Straya takes gold in globe’s most costly energy bills

Australia now has the most expensive energy bills in the cosmos:

Yet in terms of our resource endowment, we are probably closest to Norway on that chart. How did it come to this?

Jessica Irvine wrote a good piece a week ago summarising the three drivers of energy price rises in Australia:

In reality, there are three main components of household bills. Whether households actual ultimately pocket these savings will depend on what happens with all three.
The first, is the wholesale cost.

That’s the cost of actually generating the electricity, be it burning lumps of coal, a gas-fired electricity plant, solar panels, wind turbines or whatever clever ways we may come up with in the future to produce electricity. Today, 77 per cent of Australian electricity comes from mostly brown and black coal, 10 per cent from gas, and 13 per cent from renewable sources.

For a long time, this part of the system, of producing the electricity and getting it into the grid, has been going pretty well. Australians have enjoyed a reliable and low-cost supply of wholesale energy.

Basically, we burned ship loads of cheap coal, and to hell with the environment.

This is the part of the system that is now utterly falling apart and is in most need of repair – which we’ll get to.

The second major component of household electricity bills is the cost of transmission and distribution. The costs involved in building poles and wires and actually getting electricity to your wall sockets makes up about 40 per cent of your total bill.

This part of the electricity price equation has been broken for decades, and is the main reason power bills have nearly doubled over the last decade.

Power lines are natural monopolies. Traditionally they were all government owned. Jeff Kennett privatised Victorian networks, but until very recently, distribution networks in other states, such as NSW and Queensland, have remained government owned, with regulated pricing.

And basically, they stuffed that up for consumers by deciding to let the networks earn a guaranteed rate of return, based on their costs. That is, the more they spent, the more they earned.

…The third and final component of a household’s bill is the margin added by electricity retailers. In theory, anyone can set up a business retailing electricity and there are many suppliers. In reality, pricing structures are so complex consumers do not exercise their power to switch providers, and retail margins remain higher than otherwise.

So, we got to where we are today pretty much thanks to the Australia Tax, that marvelous cocktail of busted ideology, rentier policy and plain stupidity that leads most Aussie “markets” to competitiveness disasters.

Electricity retailing is a toxic mix of foreign kids banging your door down representing firms aiming to be “least worst”. There is little to judge between them.

Distribution is now a beefed up and gold-plated grid that charges like a wounded bull just as demand is falling owing to the greatest decentralisation of energy since the Industrial Revolution. Almost alone it crashed Australian multi-factor productivity over a decade as $80bn was thrown at soon to be obsolete networks. Now, as customers go “off-grid” owing to its immense expense, it is forced to keep jacking up prices to cover lost market share, entering what is known as a death spiral.

Wholesale is a political football that has sunk prime ministers. Mercifully, today we are only here to discuss this last driver of prices, those that actually generate the power.

The AFR’s Phil Coorey describes where we are:

Energy Minister Josh Frydenberg has done a good job in commissioning Alan Finkel to come up with a policy that offers a way through the political impasse.

The biggest challenge remains the conservative right, people who pay lip service to climate change because they feel they have to, but do not believe emissions mitigation should be a driver of energy policy.

“It’s price, national security and reliability,” said one MP on Friday, who is part of a small but growing number gathering behind Assistant Cities Minister Angus Taylor, who is now leading the fight against a Clean Energy Target as modelled by Finkel.

As this paper revealed during the week, Taylor has gathered a following because several years ago he cast doubt on the modelled price impacts of the Renewable Energy Target, which have, to some extent, been vindicated.

He is now telling colleagues to not believe the modelling contained in the Finkel report, which says a CET will take the pressure off prices, because the modelling uses similar methodology to the RET.

Everybody in the Parliament agrees spiralling power prices are a massive problem, politically and economically. Any MP will tell you of a large business in his or her electorate about to go to the wall but cannot say so publicly because the banks will come after them.

