In an energy market that has collapsed under years of strain, prices have spiked and supply is tight. In the short term, there is little householders can do but find innovative ways to cut energy use. In the long run, we will need state and federal governments to work with regulators and industry to rebuild not just our energy infrastructure, but the market that shapes it.

How did we get here? Will price caps help households? And where will it end?

How did we get into this mess? And why now?

For years, just about the only thing the various voices in the Australian energy sector could agree on was the need for “certainty”. Fossil giants, renewables advocates, market analysts were all calling for it. But certainty of what?

Certainty meant clear energy policy from governments (federal and state). And it was becoming more crucial because the world was changing fast. Every year the cost of renewable energy, particularly solar power, was dropping while worldwide demands to cut greenhouse gas emissions were ramping up. A chief executive could hardly go to a board or investors with a proposal to spend billions on new energy infrastructure without a business case – and without clear government policy, they couldn’t build the case.

Most of the Australian east coast’s electricity comes from a bunch of giant, coal-fired power stations. They’ve blessed the nation with abundant cheap energy and cursed it with among the highest carbon emissions per person in the world.

And they’ve grown old.

Once sold into private hands, it slowly became clear to their owners that, in this new world, at the end of their 40-odd years of life the stations would need to be replaced by cleaner forms of energy generation.

That shift would cost a fortune and take a generation, even if done right. Done poorly, it would cost more and take longer.

But without a government willing to step in and make it happen – to provide certainty via either regulations or a tax on carbon – the transition never happened. (The tax might have worked, says Victoria Energy Policy Centre director Bruce Mountain, because of the incentive it would have created to plough more capital into renewable generation.)

Federal party leaders and even whole governments were put to the knife when they flirted with policies that might see people actually have to pay for the new system that was needed. Burnt by the process, they fiddled with the market system that sees power traded between generators, wholesalers and retailers, in a bid to reduce the costs of the transition for householders.Australia’s system of generating, transmitting and selling electricity became all carrot and no stick – and infernally complex. For this complexity – let alone for failing to provide reliable and affordable energy – the market is a catastrophic wreck, says Bruce Mountain.

Meanwhile, the coal generators have lumbered along, backed by an influx of cheap renewables and by gas peakers that could be switched on when there was high demand. But while gas has filled the gaps, it has been costing more as the wells closest to cities have run dry and the export market has grown.

Encouraged by state governments determined to act on climate, renewables kept flowing in, straining the transmission system, or “grid”. The Coalition government both grumbled about this and claimed credit for the emissions reductions that renewables caused.

The system grew more brittle, more vulnerable to shock. And this year the shocks rolled in – a cold snap, floods that stalled coal mining, plant and equipment sputtering and seizing, and Russia’s brutal invasion of Ukraine.

Prices spiked. The government stepped in to cap them. But that also exacerbated the problem, so fractured is the market. Some generators simply chose to stop producing power rather than doing so at a loss. So, the government ordered them to fire up their plants, opening the door for valuable compensation from the public purse.

Finally, this week the Australian Energy Market Operator, one of an alphabet soup of regulatory bodies, pulled the plug and suspended the market.

Will that price cap you hear about curb your bill?

In short, no – or at least, not by much. It’s complicated.

Regulators rely on two tools to restrain prices when they get out of hand.

The first is the price cap that kicked in for some parts for the east coast when prices surged earlier this week. But the cap relates to the price that retailers pay to wholesalers – not to the price you pay for your power.

Obviously, by capping wholesale prices, pressure on the price you might expect to pay is relieved. But the money you pay your retailer is not just for electricity. That wholesale price accounts for roughly a third of your power bill. Retail costs add about 10 per cent, but almost half the cost goes into maintaining the network that takes the electron from the coal, solar or wind generators to the power switch in your home.

The second mechanism is the default market offer, which is a benchmark price set by different regulatory bodies depending on whether you are a customer in Victoria, or based in the other eastern states. (We told you it was complicated.)

This will increase by around 10 per cent in NSW and Queensland and about 8 per cent in South Australia from July 1, which means that the average consumer who relies on this safety net price will pay anywhere between $119 and $227 more for their power this financial year than last.

But that increase is just the beginning. It reflects price pressures that the regulator was able to consider when they set the cap – before prices shot to a staggering $15,100 per megawatt hour for a period before the cap kicked in at $300 per megawatt hour this week.

And there is more. Those generators ordered to provide electricity will be allowed to recover their costs, which will, ultimately, be fed through to households, though those costs might be spread over years rather than months.

Tennant Reed, lead national adviser with Australian Industry Group, says that if before the crisis households were paying around 25 cents a kilowatt hour in total on their bills, this could jump to between 35 and 40 cents once the current crisis fully flows through. That could happen in waves over the next two years, but would mean around a 50 per cent increase in household energy bills.

“If people have a less pessimistic outlook than that, I’d be overjoyed to see their thinking,” he says.

So what can you do to brace for the shock?

The first thing you can do is reasonably simple – shop around among energy providers for the best plan. The government’s Energy Made Easy website will help, but make sure the price being advertised is the one you’ll actually be paying, says Choice’s Chris Barnes.

He recommends calling the company to make sure they’re not going to “pull the rug from under your feet” and charge higher prices later on.

Once that is done you can cut down on your use, which is harder.

Homeowners with money to spare for big upfront costs can invest in solar panels, or even better solar panels and battery storage. They can pay for better double glazing and better insulation. They can replace gas appliances with electric alternatives for cooking and heating water and space.

Renters, or those struggling to keep pace with rising cost-of-living expenses, have fewer options.

Those with split-system air conditioners should fire them for up heating, the University of Sydney’s Professor Richard de Dear said last winter. Many people still do not realise that these systems heat more cheaply and efficiently than gas. Remember, said de Dear, that the air you heat is basically a fluid that floats up. “It’s fine if you live on the ceiling,” he says. Otherwise, a slowly turning ceiling fan will help move warm air back down into your living space.

Then there the solutions recommended for years: use appliances outside peak periods, and raid a hardware story for door stoppers and tape to kill draughts.

Where does it all end?

As Europe works fast to free itself from its lethal energy tether to Vladimir Putin’s Russia, it is spending billions to subsidise householders to reduce their energy use. This includes helping them improve insulation and replace gas appliances with electric ones, powered by rapidly expanding wind energy. Most analysts believe a short-term jump in emissions will give way to a sharper path to net zero than was imagined just months ago.

That response offers a guide to what Australian governments might do to help households cut their bills – regulate better housing standards, subsidise those energy efficiency measures mentioned above, and even restrict gas connections in new housing developments to free up future supply.

Some of this is being done.

Around 1 million households in NSW, for example, are eligible for a free solar energy system under a $128 million state government package to kick in from July 1, while homeowners in some postcodes can also access interest-free loans to purchase solar.

In Victoria, homeowners can apply for rebates on solar panels, batteries and hot water systems, and renters can also access funds to install solar if they come to an agreement with their landlord.

These measures could be combined with a federal push to build into the market a capacity mechanism – that is, incentives to have industry pump more money into renewable energy and firming technology such as batteries and pumped hydro to store renewable energy.

This would speed up our transition in line with the demands of both our economy and our climate commitments.

The process won’t be easy, cheap or fast says Mountain, but nor can it be avoided. When we’ve finished, he says, our children are likely to enjoy power that is too cheap to bother metering.

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