Hiding the truth about power prices

Hiding the truth about power prices

Prime Minister Kevin Rudd has again raised the issue of electricity prices, with his clear message that improving the productivity of Australia’s electricity industry will be a top priority of his government if re-elected.

The words had barely been uttered and Matthew Warren, CEO of the Energy Supply Association of Australia, issued a press release reminding the prime minister that former energy minister Martin Ferguson said last year that Australia's average household electricity prices still sit within the lowest quartile of OECD nations. So if our prices are in the lowest quartile of OECD nations why the big fuss about electricity in Australia?

Let’s check whether the lowest quartile claim holds water.

In March 2012, the Energy Users Association of Australia published a report that we were commissioned to do. Our analysis found that household electricity prices in Australia in the year ending June 30 2012 were amongst the highest in the developed world based on current exchange rates. Even on purchasing power parity rates of exchange they were substantially above those in the US and Canada and not far below those in Europe and Japan. So evidently a big gap between what we found and what Ferguson had said was the case.

We sought to understand why there was such a big gap: had we or they made a mistake? The source for the minister, the Bureau of Resource and Energy Economics, confirmed to us that its study had included excise and sales taxes, and also did not use the latest available data. Once this had been taken into account, the gap between the two analyses evaporated.

Now, it’s not right to include sales and excise taxes in international comparisons – they vary enormously around the world and including them distorts international comparisons. For this reason it is standard practice to exclude them. And, of course, using the latest available data is always good practice. So, it seems, our analysis and its conclusions stands.

But time marches on and our March 2012 report is now looking a little dated: household electricity prices have risen further in Australia, in many cases significantly so.

For example, in Queensland household electricity prices rose by about 12 per cent in 2012, and the Queensland Competition Authority has since determined that average household bills will increase by a further 22.6 per cent for a typical household on regulated tariffs.  So that’s about one-third more expensive than when we did our study.

Prices in other parts of Australia have risen also, although not necessarily at the same rate as in Queensland. And, we don’t want to single out Queensland for special attention: in fact our study found that in 2011 their prices were lower than all other regions of the National Electricity Market in Australia.

By comparison, electricity prices in many other countries seem to have continued to stagnate or even decline. If, in 2011, we did not have the highest prices in the world, it seems that we have now, sadly, got there.

This outcome and the reasons for it merit serious scrutiny. Network costs have obviously been a major factor and the Productivity Commission has written an authoritative report on this, calling for many changes. But it’s not just networks: the doubling of wholesale electricity generation prices over the last year has not helped, and questions now also need to be asked about the operation of our electricity market.

It is hard to see that the prime minister is making the wrong call in targeting serious and urgent reform of the electricity industry.

Bruce Mountain is a Director at Carbon Market Economics (CME).