Lane Crockett of wind farm builder Pacific Hydro accuses “groups such as the IPA” of blaming “a soft target like (the Renewable Energy Target) RET or carbon pricing for increased energy costs when in fact a majority of these increases have been driven by the policy principles of deregulation”.
He takes refuge in “official estimates by the Australian Treasury Department, the RET is likely to result in an increase in energy bills of just 2% to 4% by 2020”.
There are three issues here. First, what are the facts on energy price increases; secondly, what has caused the increases to date; and thirdly, what are the likely effects of regulations and taxes such as the renewable energy target and a carbon tax?
Over the decade to December 2010, Sydney’s electricity prices more than doubled, those in Brisbane increased by 94% and those in Melbourne and Adelaide, 80% and 64% respectively. During that period prices in general increased about 33%.
Much the greater part of the increases in electricity prices was due to regulatory sanctioned increases in the line charges of the poles and wire businesses. These businesses have near monopolies on this element of supply.
Some of that increase may have been regulatory catch-up but this is controversial. Work by Bruce Mountain and Stephen Littlechild (the latter a former head of the England and Wales regulatory agency) indicates the increases were excessive in Australia. Mountain and Littlechild assemble information that indicates excessive costs in Australian distribution, especially in the supply monopoly areas of government-owned companies in NSW and Queensland. Price increases have been lower in Victoria and South Australia, where private ownership brings greater disciplines on costs.
Though line costs and charges have dominated recent electricity price increases, carbon issues will dictate future price increases.
While Australia has no formal carbon tax at present, we do have a range of measures that have a similar affect to such a tax, the most important being the renewable requirements. The “20% renewable by 2020”
program sets a de facto carbon price by requiring retailers to incorporate a growing number (45,000 gigawatt hours by 2020) of high cost renewable energy into the electricity mix. There is also a requirement for a proportion of extremely high cost solar energy as well as for the more common form of renewables, wind, which has a premium cost over coal based electricity of around $70 per MWh.
Unless treasury’s Pollyanna forecasts of some imminent technology breakthroughs occur, the 20% renewables requirement by 2020 increases the average wholesale price of electricity by 40%. This works out at an average carbon tax equivalent on household electricity of $14 per tonne of CO2. this in itself is a tax rate on the current household bill that approaches 20%.
On top of this is the government’s proposed carbon tax. Eventually this will need to be in the hundreds of dollars per tonne if it were to accomplish the carbon reduction forcing job intended of it. But even at $20 per tonne, when combined with the existing renewable scheme it means a doubling of the costs of generation. For the household this translates into a 50% increase in electricity prices, and perhaps more than this as a result of the investment paralysis the debate has triggered. In addition there are increases in prices resulting form the higher electricity costs entailed in producing the goods and services we buy.
The IPA has a considerable level of expertise in the energy market and has published many well-regarded books, chapters in books and journal articles on the matter. We are fully aware of the drivers of price increases to date and the causes of these. Though businesses dependent for their success on regulations that stymie their competitors may make gains, the costs of the measures driving these particular firms’ profits is a loss of income by the rest of the community.
*Alan Moran is the director, deregulation, at the Institute of Public Affairs.
Three issues are nominated by the author as critical.
1. What are the facts on energy price increases? Yes, Alan, what are they? Why not put them on the table? Having demanded that the facts be known, only one factoid has been offered for consideration, that being that prices have risen by 100% or so in the major capitals, but then without a single additional fact, sticks the boot into the natural monopoly businesses of posts and wires, claiming that public ownership is at fault. But wait on a bit… why not back this assertion up with even a single fact? In the absence of fact, what is on display is instead bias; the author’s deep seated bias against the public actually owning anything at all.
2. What have caused the price increases to date? Please, do tell us. I’m waiting. How about some figures from Victoria, post-selloff?
3. What are the likely effects of regulations and taxes? Agreed, this is a good question. How about a systematic listing of the major ones, current or proposed, alongside actual numbers. Yes, numbers, the kind that accountants and statisticians use. Why slip straight to the outright falsehood that an increase of 100% in the wholesale cost of generation (even if true), due to a carbon tax, will come through as a 50% increase in the retail cost of electricity. Wait on… didn’t we just get told that the lion’s share of the increase was due to those nasty publicly owned poles and wires? Well, with the average wholesale price of power close to $60 per MWh, that works out to 6 cents per kWh unit at home. Current retail rates from my supplier are above 26 cents per unit. Where did the other 20 cents come from? Fiction?
Besides which, why ignore the other side of the equation? What about the rebates and subsidies which will come hand in hand with any carbon tax? Shouldn’t these be considered? Of course they should.
However, when it comes to storytelling, a good story plot beats the full facts anytime, eh Alan? And the Institute of Public Affairs wouldn’t be in the business of spinning a yarn, would it? And its Director of Public Paucity and Private Gain, a.k.a. Deregulation, wouldn’t dispense only half of the story.
Or would they?
I’d just like to thank the editors of Crikey for putting the background of the author at the head of the article.
eg “director, deregulation, at the Institute of Public Affairs”
Saves me the time of having to scroll down to the bottom of the article before ignoring it.
Of course the IPA has published extensively about the energy market.
They are funded by the mining and energy industry to provide positive PR for them.
A few problems with Alan’s piece:
The electricity price story going forward is not just about climate policy. Network charge growth will continue, driven by steep growth in peak demand (PS distribution companies are all regulated monopolies, whoever owns them). New build costs have escalated substantially even for conventional technologies. High prices for thermal coal will eventually affect those coal plants without captive mines when their supply contracts are renegotiated. Gas prices are likely to rise over the medium term, partly due to somewhat higher production costs (for coal seam methane) and higher demand, but mostly LNG-driven convergence with world prices. In the climate policy sPharr, uncertainty and/or regulation would exact costs even in the absence of formal carbon pricing.
The cost premium of wind over coal is not $70 per MWh, at least not in the favorable sites likely to be taken up hybrid RET. Wholesale electricity prices are currently around $50/MWh (network charges, retail, etc bring this up to about $190 delivered for households); wind is around $90, a $40 gap for LRET certificate prices to cover.
RET costs overall are adding about $7/MWh to electricity prices this year, mostly from the daft small-scale solar component. That part will ease off over the next couple of years; what happens with the rest depends significantly on carbon pricing.
The carbon price is *not* simply on top of the RET. RET certificates trade at prices that cover the gap between wholesale electricity prices and the cost of renewable generation. Thus as a carbon price increases wholesale electricity prices, the gap narrows and the cost of the RET diminishes.
The IPA has not been doing a great job of providing accurate information on energy or climate. Try Ai Group’s recent “Energy shock” report for a decent summary of credible assessments of where energy prices are going and why.
“daft small-scale solar component.”
Hear hear. Large-scale renewable power installations are a fraction of the cost, and we always knew it.
There’s nothing *wrong* with solar panels on domestic roofs, but subsidising them to the tune of 5 times more than large-scale wind power is offensive.
Of course if we subsidised cost-effective, industrial-scale renewables that much, five times more would get built, putting incumbent generators in an uncomfortable position in just a few years.