Despite this mess of interests, it must be remembered that there has actually been a consensus plan for energy transformation despite the past fifteen years of political headbutting. It resembled that of other nations and actually favoured Australia owing to its generous resource endowment. It was to shift from coal to renewables via the “transitional fuel” of gas. A carbon price following Sheregold or Garnaut enabled it. A world dominated by the Renewable Energy Target enabled it. A world in which the Clean Energy Target predominates enables it. Today, if there were no decarbonisation policy at work at all, it would still happen given the risks facing coal in the developed world are now so high that it is priced out, and although renewable energy storage for baseload power is clearly becoming economic, gas is still competitive.

It is a testament to the sense and compelling economics of the plan that it survived just about any scenario. Gas turbines are cheap to build and much cleaner than coal and can support baseload power while renewable storage catches down its costs.

But! Today it is Australia’s truly idiot genius to have engineered just about the only scenario in which this plan collapses. It is to have wasted another $80bn by installing white elephant LNG export plants in QLD, leaving ourselves short of gas and sending the price of our “transitional fuel” to catastrophic highs. Thus we now have idled gas power capacity and no more being built even as coal is retired.

Whichever decarbonisation plan ends up being in force for the long term – let’s go with renewable energy targets – while gas is uber-expensive, we’re going to get more grid stability issues and shocking prices. This will be made all the worse for households and industry as gas utility prices skyrocket.

Yet, if the gas price is lowered all of these problems disappear. It is gas that sets the marginal price in the wholesale market. Lower it and all power costs will fall.

The ultimate irony is it is going to happen anyway. Gas prices where they are today, $15-20Gj versus $3Gj historically, are literally uneconomic. Thus if nothing is changed, further energy market adjustment will happen via demand destruction and the gas price will ultimately tumble. The choice is only between whether to do it now via sensible policy or to let the market do it, such as it is, more painfully via industrial hollowing out and consumers scrambling to get off-grid.

The closing word goes to Coorey and the Coalition:

The clear disagreement is how to solve the problem. The majority of the Parliament believes the CET in-principle is the way to go because, as Finkel says, investor uncertainty created this mess and ultimately, certainty will fix it.

…Some advocate the government construct coal-fired power stations. Others want nuclear power embraced, the National Electricity Market abolished and there is a growing groundswell for much stronger intervention in the gas market.

Turnbull has already threatened to invoke constitutional powers to limit gas exports to ensure adequate domestic supply. This is no longer feeding the bulldog. In Tuesday’s party room, South Australian Liberal MP Tony Pasin said there must now be direct intervention to control gas prices, through a gas reserve or direct price control. There are others who agree. One MP said gas price control may be deemed anti-competitive and leave the government exposed to legal action but the alternative was “tens of thousands of jobs lost”.

That is exactly right. The exorbitant price of gas brought about by shipping it offshore is destroying household budgets and industrial profits. The Curtis Island LNG plants were all mis-allocated capital built in a bubble, yet every Australian is now paying the price instead of the firms that stuffed it up.  Local households and businesses are literally subsidising loss-making exports to Asia as the gas cartel applies a reverse tariff that generates cheap energy for Asian households and business:

This goes way beyond market failure. It is straight forward economic suicide:

  • Curtis Island plants have break evens around $15Gj yet are shipping gas at $9Gj;
  • the local gas shortage is only 5% of the volumes that we’re chucking offshore at huge losses;
  • Asian customers don’t even want the gas. Take or pay contracts are force-feeding them and they are reselling volumes on the spot market. Japanese customers are actively seeking ways to break contracts.

Any and all government interventions to fix it should be on the table:

  • hard gas reservation;
  • harsh “use it lose it” rules;
  • creation of a national gas company to force develop reserves and benchmark prices;
  • nationalising Santos;
  • price controls.

Whatever it is, 5% of those exports must be kept in Australia and the price be dropped to export net-back around $7Gj from $20Gj today. There is not enough gas left over to develop cheaply otherwise.

Comments

  1. In Houston, Texas I pay 5 cents a kWh for electricity and 1.96 a gallon for fuel.

    Note I am installing three phase power on a property and the electric company is installing the lines and transformers for free. They are busy at the moment so it might take 5 days to do it.

  2. In 2002 a 25 year A$25 billion contract was signed to export LNG from north-west shelf to China.

    “supply three million tonnes of liquified natural gas to China every year beginning in 2005.”

    “JOHN HOWARD, PRIME MINISTER: This is the single biggest export deal this country’s ever picked up and this is going to nourish our export income for a quarter of a century.”

