The battle of the causes of Australia’s excessive electricity prices is well and truly on. Having moved from the world’s lowest cost electricity to among the highest cost in less than a decade, finally questions are being asked.
The government commissioned the ACCC to provide advice on the elements bringing about the price increases and in a selectively released “draft” Rod Sims has said about seven per cent ($100) is due to renewables. A great chunk of the increase was blamed on ‘”strategic conduct” by companies to bid or not to bid to supply the National Electricity Market and manipulate the price’. This provides a foot in the door for the competition regulator to act. But its report seriously misrepresents the issues.
The ACCC analysis of price increases and its attribution of blame is shown here. Aside from the 40 per cent due to network prices the costs increases are put as being due to generation (17 per cent), green energy (16 per cent) and retail (26 per cent).
The numbers for retail are especially problematic since the integration of generation and retail makes the cost allocation difficult to estimate, something the AEMC (responsible for the electricity market rules) in its own work on prices has recognised. Integration of retail and generation leads to massive uncertainties that appear, for example, to show retailers in Victoria are earning far more than in other states. Doubtless there are differences in the costs by state because of the different regulatory impositions but these are insufficient to explain the divergence. Such high and growing retail margins that the ACCC estimates are not plausible in a market that has the big three heavily competing with each other and something like a dozen other retailers seeking to find gaps and take share from the majors. (Though the ACCC has, as in other cases, sought to blunt the competitive rivalry by inhibiting marketing).
The energy companies, while feeding the propaganda debate in favour of renewables, are not acting in any form of collusion. They are simply operating in the market like any other business: looking at their costs, looking at what their competitors offer and bidding in to maximise profits. The big three (AGL, Origin, EnergyAustralia) have 60 per cent of the market but concentration is far less than in many other markets where competition does its job: telecoms, domestic air travel, IPADs. Outside of the big three are several independent large generation portfolios: the two state owned Queensland businesses (although reducing them from three has had deleterious competition consequences), Engie, Snowy, Tas hydro.
The fact is that aside from the 40 per cent price increase attributable to poles and wires (some of which is due to the need to service less concentrated wind supplies), the other 60 per cent cost increase is all due to renewables. This is brought about either directly through the renewable subsidies (and not all of these are factored in by the ACCC since direct support for renewables from Commonwealth and State budgets is not included) or as a consequence of the renewable programs.
The increase in costs from generation and from retail is all due to the renewable energy program increasing costs of doing business and forcing out low cost coal generators. It is these measures that have led to the wholesale price of electricity rising from under $40 per MWh in 2015 to $90 per MWh today.
The wholesale component of household bills is about one third. So this cost increase has led to as much as a $400 per household increase on top of the $100 directly paid in green energy subsidies. The wholesale price effect is far greater for business customers where the energy component can be up to 60 per cent of costs.
The only solution to the regulation-induced crisis we face in energy involves abandoning immediately all subsidies, a solution championed by Tony Abbott, One Nation, the Liberal Democrats and Cory Bernardi.