Energy prices—the story behind rising costs

Kai Swoboda, Economics

Key issue 
The rate of price increases for electricity and gas is expected to moderate in most states and territories over the next few years after a period of significant rises. The federal government is able to directly influence only a small part of price outcomes. Intergovernmental agreements and action by state and territory governments are the most important policy levers to curb future price increases.

Electricity and gas prices for manufacturing businesses and households have increased sharply in recent years and indications are that prices will continue to increase. The underlying cause of these increases is different for electricity and gas and the contribution of each factor is also different for each state and territory.

Responsibility for regulating the electricity and gas supply industries is shared between the Australian and state and territory governments. The Australian Government can only directly influence price outcomes in a small way. Its key role is in coordinating and incentivising action by state and territory governments.

Extent of price increases

In real terms—that is, taking into account the general increase in prices across all goods and services—prices for households increased on average by 72% for electricity and 54% for gas in the 10 years to June 2013.

Real electricity price increases for manufacturing businesses over the same period have been of a similar magnitude (60%). For gas, prices for manufacturing businesses have risen to a lesser extent (29%) (Figure 1).

The increase in real prices after June 2012 of around 14% for household electricity and 13% for household gas is associated with the implementation of a carbon price from July 2013.

The pattern of price increases over the 10 years to June 2013 has differed across states and territories. In real terms, the rate of increase for electricity has been 30% in Perth, 41% in Adelaide, 73% in Brisbane and 107% in Sydney. For those cities connected to natural gas networks, household gas price increases over the 10 years to June 2013 have ranged from 40% in Sydney to 78% in Perth.

Figure 1: Real electricity and gas price increases, 2003 to 2013

Figure 1: Real electricity and gas price increases, 2003 to 2013

Source: Australian Bureau of Statistics.

Factors contributing to price increases and future outlook

There are three major components of a typical energy bill: wholesale costs (covering electricity being generated or gas being extracted); network charges (paying for the reliable delivery of energy via power lines or gas pipelines); and a retail margin (paying for meter reading and other services).

Energy bills can also include components for Australian and state and territory government-based environmental programs such as those aimed at increasing renewable electricity generation. The share of each component can vary significantly across jurisdictions and for different types of customers. However the cost of transporting energy and wholesale costs typically accounts for around three-quarters of the final energy bill.

Retailers compete for customers on price and other services in all jurisdictions except Tasmania. All states and territories except Victoria and South Australia regulate electricity or gas retail prices in some way. Retail prices incorporate the costs of maintaining and upgrading supply networks, which are largely set by a single Commonwealth regulator under nationally agreed rules. The wholesale cost of electricity and gas prices is largely set in competitive markets. While major electricity and gas wholesale markets are connected across some state and territory boundaries, state and local factors can be an important determinant of wholesale price outcomes.

In recent years, much of the increase in prices has been attributed to the need to invest in the network component because of previous underinvestment in maintaining the network or to increase capacity. Also important has been the impact of policies to address environmental issues.

In the case of electricity, the rate of price increase is expected to moderate in the next few years. Overall, household electricity prices are expected to increase at an average of 3% over the next year, with outcomes varying across jurisdictions from a high of 16% in the Northern Territory to a 1% fall in prices in South Australia.

Smaller electricity price increases are largely the result of recent changes to the regulation of transmission and distribution networks and competition in electricity wholesale markets due to low demand growth. These may be offset in some jurisdictions by removing state and territory government interventions that have kept electricity prices lower.

In the case of gas, prices for households and businesses are expected to increase significantly in eastern Australia, as the development of new gas export terminals leads to a tightening of supply. This effect will depend on how quickly new gas resources are developed.

Proposals to keep further price increases in check have included:

  • further privatisation of state government-owned electricity networks
  • adjustments to environmental policies that impact on wholesale energy costs
  • further retail price deregulation
  • setting reliability standards based on the value that customers place on network reliability.

Australian Government influence over retail price outcomes

Australian Government intervention to directly affect retail price outcomes is largely confined to the impact of the carbon price as well as other renewable energy and energy efficiency measures. Changes to energy prices from amending these measures (which would require legislative action) should flow through, to some extent, to end users.

Australian Government action can also be directed at gaining intergovernmental cooperation to change regulatory outcomes and influence government-owned energy suppliers. One current policy debate is about the merits of a gas reservation policy to address price issues that are associated with LNG exports on the east coast.

There are a number of intergovernmental processes, particularly through the Council of Australian Governments and the two key regulators—the Australian Energy Market Commission and Australian Energy Regulator—to address some of these issues. However, it remains to be seen whether they will be effective in containing price increases in the medium term.

Further reading

Australian Energy Regulator, State of the energy market 2012, Australian Competition and Consumer Commission, Canberra, 2012.

Productivity Commission (PC), Electricity networks regulatory frameworks, Inquiry report no. 62, PC, Melbourne, 9 April 2013.

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