Additional comments from the Coalition
The sudden realisation by the Gillard Labor government that
Australian families are hurting from rising electricity prices has only come
after the government has made the situation worse by adding a carbon tax.
The Consumer Price Index (CPI) figures for the first quarter
in which the carbon tax applied clearly confirmed the impact of the carbon tax
on the cost of electricity and the cost of living.
Electricity prices have seen a 15.3 per cent rise with
household gas and miscellaneous fuels seeing a 14.2 per cent rise. These are
the largest quarterly increases since records have been kept.[1]
The establishment of this committee is part of a
co-ordinated attempt to deflect attention away from the government and the breaking
of its emphatic pre-election promise not to introduce a carbon tax.
The government is seeking to blame everyone except itself
for the added cost of living pressures on households and the increases in the
cost of doing business in Australia.
Electricity prices have been a growing concern for
Australian households and business.
One of the key arguments the government has pursued recently
was to blame the increase in power prices on network costs—a transparent
attempt by the Gillard government and its alliance partner, the Greens, to
shift blame to the states.
Coalition senators acknowledge that network costs do
contribute to the costs and have been rising. However this is not a new
development.
Two years ago, Prime Minister Gillard was encouraging further
investment in the networks and encouraging the power companies to increase
prices:
The current price rises in a number of states have been
principally caused by a sustained period of under-investment.[2]
And Minister for Resources and Energy Martin Ferguson has
clearly acknowledged that the states should not be blamed:
The states do not control the regulatory authorities that set
prices and any suggestion that they do has no basis in fact and is a cheap
shot.
The states might be getting good dividends but they do not
determine the price setting rules.[3]
Importantly, the Prime Minister and others across government
only started to try and blame the states for increases in electricity prices
after relatively recent changes of government in Queensland and New South
Wales.
This is all about diverting attention away from the single
policy change that would have the most immediate impact in terms of lowering
the cost of electricity—the repeal of the carbon tax.
The impact of the carbon
tax on electricity prices
One of the primary goals of the government’s carbon tax is
to increase electricity prices and thereby reduce the quantity of electricity
demanded. Indeed, the government’s own carbon tax modelling states that:
Electricity demand is an important source of abatement in the
early years, comprising over 40 per cent of the cumulative abatement to 2020.[4]
It is no surprise then that the empirical evidence
demonstrates that the imposition of the carbon tax has led to a record increase
in household electricity prices. After all, that is precisely what the carbon
tax was intended to achieve. Of course, it is highly questionable whether this
increase in prices actually reduces the quantity of electricity demanded. We
know that the government expects domestic emissions to continue to rise and,
given increased business costs and lower international competitiveness as a
result of the carbon tax is likely to help overseas competitors take market
share away from Australian business, any reduction in emissions in Australia as
a result will be offset by an increase in emissions in other parts of the
world—arguably at times by more.
By the same token, electricity price experts agree that
removing the carbon tax—in other words, implementing the Coalition’s policy—would
reduce electricity prices.[5]
Data from the Australian Bureau of Statistics CPI for the
September 2012 quarter (which covers the months of July to September of 2012)
shows that the 15.35 per cent increase in electricity prices in this quarter
was the largest single quarterly increase in 32 years. That is, the
introduction of the carbon tax led to the highest increase in electricity
prices in the entire history of the series.
Statistical analysis of the historical data, which is
summarised in Figure 1 below, puts some additional context around the data and
shows how large an outlier the September increase actually was. The data shows
that over the last 32 years, the historical average of quarterly increases in
household electricity prices in Australia has been 1.6 per cent. In other
words, the introduction of the carbon tax led an increase in electricity prices
of nearly 10 times the historical average.
Figure 1: Data summary of quarterly historical increases
in household electricity prices, 1980 to 2012[6]
Statistical Measure
|
Value
|
Mean
|
1.61 per cent
|
Median
|
0.67 per cent
|
Maximum
|
15.35 per cent
|
Minimum
|
-3.85 per cent
|
Std. Dev.
|
2.95
|
No. Observations
|
128
|
Figure 2 below illustrates graphically the record increase
in electricity prices following the introduction of the carbon tax.
