Bill shock explained. The three things driving up electricity prices

Few subjects stir consumer passions like rising electricity bills. With power prices more than doubling after inflation over the past 10 years, that’s hardly surprising.

In this week’s episode of the Fairfax podcast, It All Adds Up, the team dissects what has caused the surge in electricity costs.

Hosts Jessica Irvine and Matt Wade are joined by two of Australia’s leading commentators – economics editor of The Sydney Morning Herald, Ross Gittins, and economics editor of The Age, Peter Martin – to investigate.

They identify three components of electricity bills – all of which have put upward pressure on prices:

1. The cost of generating electricity

An unfortunate combination of ageing power stations, poor government decisions and doubts over the future of climate change policy has created great uncertainly in Australia’s power generation sector.

Peter Martin explains how the soaring price of gas has been an important factor in rising electricity costs recently, even though gas-fired generators only supply about 10 per cent of Australia’s electricity generation. That might sound insignificant but, as Martin points out, sometimes small things “can make all the difference”.

The removal of supply due to the recent retirement of several old coal-fired generators has also been blamed for pushing up wholesale electricity prices.

2. The cost of poles and wires

In a speech last month Rod Sims, the chair of consumer watch dog the Australian Competition and Consumer Commission, said the loosening by government of the regulation of the poles and wires monopolies has been a factor in rising costs to consumers. “This was done largely to maintain or boost government revenues, with no or little concern as to affordability,” he said.

Unnecessary changes to network reliability standards, especially in NSW and Queensland, “have also seen costs rise to consumers,” said Sims.

Distributing electricity to businesses and households is a lucrative business and Gittins explains in the podcast how perverse incentives and conflicts of interest in the sector have allowed networks and state governments to boost revenues at the expense of consumers.

“If you are explaining why retail electricity prices have doubled in real terms over the past decade the by far the far the biggest reason, although not the only reason, is the huge increase in network costs,” he says.

3. The margins charged by retailers

It’s not just electricity generation and distribution that’s pushing up bills. The retailers who sell business and households electricity have also come in for criticism. In March the Prime Minister, Malcolm Turnbull, declared: “there is excessive profit margins being made by retailers in the electricity market.”

Mr  Sims, who is conducting an inquiry into electricity prices, said Australia has considerable concentration in the retailing of electricity. According to Sims, there are three “vertically integrated players” who control the lion’s share of the market. He pointed out that many consumers are paying high standing or default prices which “for a range of reasons are not being competed away.”

Got a question? Email the team at italladdsup@fairfaxmedia.com.au, tweet using the hashtag #italladdsup or leave a message on the podcast hotline 02 9282 1632.

Listen to previous episodes here or subscribe now wherever you get your podcasts.

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