Deregulation of the electricity market in Australia should have led to increased competition and lower prices for everyone. However, electricity prices have continued to risein certain areas at least, and demand continues to fluctuate. Why is the price of electricity increasing despite these changes? There are a number of factors contributing to the continued price rises, but while Australians once enjoyed some of the cheapest electricity prices in the world, in 2015 we ranked as the most expensive per kWh in the developed world.
You may think the price you pay for energy as just for what is taken out at the wall socket or gas tap, but there is a great deal more involved. Around 50% of the cost of your household electricity bill covers the distribution networks that carry electricity from generators to urban centres where it’s used. While you can be reasonably expected to pay out of your own pocket for the electrical systems in your home, the companies that supply electricity and generate it must pay for the means to deliver it to where you live. It’s only a relatively modern idea that electricity is generated where it’s used, as can be achieved with photovoltaic solar panels.
The cost of maintaining and expanding the generation and distribution equipment is passed on to distributors who in turn pass it on to retailers, and then it ends up being paid for by the buyers of the end product: you. In recent years, generators and distributors have spent a lot of money repairing and replacing ageing networks and building extensions to service expanding populations, which has led to price increases that gets passed down the line. Some commentators have suggested this improvement to the network is unnecessary, as current levels of reliability and service are well above what customers demand, but investment continues. It has been suggested that giving independent regulators, rather than state governments, responsibility for setting reliability standards may curb spurious infrastructure spending by what are effectively government-owned businesses running at a profit.
The national grid allows electricity generators to sell power all over the Eastern states where most of the population is located. The competition between generators keeps prices relatively low, but with only a single distribution network, government regulation is required to maintain economic viability of that network while keeping prices affordable. This may be a bigger impact on current prices as regulation is possibly focussing on returns on investment rather than ways to maximise efficiency.
Electricity prices have risen in real terms for the average domestic customer by 10-14% since 2007, but the Australian Energy Market Commission (AEMC) project that price increases are likely to flatten out and even fall over the next 3 years. The AEMC publishes a report on electricity pricing every year in December, and in 2015 their data shows that removal of the Carbon Tax caused a short term price drop across the whole country, but that local state and Territory issues affect prices differently. They also found that in places where market offers are available, people can save between about $100 to almost $250 per year by switching to a different electricity contract due to increased competition. They also warn that over supply of electricity and reduced demand can lower prices, but in the long term this may not be sustained as lower returns for generators mean that less profitable generation businesses could leave the market allowing remaining generators to increase prices in response.
For most people, lower electricity prices are desirable, but with so many variables affecting the final retail price of electricity chances are it will continue to increase over time. If you find you are paying too much for your electricity, comparing providers is a quick way to find out if you can make savings – head over to our price comparison page for more.