Explainer: Why are electricity prices expected to rise, yet again?

Households in three states could be facing electricity price increases of up to 23.7% from July following a report from the Australian Energy Regulator.

The increase will affect customers on standard power plans, known as the “default market offer” in South Australia, New South Wales and south-east Queensland. 

Small businesses could be facing price increases of between 14.7% to 25.7% depending on their location.

The default market offer represents the maximum price is an electricity retailer can charge retail customers for their electricity in those states which have opted in to the system. There are around 540,000 household and 91,000 business customers in NSW, SA and Qld on the default market offer.

In Victoria, an equivalent default offer set by the Essential Services Commission is expected to rise by 31.1%. In Australia, energy is largely the domain of state and territory governments, and other states have different approaches.

Price changes are likely to apply from 1 July 2023 to 30 June 2024.

According to the Australian Energy Regulator, the largest factor driving the price increase is the higher cost and volatility of generating electricity.

In announcing the increase to the default market offer, AER Chair Clare Savage said the regulator carefully considered the need to protect consumers from unjustifiably high prices.

“We know many households and businesses are already struggling with cost-of-living pressures. This is certainly a challenging environment for people to hear that further electricity price rises are on the horizon.

“Energy prices are not immune from the significant challenges in the global economy right now; that’s why it’s more important than ever that we strike a balance in setting the [default market offer] to protect consumers as well as allowing retailers to continue to recover their costs and innovate.

Energy Consumers Australia CEO Lynne Gallagher says the slated increases come “on top of double digit increases the previous year” and are a blow for consumers struggling with cost-of-living pressures.

“These electricity price increases will hurt, heaping more pressure on household budgets and on small businesses,” she says.

The default market offer represents a safety net for consumers, not the best price available. 

Savage and Gallagher both encouraged customers to look for a better deal from electricity retailers.

What does my electricity bill pay for? 

November 2022 report by the Australian Competition and Consumer Commission says average household electricity costs comprise:

  • 49% network costs (the poles and wires that deliver the electricity from power plants to consumers)
  • 28% wholesale costs (the cost of generating electricity from solar, wind, hydro, gas or coal-fired power stations)
  • 11% environmental costs
  • 10% retail costs
  • 2% electricity retailer profit margins.

These relative shares change over time. The Australian Energy Regulator says generation makes up around 30 – 40% of the price, a larger share than the ACCC reports.

Generation driving up costs now

The cost of generating electricity – from solar, wind, gas or coal – is reflected in the wholesale energy cost.

According to the energy regulator, wholesale price increases reflect higher prices for gas and coal, reliability issues with ageing coal-fired power stations and the expected closure of Liddell Power Station in NSW in April 2023. Some regional issues also affected prices, such as SA’s extreme weather in November.

Energy economist Bruce Mountain is Director of the Victorian Energy Policy Centre.

He says the volatile price of generating electricity is due to a range of factors. These include developments in Europe like the shift away from reliance on Russian gas which is increasing global demand for fossil fuels from other countries including Australia.

Mountain says the combined demand from export contracts and local coal and gas use is higher than supply. Which is why when prices increase overseas, those higher international prices flow through into higher domestic prices.

“We’ve got plentiful gas and coal, but we don’t have enough gas on our south and eastern seaboard to meet both domestic consumption and export demand,” he says.

“And then on top of all of this coal and gas producers, power producers are profit-maximising. They will look for opportunities to take advantage of constraints to exercise market power.”

While new renewable electricity are adding to supply, and reducing reliance on coal and gas, it’s not yet enough to counteract these effects.

Mountain says the effects of higher coal and gas prices aren’t limited to fossil-fuel reliant states like Queensland, New South Wales and Victoria. Interstate connections mean electricity prices in renewable-dominated states like South Australia and Tasmania are influenced by market prices elsewhere.

In the future, transmission 

Getting off fossil fuels might ultimately reduce generation costs and exposure to international prices for coal and gas.

But Mountain expects current proposals for new major transmission lines (connecting to new Renewable Energy Zones) will “cost a fortune”, and factor in to future prices.

He doesn’t believe the Integrated System Plan outlined by the Australian Energy Market Operator – involving a complete redesign of electricity infrastructure – will actually be fully implemented. 

“It’s of such huge magnitude, and it will have such massive implications for the environment and for landowners. I cannot imagine it’s going to be built.”

Mountain says he thinks this could delay the transition to renewable energy. He says, a better, more achievable approach would be to maximise wind and solar resources as close to existing demand as possible minimising the need to build enormous transmission lines. 

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