Figure 2: Histogram of historical electricity price
increases[7]
![Histogram of historical electricity price increases](/~/media/wopapub/senate/committee/electricityprices_ctte/electricityprices/report/d01_1_gif.ashx)
The government has chosen to ignore this evidence, and has
instead claimed that the carbon tax would lead to a "modest" increase
in household electricity prices.[8]
It is difficult to understand how a record increase of nearly ten times the
historical average—the largest increase in prices in at least 32 years—constitutes
a "modest" increase.
The government’s carbon tax modelling also claimed that:
The carbon price leads to an average increase in household
electricity prices of 10 per cent over the first five years of the scheme.[9]
The Prime Minister even went so far as to say that:
When the government priced carbon, we forecast an electricity
price impact on consumers of around ten per cent—a forecast which has now
become reality.[10]
But forecasts from computer models are not reality—they are
forecasts. The actual data and the government’s own Budget papers suggests
that the10 per cent forecast over five years is very far from "reality".
First, the evidence reviewed above suggests that contrary to
the Prime Minister’s claims, the increase in household electricity prices since
the introduction of the carbon tax has already easily exceeded 10 per cent. In
addition to the Australian Bureau of Statistics (ABS) data outlined above, the
TD Securities /Melbourne Institute Inflation Gauge for the month of July stated
that '[d]ue to the introduction of the carbon tax from 1 July, the price of
electricity rose by 14.9 per cent'.[11]
Second, the government’s goal is not for the carbon tax to
remain at its current level. There are still four years and nine months' worth
of carbon tax increases until we reach the end of the government’s "first
five years of the scheme".
The carbon tax increases that are expected over the next few
years have been deliberately designed by the government to lead to further
increases in electricity prices, in order to reduce the quantity of electricity
that is demanded which, as discussed above, is the government’s goal.
Specifically, the government’s own modelling (which is
incorporated into the Budget forecasts and projections of carbon tax revenue
and upon which the government is relying to achieve a promised surplus),
suggests that the carbon tax will increase by at least a further 35 per cent
over its current level over this period.[12]
In other words, even though Australians have been hit with a
record increase in electricity prices, the government is expecting (indeed, it
is relying upon) sizeable increases in the carbon tax over the next few years,
with further associated increases in electricity prices.
Disturbingly, under the government’s own modelling
assumptions, by the end of the first decade of the scheme, the carbon tax will
have more than doubled in nominal terms from today’s level.
It cannot be denied that the carbon tax is the largest, most
easily addressed component of electricity price increases, as admitted by the
Department of Resources, Energy and Tourism in recent Senate Estimates
hearings:
Senator CORMANN: What are the five biggest drivers of
increases in electricity prices?
Mr Morling: It is probably best to look at it on a
jurisdiction-by-jurisdiction basis. If you look at New South Wales, for
example, the average price increased by around 18 per cent in 2011-12. If you
break that down, about 8½ per cent was network costs, about nine per cent
carbon costs, 1.2 per cent retail costs, 0.8 per cent wholesale energy costs
and 0.3 per cent other green schemes costs.
...
Senator CORMANN: So the biggest driver of the ones you have
just mentioned for increasing the cost of electricity is the carbon tax?
Mr Morling: The point has been made elsewhere that that was
expected and it is slightly below the expected impact of the carbon price.[13]
The repeal of the carbon tax should be the first step in
putting downward pressure on electricity prices.
Recommendation 1
That the government act immediately to reduce the upward
pressure on electricity prices on consumers and business by repealing the
carbon tax.
The state of the
electricity market
The committee’s report contains much useful information
about the state of electricity markets in Australia. We support many of its
recommendations to improve the regulation of electricity prices and to
investigate the potential to invest in more demand management tools which can
help to moderate the peaks in electricity demand. For instance, we agree with
the report’s findings that there has been an historic increase in electricity
prices of 90 per cent since 2007.
Nonetheless, the Committee’s report:
- fails to stress that the objective of electricity regulation
should be to deliver the most affordable electricity to the consumer with a
level of reliability commensurate with the consumer’s willingness to pay;
- places too great an emphasis on the increase in network and
distribution costs as causes for the recent increases and hence puts too much
weight on changes to network regulation as a potential solution for high
electricity prices; and
- downplays the impact of the carbon tax and other green schemes in
increasing electricity prices.