    I wondered at that time if long term contracts are a good idea or a bad idea. In hindsight they are a bad idea.

    Spot price is the way to go. Aussies do not have fixed price home loans. Nor do Aussies have fixed price petrol. Why should LNG be any different?

    Say the Audi A4 cost $1 billion to develop. They had no contract with car buyers around the world. The Audi A4 is sold at the spot price to anyone who wants one. So LNG plants should also be built with no buyer in mind.

    • It was obvious to most of us at the time that it was a bad deal. I remember Bob Brown making some anti-China comments at the time (on other issues) and being criticized for potentially jeopardizing this big gas deal. “Excuse me, Dr. Brown, we are trying hard to get ourselves [email protected]*ed here, please keep your mouth shut and don’t rock the boat.”

  3. drb1979MEMBER

    those UK prices in the first graph seem a bit high – I’m paying 11p /Kwh in the London during the day, and 7p at night(SSE Electric)
    A lot less than the AUD 30c listed. Standing charge of 20p per day.

  4. If you’re a business customer than this pricing really sucks and I’m not sure that I have a solution.
    If you’re a retail household than it’s high time that you investigated rooftop Solar PV + minimal Battery storage (say 5kwh) +solar hot water.
    That’s the thing about free markets, they find and develop alternate solutions if any alternative exists. As prices stand today, for about $10K you could have a minimalist Solar + Battery solution that met your power needs 80% of the time, add in a $200/year grid connection and you’re laughing ( btw you’ll be laughing even harder if you make some deal with your neighbor to sell them your excess solar electricity in exchange for grid access on the 20% of the time when solar proves inadequate)
    This point about neighbors sharing electricity is important because it raises the possibility of community electricity Grids that are ran for the benefit of the community, these grids would have the necessary back-up generators and national grid hook-ups and be all properly managed and properly engineered. (important point if you want to avoid house fires from poorly managed generators/ batteries)
    Thing is, these alternative electricity sharing solution would be considered weird wacko survivalist stupidity in the US (where Robert above is paying 5c/kwh) but they’re viable in Australia because the alternative is so totally F’ed up.
    That’s good news for Australian entrepreneurs because it gives us the first mover advantage in developing these futuristic alternate microgrid solutions. One thing that you can count on is that PV solar prices will continue to fall (in real terms) so if battery costs fall just a little more than we are looking at a truly global opportunity for these sorts of micro-grid ideas and the glue products that create a viable manageable microgrid
    It’ll definitely prove hard to displace that 5c/kwh Houston electricity but that still leaves about 7B people wanting your product….that’s good enough odds in my way of seeing things.

    • Robert claims to be paying U$0.0561/kWh (A$0.07/kWh). But the US average is U$0.12/kWh.

      California is the biggest state in terms of population and electricity is costly in California. Solar power does not need to be as cheap as what Robert claims to be paying. Most people do not live in Texas and most factories are not in Texas.

      Solar panels will keep getting cheaper and perhaps UHVDC transmission lines will too.

    • Problem is, to maximize the sale price of their assets state governments seem to have made all sorts of secretive guarantees of profitability. If consumers started dropping off the grid in any number, they would have to raise taxes in other ways in order to compensate the owners.

  5. Tassie TomMEMBER

    Ha ha ha! Tassie is the cheapest state in Australia! (ACT is a territory).

    And down here the generators, the distributors, and the retailers are all government owned. How’s that for “efficiency of private enterprise” all you mainlanders?

    And we’re still cheapest despite our state-owned power companies carrying $2.5 billion in debt rated BBB+ so that this debt can be hidden from the government balance sheet which is rated AA+, hence we’re probably paying 5% on it – or $1000pa extra on a family of four’s electricity bill in interest alone.

    And we’re still cheapest despite the crappy PPP arrangement in leasing the Basslink cable, which again, in an attempt to hide the cost of Basslink from the government’s balance sheet, will probably cost us about 3 times as much in the end as if we’d just paid for it.

    And we’re still cheapest despite our current and past energy ministers not knowing their arse from their face when it comes to managing Tasmania’s energy infrastructure and the massive opportunities it presents.

