, which represents the Australian electric power industry – not a unanimous group with diverging views – would have probably preferred had EUAA not published the study with its incendiary message just as a controversial carbon tax is to be introduced in July 2012 and coincident with significant network price increases taking place across the country with the blessing of the Australian Electricity Regulator (AER).

On its website, ESAA points out – correctly – that EUAA uses regulated rather than market or contracted prices, which many households actually pay, thus over-stating the Australian prices. The EUAA report suggests, “caution in drawing conclusions” from its own study.

The explanation often heard from the regulators is to blame the rapid pace of economic growth, especially in Queensland and Western Australia, and an aging infrastructure in need of major upgrading and replacement in New South Wales and Victoria. There is, no doubt, some justification in this. The author of the EUAA report, Bruce Mountain, however, dismisses these as not the “real reasons” but admits that the “results surprised us, and suggest the need for a seriously hard look at the reasons for this outcome.”

Asked to comment on the controversy surrounding recent Australian price increases, Roman Domanski, Executive Director of EUAA said, “Australian electricity consumers – business and household – are fed up with double digit price increases year in, year out. They have grown weary of the excuses by the industry and government that this is due to aging asset replacement and peak demand growth, when they know it is because of a combination of poor network regulation, rent capturing, unproductive and wasteful government ownership and inefficient renewable energy subsidies.”

He adds, “It is simply not acceptable that a country as rich in energy resources as Australia has close to the highest electricity prices in the developed world when it should have closer to the lowest.” Representing mostly energy intensive consumers who are unanimous in their affinity for lower input prices, Mr. Domanski’s frustration is understandable.

Part of the answer may be to say that electricity prices are on a rising trajectory, for a variety of reasons, and this may be a global phenomenon. ESAA refers to a study by Simshauser and Laochumnanvanit (2011) showing historical residential prices for New South Wales and Queensland for the period 1955-2011 (graph below). Inflation-adjusted prices, on a downward trajectory for decades, appear to have hit the bottom in early 2000s and are rising with alacrity.

Perhaps this represents the end of significant economies of scale and scope that allowed the industry to deliver more kWhs from ever larger and more efficient central power plants. The global upward price trend also captures higher fuel prices, environmental regulations, and policies promoting renewable energy – although these are yet to be reflected in Australian prices.

When asked what the right answer is for consumers frustrated with rising electricity prices, like Mr. Domanski’s constituents, this editor’s reply is:

• First, get used to it. The days of cheap electricity – and energy – are over;
• Second, cut down consumption by investing in energy efficiency. It will pay back, sooner or later; and
• Consider generating as much as you can when/if it makes sense – once you have completed step 2.

For many Australian consumers who don’t know any better, it may be tempting to blame higher prices on the country’s recently passed carbon tax law, scheduled to be introduced in July. That would be misleading and unfortunate.

F.P. Shioshansi

This post is extracted from EEnergy Informer, JUne 2012 issue.

This entry was posted on Sunday, June 10th, 2012 at 4:46 pm and is filed under Electricity. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.