There’s more to high cost of energy than the green transition
Some people focus on the correlation between higher electricity prices and action to address climate change, and see a trade-off between reducing emissions and the cost of electricity. But correlation is not causation.
If we misdiagnose the affordability problem we will either not address it or make it worse.
The starting point to addressing high electricity prices is to understand what caused them to rise in the first place.
Australia’s electricity price problem can be broadly divided into two periods. From 2005-2015 the main driver of higher electricity prices was the gold plating of the network. It is not often recognised that network costs are, broadly, around 45 per cent of the household bill.
Around 20 years ago, much-publicised power outages in NSW and Queensland, with no link at all to renewable energy, saw governments set overly stringent reliability standards, which saw massive investment in the network. This overinvestment increased the regulatory asset base per customer by around 60 per cent between 2006 and 2015. This self-induced problem saw Australia go from having relatively low to relatively high electricity costs by OECD standards. Household prices doubled in real terms during this period.
From 2015-2025 the main driver of higher electricity costs was higher wholesale gas prices. Gas generation is often the marginal electricity generator that sets the wholesale electricity price most of the time. Gas prices either directly set the market price or indirectly do so as coal producers shadow the price of the gas producers.
Australian east coast domestic gas prices approximately tripled from around 2015 as the three Queensland LNG producers drew on domestic gas to meet their export needs. Not only was the domestic market then short of gas, but prices were linked to international LNG prices.
Then Russia invaded Ukraine and sent international gas prices higher, which flowed to the Australian market, and through to electricity prices in Australia and Europe. Making matters worse is the market power of gas generators; for example, one player in South Australia has much more than half the market.
In addition, Australian coal-fired generators have been increasingly purchasing coal linked to international prices, especially in NSW, and global coal prices also rose significantly after Russia’s invasion.
There are, of course, other factors that have boosted our electricity prices. More than 60 per cent of coal generation capacity in the main national grid is around 40 years old, which usually means dramatically reduced reliability. The four most severe price events of the past seven years were driven by unplanned coal generation outages.
A recent problem is the slowing rollout of new, essentially renewable, generation just as demand for electricity is rising to meet data centre demand. How much of this is due to the structure of the government’s Capacity Investment Scheme for new renewable generation is hard to tell, but few projects under the scheme have commenced construction. Australia’s appalling process for project approvals is also clearly delaying projects.
As we focus on electricity affordability we need to understand what has caused the problem. But other facts also need to be taken into account.
Coal was the cheapest form of electricity generation in 2005, but new-build coal generation construction costs have increased by around 80 per cent in real terms in the past 20 years, and coal input prices have also increased. Those believing that coal provides the lowest-cost electricity generation are 10-20 years out of date. And adding carbon capture and storage will only increase costs.
Likewise, new-build gas baseload generation construction costs have increased by around 50 per cent, and would be extremely expensive to run even if Australia’s current gas prices halved.
Nuclear is more expensive than coal and gas if recent builds in the US, UK and France are any guide; proponents need to explain why Australia can build nuclear generation plants more cheaply than countries we usually compare ourselves to and which already have nuclear plants. Further, we need to compare the cost of generation from new-build nuclear, not fully depreciated plants. By all means, lift the moratorium on nuclear generation, but likely no investment will follow.
Fortunately, Australia is benefiting from an amazing change for the better. Solar, wind and battery prices have fallen dramatically. Ten to 20 years ago it would have been laughable to suggest that solar and wind, backed up by pumped hydro, batteries and peaking gas, would be the cheapest form of new firm electricity generation. Not so now. And firmed renewables are not weather-dependent; batteries, pumped hydro and low-capital-cost gas peakers can fill any gaps.
Australia needs fast and practical action based on facts to address our electricity affordability problem. Let us hope we get this.
Rod Sims is a professor at the ANU’s Crawford School of Public Policy and chair of the Superpower Institute. He was chair of the Australian Competition and Consumer Commission, 2011-2022.
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We should welcome the current focus on the affordability of electricity. High electricity prices disproportionally affect lower-income households and affect the cost structure of businesses. In 2005, Australia had some of the lowest electricity prices in the world. We then went to having some of the highest prices before settling now to be about mid-ranking in the OECD.