Australians are hurting
from the increase in electricity prices since 2007
Since 2007 electricity prices for Australian households have
increased by 90 per cent in nominal terms. The Australian government is adding
to this burden with a carbon tax that will increase the costs of electricity
every year.
These historic increases in costs have placed a significant
additional burden on Australian households, particularly lower income
households and Australians living in regional areas.
Higher electricity prices also make it harder for Australian
businesses to compete. The rapid increases have meant that Australia’s
electricity prices are some of the highest in the world and much greater than
those in the United States and Canada (see below). These effects are greater in
industries that are energy intensive, such as heavy manufacturing, which is
already struggling from a high Australian dollar. Higher electricity prices
have therefore exacerbated the impact of the "two-speed" economy by
making it harder for Australian industry to compete.
Figure 3: Average household electricity prices in
Australia in 2011 compared to common monetary areas and other major economies
at Purchasing Power Parity[14]
![Average household electricity prices in Australia in 2011 compared to common monetary areas and other major economies at Purchasing Power Parity](/~/media/wopapub/senate/committee/electricityprices_ctte/electricityprices/report/d01_4_gif.ashx)
Government policy has been
too slow to respond
Prices have been increasing consistently over the past five
years yet the government has failed to take action to respond to these rapid
increases in costs. In 2008, the Australian government transferred the power to
regulate the prices of electricity distribution and transmission companies to
the Australian Energy Regulator (AER).
The government has belatedly established a number of reviews
to try and get a handle on the runaway price increases. These reviews, however,
are unlikely to take any action to reduce prices from their current levels,
even if they may seek to moderate the size of future price increases.
We note that the committee has not provided any estimates of
how much electricity prices could fall by if its recommendations are
implemented. That is, because the question of whether the investment in network
infrastructure is a complex one, something that is discussed further below.
While strengthening the AER’s power to reject proposals to roll in investment
into the regulatory asset base, may help moderate future potential price
increases, these proposals are unlikely to reduce the current level of prices.
The only concrete proposal to reduce electricity prices from
their current levels is to remove the carbon tax.
The consumer should be at
the heart of Australia’s energy policy
We believe that Australia’s energy policy should be designed
with the interests of end consumers at its heart. The pricing of, and
investment in, our electricity sector should balance the need for consumers to
have access to reliable electricity against the need to deliver that
electricity at the cheapest power possible. Achieving this goal is doubly
important: We should strive the deliver the cheapest possible power to take
pressure off the cost of living for those doing it tough, and delivering
cheaper power helps increase the productivity of all sectors of the economy
given that it is such an important input to business costs.
For this reason, we are concerned about Recommendation 8 to
require the "AEMC consider how broader environmental considerations could
better align with the operation and regulation of the NEM".
The Australian Energy Market Commission (AEMC) should focus
on delivering its core objective to: ... As the AEMC told the Committee:
We of course would apply and pursue whatever objective Parliament
see fit to give to us. This issue is not a new one. The way I think about it is
with a football team analogy: everyone on the team has the same objective; it
is just that we have different positions and different roles. Apologies to
those who do not come from rugby states but, if the bonehead thinks that the
five-eighth is not doing a good job, the worst thing he can do is try and do
the five-eighth's job for him. Our role in relation to rules that relate to
economic efficiency is part of one role in what people expect out of this
sector. There are other manifestations of government that obviously deal with
environmental issues in a systemic sense, such as climate change and, in a
local sense, land use planning and emissions—NOX and SOX and salts and things
from the plants.[15]
Moreover, adding additional objectives to the AEMC is
inconsistent with the recent recommendations of the Productivity Commission,
which found that:
The overarching objective of the regulatory regime is the
long-term interests of electricity consumers. This objective has lost its
primacy as the main consideration for regulatory and policy decisions. Its
pre-eminence should be restored by giving consumers much more power in the
regulatory process.[16]
Coincidentally, the committee gave its support to this
finding of the Productivity Commission even though it would appear to be inconsistent
with its Recommendation 8.
We believe that the government should seek to restore the
primacy of the consumer by implementing the draft recommendations of the
Productivity Commission. In our view, the committee’s report has played only
"lip service" to this concept without making concrete recommendations
for its implementation.