    To still be cheapest despite all this says something about what’s happening on the mainland, doesn’t it?

    • “And down here the generators, the distributors, and the retailers are all government owned. How’s that for “efficiency of private enterprise” all you mainlanders?”

      Thankfully in Victoria we can still scab some of your cheap state owned energy through Momentum Energy, otherwise yeah it would suck..

    • Philly SlimMEMBER

      Transmission and distribution make up c. 40% of the bill. And tassie is tiny compared to NSW and Qld. Even Victoria has a relatively dense grid compared to SA / Qld / NSW so they are getting the most screwed.

    • Give us back your per capita GST overpay and then get back to me about your cheap power.

  6. The power companies are owned by mums and dads trying to get ahead. If not for them, there would be no power anywhere in the country.

    • The wealthy power company owners supply 90% of Australia’s energy, which in turn delivers 100% of our profits.

      Without the power companies we would all be living in caves under communist rule.

      All prise the energy companies.

      .

    • That’s some pretty twisted logic you’ve got there.
      I think I’m correct in saying that all of Australia’s major generation and Transmission infrastructure was built by state governments some 30 odd years ago. It’s only in the last 20 years that these assets have been privatized.
      If you only consider the assets created since privatization than maybe there is some logic in the statement however that sort of assumes that the Public ran electricity system couldn’t have done the job equally well…if not better.
      Sorry but your, I own a monopoly so damm it your going to pay through the teeth to access my monopoly attitude, is what’s the real cause of this uniquely Aussie electricity F’up.

      • No, all the power would disappear, and the millionaire mums and dads with taxable incomes of less than 80k would die. Why would you want to KILL mums and dads?

    • Fuck mums and dads trying to get ahead (like they’re some protected Aussie species) , i am fed up with this shit… and yes I am a dad

      • I’m an ordinary mum and dad millionaire with a taxable income of zero. Why would you deny me the Australian dream of getting ahead by becoming a super smart rentier? [email protected] mums and dads? Doesn’t that make you a mother and a father [email protected]?

    • Not only are they owned by Mums and Dads, but they need to budget for the expense of employing ex-politicians in do-nothing jobs after they leave politics.

      This is the pollies reward for keeping power prices going up!

      • That’s so racist. How do you know all those people living in Singapore and China aren’t second generation Australians? Ordinary mum and dad Australians. Trying to get ahead. With taxable incomes of less than 80k.

  7. Let’s be frank we’ve got shed loads of cheap energy but we’re strangling household electricity bills for the God of man(and woman!!!)-made climate change. Distributors/wholesalers aren’t what’s changed over the past couple of years. Terry McCrann wrote a good article in the Australian over the weekend on this.

    • Nope. The article´s table and Bolstrood´s post (below) summarize the situation nicely. In the end Australia doesn´t have a forward thinking plan. It reacts WTSHF, and that never leads to efficient solutions. That is why the infrastructure is laughable and the problems almost 3rd world in nature. It is a textbook case of how not to run a country.

  8. stagmalMEMBER

    yep, ive been getting $500 power bills a quarter and i live alone in a two bedroom apt and actively work to reduce my power usage. fucked as brew.

  9. Casual observation. Almost all policy takes a business first consideration. This seems practical, but it ignores one key point of commerce – business exist around a consumers needs and wants – 101 right. Policy should be what does the consumer / voter need, then business adapts around this point. Almost no policy is created from the basic point of “lets design a system for the consumer and work back from here………”. It’s then up to business to work for it, stretch, adapt……. this is why Aus businesses are so sluggish, fat and lazy. Where our system fails (no doubt many points) – is that if two of the only two tenders have no interest, then you open to the whole market, not the game of mates club……….

    • Know IdeaMEMBER

      You reminded me of my experience touring China and introducing Chinese SOEs and companies to the idea of understanding the (Western) consumer and developing products from there. The typical response was along the lines of “Why would I do that when the officials can just tell me what to produce?”. Maybe Australia is not so much different after all.

  10. Watch for the RBA deciding to exclude power bills from their basket of consumer goods. They are continually fiddling with this basket in an effort “to keep inflation down”.

