04.Why are energy prices rising?
National electricity bills rose sharply in 2007 – in Victoria up to 17% – as the drought across eastern Australia reduced the output from hydro-electricity plants. More expensive gas- fired generators were used to produce electricity instead.
But there is more to high prices than the drought, says Roman Domanski, executive director of the Energy Users Association of Australia (EUAA). The EUAA commissioned an independent investigation in 2007, which found that a lack of rational water policy and planning, as well as opportunistic bidding by electricity wholesalers, contributed significantly to high prices. Opportunistic bidding occurs when generators withdraw supply and then re-offer power to the market at increased prices.
Domanski told CHOICE that wholesale prices, high network costs and steep costs associated with renewable energy will force prices up. He estimated wholesale power prices – 40% of what makes up your electricity bills – will rise by 10% in 2010 and a further 16% in 2011, even before carbon and renewable energy prices are factored in. In January, Queensland Electricity raised prices by up to 24%, while the Australian Energy Regulator has given the green light for prices in NSW to increase by as much as 10%. The federal government’s Carbon Pollution Reduction Scheme will increase electricity costs by 1.1% in 2010-11.
“It is very difficult to forecast precisely the overall percentage increase in prices for consumers in each state, as power costs are comprised of several components and they vary from state to state,” says Domanski. “Competition can help to moderate the price, but my concern is that there’s still limited price competition, even in Victoria. Generators who are also retailers have too much market power and limit the extent of competition in the market. There is no doubt prices are going one way – up.”
Generators sell power at wholesale prices in the National Energy Market. Retailers then buy electricity and package it for sale to consumers. AGL Energy, for example, is both a power generator and retailer and has a big share of the market in Victoria.
Different states, different markets
Different levels of price capping, state government involvement and industry competition have created very different market forces across the four deregulated states. NSW and Victoria, for example, were both deregulated in 2002, but spirited competition in Victoria has spurred a much higher switch rate than in NSW, where the state government owns the main generation plants and retail companies EnergyAustralia, Country Energy and Integral Energy.
The seven new entrants in NSW have only acquired about 14% of the small customer market from the government incumbents. Despite this, it’s not yet clear whether competition truly benefits consumers in the electricity market. In the 2007 World Energy Market Retail Rankings, SA came a close second to Victoria in having the highest switching rate in the world, followed by NSW in fifth place and Queensland in seventh. All four states ranked higher than the UK, Sweden, Germany and New York among the 22 markets ranked.
The rankings were part of the Utility Customer Switching Research Project, an international group monitoring switch rates and trends in fully deregulated global energy retail markets. Our survey results are consistent with these findings, with about 50% of respondents in Victoria and SA having switched at least once in the past five years, compared with 30% in NSW and 37% in Queensland. States where competition is not significant were not included in the survey. The ACT government operates a joint venture with the private sector to provide retail services, while WA, Tasmania and the NT retain government control in the retail sector.