Electricity prices
What a time for the Energy Regulator to announce a price rise
Late last week, as the government was finalizing the budget, the Australian energy regulator published its draft determination for electricity prices in 2025-26, to take effect on July 1, proposing price rises between 2.5 percent and 8.9 percent.
The regulator sets what is known as the default market offer (DMO), which essentially establishes a maximum price for electricity customers in New South Wales, South Australia and the Brisbane region. (It’s actually more complicated than a price cap, as explained on Energy Australia’s website, but that’s the easiest way to think of it.)
It summarises the reasons for the price increases:
Average wholesale market spot prices increased across 2024, impacted by factors such as high demand, coal generator and network outages, and low solar and wind output that drove high price events across DMO regions.
Other drivers include network costs – the costs of transmitting and distributing electricity – which have risen because of higher interest costs in this capital-intensive industry. (When will the RBA look around the world and understand that in some industries high interest rates cause prices to rise?) The regulator also mentions increased retail costs – costs incurred by “retailers” who smooth out the wholesale prices and take a big commission for not doing very much.
Note that the only mention renewable energy gets is that there isn’t enough of it.
At the wholesale level the main cost drivers are our ancient power stations, which would now be well retired had the Coalition governments between 2013 and 2022 not deliberately held back the development of renewable energy. We have to keep them going for now, but they’re unreliable, and when they fail we have to turn to expensive gas generators.
The ABC’s Rhiana Whitson describes how outages at Eraring, our largest coal-fired station, and at other coal-fired stations, are driving up the wholesale price of electricity, in spite of state-government subsidies paid to keep them operating. The problem for consumers is that in the quasi-market NEM, prices are disproportionally influenced by the highest-cost supplier, not by the industry’s average cost.
Governments – state and Commonwealth – are rather annoyed at the regulator’s proposals. In his article State and federal governments scold regulator over power price hikes the ABC’s Tom Lowrey draws particular attention to increased costs incurred by the “retailers” – including administration, debt management, and advertising costs. These are some of the costs resulting from breaking up the previously government-owned electricity utilities when a bunch of economists, infatuated with the imagined gains from structural separation and privatization, established the National Electricity Market.
Although the final determination might be scaled back, this price rise comes at a bad time for the Commonwealth, which, along with other governments, has been financing rebates to electricity consumers. Even if there were no rise in the regulator’s DMO, governments would be under pressure to maintain the rebates. The graph below, constructed from the ABS Consumer Price Index data, illustrates what would happen to electricity prices if governments, state and Commonwealth, were to withdraw all rebates: the index of the non-rebated price is about 46 percent higher than the price after rebates. Politically the government has to do something.
If renewables are cheap, why aren’t power prices falling?
In fact even before the rebates are applied power prices have been falling. That fall is displayed in the electricity price index graph. The blue line, the index before rebates, has fallen by 2.5 percent since September 2023, over a period when the CPI for all goods and services has risen by 3.5 percent. That’s a real fall of around 6 percent.
So in view of the tumbling cost of energy produced from renewable sources, particularly solar energy, and the big expansion of both commercial and household rooftop solar, it’s reasonable for people to ask why prices aren’t falling more rapidly.
Writing in The Conversation in his article Renewables are cheap. So why isn’t your power bill falling? Tony Wood provides two explanations.
One is that as yet there isn’t enough renewable energy, particularly in New South Wales and Queensland. Victoria (where power prices will rise by only 0.7 percent) is better off, because it can draw power from Tasmania and South Australia where renewable energy is plentiful.
The other main reason is the cost of transmitting power. Wood writes:
While solar and wind farms produce power at remarkably low cost, they need to be built where it’s sunny or windy. Our existing transmission lines link gas and coal power stations to cities. Connecting renewables to the grid requires expensive new transmission lines, as well as storage for when the wind isn’t blowing or the sun isn’t shining.
This is where the politics of renewables comes in. Even Coalition politicians have to acknowledge that renewables generate electricity much more cheaply than coal and gas. But like Wood they point out that the sun doesn’t always shine and the wind doesn’t always blow. Unlike Wood, and most energy experts, however, their model of the world is one in which we need 24/7 “base load” power. They also note, as does Tony Wood, that we need new transmission lines to connect renewables to customers, and that transmission lines are expensive. That thinking lies behind their nuclear fantasy – just replace the big old coal stations with nukes, in the same locations, and connect them to the existing lines.
It’s rubbish economics, because they vastly under-estimate the cost and delays in building nuclear power plants, because their modelling assumes very low growth in electricity demand, and because they have locked themselves into the idea of base load power rather than the idea of dispatchable power.
Demand-shifting and investment in storage can obviate the need for wasteful base load power. This is all covered in the roundup of 21 December, which responded to the Coalition’s nuclear proposal, and Tony Wood covers these issues again in his article.
Wood argues that we should hold on to our present course, and go ahead with transmission and storage projects. Battery projects are rolling out fairly quickly, and ANU engineers Timothy Walker and Andrew Blakers, writing in The Conversation, draw attention to 300 possible new pumped hydro sites.
But we don’t yet have those transmission lines, those pumped-hydro systems and other storage systems. We have heaps of rooftop solar – more than 4 million solar systems on household and business rooftops – but it’s more than the system can absorb in the middle of the day. As a result solar-energy feed-in tariffs – the price per kWh the utilities pay for rooftop-generated electricity, has tumbled as the ABC’s Daniel Mercer explains: Solar feed-in tariffs plunge up to 99.93pc in 15 years as market saturates. Households can use some of their own electricity through running washing machines and dishwashers in daytime, for example, but the rest has to go back into the grid at very low prices.