  11. bolstroodMEMBER

    Watching Insiders yesterday, with Barnaby Joyce as guest intervievee, they , Barry, Panel and Barnyard, all talked around electricity & power prices and not once was gas generation mentioned.
    In the SA power outages last summer , caused in some part by the collapse of 20 odd high voltage pylons,privately owned gas turbines were not accessed to restore power because 1. the operators refused unless exortionate price were allowed , and 2. because they had no gas , having sold it into the Gladstone export market.
    Coal was , according to Barnyard, an essential for base load.

    This led me to think that the public will be subjected to high electricity prices and power outages next summer and they will complain bitterly. Then Gas will be ressurected. Only by major gas mining (read CSG) will the situation be saved .
    All new CSG will be reserved for domestic cosumption. Thus pitting the communities angst about CSG against the communities angst about expensive and unreliable electricity supply.
    This save the Coalitin from having to step in and regulate the East Coast Gas Cartel, which is against their neo-liberal free market philosophy.

      • No there will not be blood. Aussies are dumb sheep an not used to protesting anything.

        Business as usual will continue.

      • I am with Marcus, Australians are dumb sheep. It would’ve been protests on the street by now already from everything else (cuts to education , hospitals, pensions, house prices, public spending, privatization of almost everything, Centrelink debt collection, NBN, government corruption, gov perks on public purse, economic meltdown for the sake of the rich..and the list goes on and on), but ….crickets in the streets. They rather protest for gay marriage and refugees.

  12. And Victoria is doing the heavy lifting in this global leadership thrust. Time for the other state to be levelled up – national pride demands it!

    Go straya!

  13. There is a simple Economics textbook rule: NEVER privatise any defacto Monopoly, or if you really, really want to, do so with strict Government set price controls.

    It seems AU Govs do not know any economics principles at all ….

  14. ErmingtonPlumbingMEMBER

    The AngloSphere needs its “Left of centre” parties to reject the legacy of the Thatcherites Keating, Blair and Clinton and reembrace the spirit of ” Article 4″ of the British Labor party.

    When Margaret Thatcher was once asked, what she thought was her greatest achievement, Her reply was, “New Labor”
    No doubt she was referring to Thatcherite disciple Tony Blair’s removal of Clause 4 from the labor party’s constitution.

    Clause IV (also Clause Four) historically refers to part of the 1918 constitution of the Labour Party in Britain which set out the aims and values of the party. Before its revision in 1995, its application was the subject of considerable dispute.

    To secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution and exchange, and the best obtainable system of popular administration and control of each industry or service.[3]

    In 1918, nationalisation was seen by many voters as akin to modernisation – the nationalisation of the railways was a widely supported policy, for instance, as it would reduce the plethora of uncoordinated and competing companies. This text is usually assumed to involve nationalisation of the whole economy but close reading of the text shows that there are many other possible interpretations. Common ownership, though later given a technical meaning by the 1976 Industrial Common Ownership Act, could mean municipal ownership, worker cooperatives or consumer cooperatives.[citation needed]

    In December 1944, the Labour Party adopted a policy of “public ownership”[4] and won a clear endorsement for their policies – the destruction of the “evil giants” of want, ignorance, squalor, disease and idleness (identified by William Beveridge in the Beveridge report[5]) in the post-war election victory of 1945 which brought Clement Attlee to power. However the party had no clear plan as to how public ownership would shape their reforms and much debate ensued.

    The nationalisation was led by Herbert Morrison who had had the experience of uniting London’s buses and underground train system into a centralised system in the 1930s. He started with the Bank of England in April 1946, whereby stockholders received compensation and the governor and deputy governor were both re-appointed. Further industries swiftly followed: civil aviation in 1946, and railways and telecommunications in 1947, along with the creation of the National Coal Board, which was responsible for supplying 90% of UK’s energy needs. 1946 also saw the establishment of the National Health Service which came into force in July 1948 and in 1948 came the nationalisation of railways, canals, road haulage and electricity. By 1951 the iron, steel and gas industries had also been brought into public ownership.[citation needed]

    https://en.wikipedia.org/wiki/Clause_IV

    Its time to take out Countries back people,

    https://youtu.be/ETqOvBKnKdk

    https://youtu.be/M_o2tsp-E2I

  15. DominicMEMBER

    I saw an article earlier this morning in the paper claiming ‘free market failure’. If I had a dollar for very time I’ve read a similar line in recent months etc ..
    The frightening thing is that it proves those opining on this subject are worse than clueless. If you can’t identify the problem then how do you expect to be able to solve it?
    This is policy failure on a grand scale. Nothing more. What private money is going to touch power generation with a barge-pole when policy is worse than schizophrenic. Investors in power generation assets need multiple decades of policy certainty otherwise the investment risk becomes too great. If the goal-posts are going to be moved every time we change government we’re going to end up living in caves again.

