The Truth about the Rising Price of Australian Electricity

It seems that the tabloids are awash once more with stories of rising electricity prices, increased expenses and general financial turmoil for the average Australian family. Recently, AGL and Origin energy raised their prices by 10% and 6.5% respectively in South Australia. It is time that we all take a closer look at exactly why we keep seeing price hikes all over the country, and what this means for the future of your next utility bill.

It is important to realise that like any industry, the economy and markets forces in play can be complex, and most of the time require a bit of digging to understand. This usually means that large energy corporations are able to raise their prices on a whim, giving one or two seemingly reasonable reasons as to why.  Everyone then accepts this and scuffles off in a disgruntled manner, grumbling in a similar way people do when a politician says...anything really.

Energy prices have been rising at an alarming rate, increasing 151% over the last decade in Queensland. Energy companies like Origin and AGL are quick to state that inflation plays a role, as well as market forces which are entirely outside of their control. However, this doesn’t reflect the facts surrounding the issue or the sentiment of many Australian families.

Inflation only accounts for a 30% increase over the last decade (you can see for yourself using the Reserve Bank of Australia’s inflation calculator). That leaves a lot to be answered for. Of course, as private companies AGL and Origin have the right to do as they please, however, in other industries market forces dethrone incumbents who are taking advantage of their apparent monopoly. In this case it seems that utilities aren’t being challenged, most likely due to a huge amount of red tape and regulation that surrounds the industry as well as some level of cooperation between the major players.

Moreover, Australian families are simply not seeing the value, for example Brisbane mother Kathy Ryan said:

“They (electricity costs) have risen well in excess of inflation and they’re one of the home costs that has just risen above and beyond a reasonable increase”.

Let’s take a deeper look at the recent price hike thrust upon South Australia. AGL and Origin raised their prices around 6.5% and 10% and had this to say as the reason why:

Origin: “Changes to the electricity generation mix in South Australia has had an impact on the wholesale cost of energy, which in turn flow through to Origin’s retail prices.”

AGL (10%): “The increase has been partly offset by the decrease in network costs, but is mainly driven by the cost and availability of coal and gas supply for electricity generation as well as the changing mix of generation output.”

Both companies blamed the mix of generation output, more specifically the increase in wind power as one of the reasons for the price jump. While there is a lot of evidence to say that on low-wind days, renewables increase the price of wholesale electricity as power becomes less available.

This comment also refers to the fact a large coal powered plant was recently shutdown, meaning supply decreased as demand went up. Solar-Quotes did a great job of analysing how this affected wholesale prices and were able to deduce that there was an increase of around 4.7c, once other factors were taken into consideration.

Well, case closed then. Obviously this must have been enough to justify a retail price hike, it only makes sense. Especially when the increase only resulted in a jump of 2.1-3.1c. However, Origin and AGL failed to mention that the industry has seen a huge number of cuts to wholesale prices, as well as the fact that recent wholesale increases are temporary, where as it is a rare sight to see retail prices going in reverse.

First of all, it is a symptom of the economy for prices to be somewhat temperamental. Wholesale prices were actually falling gradually, until the Northern Power Station was forced to shut down. This resulted in a price surge as supply decreased, however the high rates will attract more players, subsequently lowering the cost of wholesale electricity once more.

In the retail sector, we consumer don’t get this luxury, and therefore have seen a fairly steady increase in prices regardless of wholesale price drops.

Secondly, and most importantly, South Australia recently lowered network costs by 28%. To get an understanding of why this is such a big deal, network costs make up around 40% of your bill. They simply refer the cost of actually transporting the power from the generator to your kettle, as electricity is lost as it moves through circuits.

After all things are considered, Origin and AGL have increased their prices by around 0.7 c and 1.7c respectively, with no reason other than they are business that functions solely to make money, with no serious competition to stop them from continually putting up prices regardless of the market.

This phenomenon is not exclusive to South Australia, but this example just shows how energy companies take advantage of their circumstances to quickly raise prices, increase profits and make an excuse, without anyone batting an eye.

In Queensland, electricity prices are at an all time high, and are some of the most expensive in the world. In fact, rates in Queensland jumped by another 3-4 per cent on July 1. As we head towards being the leaders in electricity price surges, it is important to think about our financial future.

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While you can try to increase the energy efficiency of your home, the only thing that will significantly improve your expenses is rooftop solar. The average family is expected to spend around $73,000 in the next 25 years, where as a solar powered home will spend $33,000, so the benefits, and the disadvantages of missing out are obvious.

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