Network costs are important
but they are not the answer
The committee’s report puts great emphasis on the role that
increases in network investment have played in increasing electricity prices.
While these have played a role in recent price increases there are other
significant factors at play. For instance, the Productivity Commission has
compared the components of an average bill in New South Wales in 2012–13 against
an average bill in 2007–08.
There is widespread acceptance that there was a need for
further investment in electricity networks, something that the committee has
also recognised. While there are questions over whether these price increases
have been excessive, the question is whether these benefits outweigh consumers’
willingness to pay for greater reliability and fewer outages. The committee has
not provided a clear answer to that question.
It is incumbent on those claiming that network costs have
been too high to identify what reliability standards should be reduced. While
the committee has called for a number of reviews of the electricity sector it
has not identified one specific example of a reliability standard that it would
reduce to help bring down electricity prices.
There is some evidence that consumers place a high value on
reliability standards. For instance, the Energy Networks Association said that:
The AEMC has tested customer attitudes as part of its review
into reliability standards. The results confirm that most customers place a
high value on reliability and are not attracted to trading off reliability for
modest savings in costs.
AEMC analysis also reveals the limited savings which can be
achieved by relaxing standards. According to the AEMC, lowering reliability
standards in New South Wales would yield annual savings of only $3 to $18 per
household once fully implemented (i.e. in 2028/29).[17]
Indeed, we note that there are divergent views within the government
over whether investments in network infrastructure have in fact been excessive.
In late September, the Minister for Energy, Martin Ferguson, rejected a plan by
the Member for Lyne, Mr Rob Oakeshott, for a federal takeover of electricity
price regulation. Minister Ferguson said:
The states do not control the regulatory authorities that set
prices and any suggestion that they do has no basis in fact and is a cheap
shot.
The states might be getting good dividends but they do not
determine the price setting rules.
It is a complex reform that won’t be solved by cheap
front-page headlines.[18]
In our view, the government’s attempts to try and blame state
governments for recent electricity price increases have been clumsy and are not
helpful in trying to formulate better energy policy. In this regard, we note
that the committee has identified "dividend extraction by state
governments" as a factor in contributing to household electricity price
increases with no evidence that this has been the case. Indeed, elsewhere in
the report, the committee notes that dividends from electricity companies are
actually falling in New South Wales.
Engaging in a blame game with the states is not the way to
help reduce electricity prices, particularly given that it has been federal
regulation, through the Australian Electricity Regulator, which has overseen
many of these very price increases.
Lack of attention to
Western Australia and the Northern Territory
The Coalition notes that the overwhelming majority of
recommendations appear to apply directly to states that participate in the
National Electricity Market (NEM) and not to Western Australia and the Northern
Territory, which do not participate in the NEM. For those recommendations that
do not specifically refer to NEM jurisdictions, it is unclear whether they
apply to non-NEM jurisdictions as well and, if they do, how they would be
implemented in those jurisdictions, given their separate and different regulatory
arrangements.
As such, it is unclear from the report what the direct or
indirect implications of the recommendations would be for the non-NEM
jurisdictions.
Indeed, none of the evidence brought before the committee
regarding the regulatory arrangements of non-NEM jurisdictions - including
similarities and differences with the NEM and advantages and disadvantages of
various arrangements - appear to have been considered in any great detail in
the report.
The Coalition considers this is a major oversight.
Concluding remarks
Coalition senators are deeply concerned about the impact of
electricity price rises on the cost of living.
Coalition members of the committee conditionally support the
recommendations of the majority, with the following qualifier:
Any changes to the electricity sector should be based on
the creation of a more open, transparent and competitive market, not through
the imposition of more red-tape and regulation.
The dead hand of government is already imposing a
significant new cost in the form of a carbon tax. Any future changes should
undergo a rigorous cost-benefit analysis and only proceeded if clear benefits
to consumers—particularly households, older Australians and those living in
regional Australia—can be demonstrated.
Coalition members of the committee make the following
additional recommendation:
Recommendation 1
That the government act immediately to reduce the upward
pressure on electricity prices on consumers and business by repealing the
carbon tax.
Senator Mathias
Cormann
Senator for Western Australia |
Senator Sean Edwards
Senator for South Australia |
|
|
Senator John
Williams
Senator for New South Wales |
|
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