  16. The big ticket item in the Victorian networks has been the expenditure on reducing forest fire risks posed by power lines. The original sum was $750M and it has only gone up from that:
    https://www.energy.vic.gov.au/__data/assets/pdf_file/0020/41627/PBSP-overview-fact-sheet-2016-121216.pdf

    Gas prices are not the cause of the power price increase. It has come about through State and Federal governments establishing renewable energy targets or direct tax on CO2.

    Building wind turbines is the greatest asset to the coal industry that could ever be imagined. The price of coal is skyrocketing, both thermal and met, as demand in the places that make wind turbines grows exponentially. The construction material intensity for wind turbines is two orders of magnitude higher than that required to build coal fired generators. China buys Australian coal and iron ore; uses it to manufacture the components that go into wind turbines then finances Australian purchase of these symbols of stupidity so Australians can subsidise their uneconomic power production.

    Right now, midday AEST Monday, the 4395MW of installed wind power in Australia is pumping out 380MW – just 8.6% of capacity installed; or 1.5% of NEM demand. According to the Jacob Group report, that backs the Finkel report, that situation never happens.

    • notsofastMEMBER

      I find it incredibly strange (but not surprising) that the Electricity Industry is spending huge amounts of money trying to minimise a fire risk from its poles and wires but seem perfectly happy to introduce another fire risk inside the home of almost every Australian due to the impossibility of adequate voltage regulation with significant amounts of distributed generation. The people who champion distributed generation aren’t going to be held accountable for the deaths that result from these future fires so its all care and no responsibility from them. And when the fix (which will be very expensive if it is to meet the required levels of safety integrity) does eventually get worked out you can bet your bottom dollar that it won’t be the people that have installed these distributed generation systems that will be required to pay for the fix. Adequate voltage regulation in the home is an area that requires urgent investigation and intervention. This requirement for urgent action should not and must be lost in the current power price crisis.

      • Adequate voltage regulation in the home is an area that requires urgent investigation and intervention.
        Interesting comment, can you give some examples.
        From my own experience most moderns sine wave inverters have fairly tight control voltage regulation, +-5V peak is very common load regulation spec. in my book that’s pretty good regulation for loads from 20W to 5kW..
        Maybe you are talking about RMS voltage changes resulting from high levels of third / fifth Harmonic load current, or maybe not….definitely interested in understanding.

    • Rick mate, don’t ever lets facts interfere with your conclusions especially given the extreme care exercised by HnH to not make that mistake.

      • The only reason electrical generation is reliant on gas is the need to have fast response generators to meet the vagaries of wind and solar – up and down minute to minute. This came about due to various governments’ regulation for intermittent generators to take higher proportion of the load making low cost base load generators no longer economically viable. The whole NEM system is degraded for the sake of these subsidised symbols of stupidity scattered across the country side.

      • No argument from me, BUT Renewables are still the future.
        Today’s problem is that no bank would lend any Australian generator the cash to invest in a new Coal fired power station. No money to invest means everyone involved in Coal fired power is just running out the useful life of their existing assets and logically intends to leave a completely F’ed up mess behind. Look at SA for a glimpse of our future on the east coast. We certainly didn’t have to take this road given Australia’s huge coal resources but I suspect it’s too late to turn back now.

  17. In WA the government says that electricity charges to customers need to rise so they cover the real cost. Currently the government subsides around 15% of the cost. How about instead of increasing the price 15% they work on reducing the cost 15%? Even the media never suggest that!

    Part of the high cost is that the government pays a retainer to private generators to keep them available. The generators are paid even if they dont provide any electricity. This cost the state $1B per annum in 2014.