Rhiana Whitson explains that this combination of expected higher electricity prices and lower feed-in tariffs has resulted in a surge in demand for household batteries. For most households a system of batteries and storage makes for a sound tax-free investment, but not everyone has a spare $10 000 or so, and many of those who do have available funds don’t do their sums to calculate the benefits. (It’s much easier to complain about “Labor’s high power prices” than to take personal responsibility for lowering one’s costs.)
That’s why there are suggestions that governments, instead of helping people with their electricity bills (which does nothing to encourage people to adjust their behaviour) should help people buy household-scale batteries to complement their rooftop solar systems.
That makes good sense. Such subsidies are justified not only as a nudge to encourage households to take up the technology, but also because when households use their own energy at night they reduce system-wide demand, avoiding the need for reliance on expensive fossil-fuel systems and lowering the price for everyone. Former RBA Deputy Governor Guy Debelle, John Grimes of the Smart Energy Council, and Independent Member of Parliament Sophie Scamps, are among those who advocate such a re-direction of government support.
How did we get to a situation where we have to give rebates?
Tony Wood explains that “while it was foolish for the Albanese government to promise more renewables would lower power bills by a specific amount, the path we are on is still the right one.”
That specific amount -- $275 – was made in the 2022 election campaign, and it has haunted the government ever since.
On the Radio National Breakfast program on 13 March, Peter Martin explains to Sally Sara how Labor came to make this rash promise. I cannot link it directly because the ABC provides links to interviews with lobbyists and politicians, but not to its own experts offering unbiassed analysis and information – an inexplicably absurd policy! But if you go to the complete 3-hour session, and go 50 minutes and 30 seconds into the session, you can hear Martin’s explanation, summarized below.
In late 2021 Labor made that promise, based on modelling by energy market analyst firm Repu Tex. In February 2022 the Australian Energy Regulator issued its draft determination of prices for 2022-23, indicating there would be a fall in prices of 4 to 6 percent. Labor looked to be on track.
But just six days after the regulator had issued that draft, Russia invaded Ukraine, and the energy regulator began reworking its numbers. It was meant to publish its final determination on May 1, just three weeks before the election.
Had they done so, Labor would undoubtedly have withdrawn its promise. But the Morrison government, which knew of the changed forecasts, amended the regulations around disclosure of the determination, getting it to report later, just after the election.
That decision, not for a price cut but for a price increase, of 11 to 13 percent, wasn’t known until after the election. So the price rise wasn’t blamed on the Morrison government – or on Putin – but on the incoming Labor government.
The Coalition has been making the most of that deceit ever since.
Even if Russia hadn’t pushed up world energy prices, Labor’s promise was a dumb one. It wasn’t about the price of electricity; rather it was about the average household electricity bill. But what does that really mean when there is a huge range in the amount of electricity households use, depending on household size, location, quality of insulation, and other sources of energy including gas and solar?
It would be far more informative for consumers if the government could talk about the price of electricity – the price per kWh – just as we talk about the price per liter of gasoline.
Because it has allowed the public debate to be about the size of people’s electricity bills, it has allowed the Coalition to talk about people’s electricity bills, rather than the price of electricity. In fact some journalists lazily represent the Coalition’s promises about bills as promises abut the price of electricity.
All the Coalition has claimed is that the nation’s total cost of generating electricity will be lower under its nuclear power plan. That is based on absurdly low estimates of the cost of nuclear power, and an equally absurd assumption that there will be little growth in electricity demand. The Coalition has made no promise on prices, and it will not, because the price per kWh would inevitably be higher.
In fact under the government’s plan your electricity bill may well be higher than it is now, because you may have bought an electric car, you may have disconnected your high-cost gas supply, all reducing your total outlay on energy.
Wobbles in the Coalition ranks
Pressure is mounting on the Coalition to drop its nuclear power plan and its commitment to limit renewables’ contribution to 54 percent of the electricity grid. The Sydney Morning Herald’s Nick Toscano writes that a group of big investors, including the US company Black Rock, France’s Neoen, Macquarie Bank, and Andrew Forrest’s Squadron Energy “has ramped up its push against the policies that would restrict the expansion of wind and solar and keep the grid heavily tied to fossil fuels for longer”: Investors take aim at Coalition as nuclear debate hits boiling point.
They are backed by the Clean Energy Investor Group, who represent investors with $38 billion in Australian renewable projects. According to that group’s analysis, household electricity bills would be up to $417 a year higher, were it not for the investments in renewables made so far.
A group known as “Liberals Against Nuclear” is now urging Dutton to drop its nuclear power plan, as reported by Jim Green on the Renew Economy site: “Desperate” Liberals urge Dutton to “stop this stupid nuclear palaver”. These are people who want the Coalition to win government, but are concerned about its nuclear power idea on the basis of cost, security, and the continuing use of high-cost-high-polluting power sources in the decades before a nuclear system is built.
It’s sound political advice, but it’s hard to see Dutton backing down. At most he might hope the issue of nuclear power will go quiet, and that journalists won’t notice that the Coalition has avoided making any claims about the price of electricity.
The Coalition, particularly the National Party, backed by “environmental” front organizations out to stop the construction of power lines, wind turbines and solar farms, has put a great amount of energy into its attempts to stop or reverse Australia’s energy transition. There are powerful interests in Russia and in other countries who don’t want to see Australia demonstrating the way renewables replace fossil fuel.
They have had some success. The most recent Essential poll reveals that in the last eight years the proportion of Australians believing “climate change is happening and is caused by human activity” has fallen from 64 percent to 54 percent, and that the proportion believing that “we are just witnessing a normal fluctuation in the earth’s climate” has risen from 24 percent to 35 percent. The last survey date was while Brisbane was being hit with Cyclone Alfred. The same survey finds that Coalition voters hold these denialist opinions even more strongly. Dutton is not likely to abandon his strongest supporters.