Sunday 19 August 2018

Once more a Coalition federal government is promising savings on household electricity bills


“Throughout the 1980s, '90s, and most of the 2000s, electricity prices tracked fairly closely to general consumer price trends. In the past decade, however, electricity has shot off the charts. Since 2008 power prices have risen 117 per cent, more than four times the average price increase across sectors.” [ABC News, 18 July  2018]

All three major NSW political parties - Liberal, Nationals and Labor - along with their federal counterparts drank the Kool-Aid when it came to the alleged desirability of privatising state assets in the electricity and gas sectors of energy supply.

Here is a brief outline of the how and why...... 

DECEMBER 2010


"The completion of this first tranche of the energy reform process meets the government's objectives – we have exited electricity retailing, we have created a competitive market structure approved by the ACCC and we have received a strong financial return for the taxpayers of NSW,” he [NSW Treasurer] said…..

Earlier, the shadow treasurer, Mike Baird, said: "Whatever they finally announce, it is clear from the ongoing speculation that the receipts will be at the lower end of the $5 billion to $7 billion range, which is about half what these assets are worth – and that is before you take off the $2.3 billion in inducements for the new coalmine needed to get the deal away.

'The end result is billions of dollars lost forever."

A UBS analyst, David Leitch, said: "NSW households are in for higher electricity tariffs and more people at their front door, trying to get them to change electricity supplier."

NOVEMBER 2013


"When this bill is passed, this Government estimates that power prices will go down by 9 per cent, gas prices will go down by 7 per cent, and that means that the average power bill will be $200 a year lower and the average gas bill will be $70 a year lower," Mr Abbott said on October 15.

JUNE 2014


As of 12 May 2017, two government assets have been privatised in 2017. The most recent privatisation is the 99-year lease of a 50.4% share of Endeavour Energy. On 11 May 2017, the NSW [Berejiklian Coalition] Government announced that a consortium led by Macquarie Group's infrastructure arm had been successful in securing the tender for a price of $7.6 billion. Along with Ausgrid and Transgrid, the lease of Endeavour Energy represents the final of the three “poles and wires” sales – a key policy of the Liberal/National government in the 2015 State election. Announcing the sale, NSW Treasury stated:

The NSW Government will retain a 49.6 per cent interest in Endeavour Energy and will have ongoing influence over operations as lessor, licensor and as safety and reliability regulator.

June 2017


Electricity is now management heavy with a blow out in the number of managers relative to other workers. In addition electricity now employs an army of sales and marketing and other workers who do not actually make electricity. In addition the reforms seemed to encourage profit gauging on the part of companies in the industry who are able to inflate the asset base used in calculating the permitted return on assets. More than half the asset base appears to be ‘goodwill’ and retained earnings. There is a weird circular process in which high rates of return are capitalised in ‘goodwill’ and other fictitious or notional items while high profits guarantee high retained earnings which also feed into the asset base. In that way the unproductive capital base is allowed to increase and we are charged for capital that has no real function in producing electricity….

A host of factors have been blamed for the increase in electricity prices relative to other prices but we would point out that the main departure from the rest of the price index happened post privatisation and corporatisation.

JULY 2017


Origin, EnergyAustralia and AGL have all announced price increases for electricity and gas starting from July 1….

In NSW, residential EnergyAustralia customers will see electricity prices increase by up to 19.6 per cent. Origin Energy customers will get a 16.1 per cent rise.

DECEMBER 2017


The key supply chain cost components examined in the report include wholesale electricity purchase costs, regulated network costs and environmental policy costs.
Annual electricity prices for the representative consumer on a market offer in New South Wales:

* increased by 10.2 per cent from 2016-17 to 2017-18 due to higher wholesale electricity costs, driven by the retirement of Northern and Hazelwood generators and increasing gas prices

* are expected to decrease by an annual average of 6.6 per cent in 2018-19 and 2019-20. The expected decreases are largely attributable to decreases in wholesale electricity costs driven by expected new generation (approximately 4,100 MW across the NEM) and the return to service of the Swanbank E generator (385 MW in Queensland). In addition, in NSW, regulated network costs are uncertain in the two years to June 2020 due to the AER being required to remake revenue determinations for the NSW distribution network providers for the 2014-19 regulatory control period.

JANUARY 2018


The most significant price rises were electricity, up 12.4 per cent, fuel up 10.4 per cent, domestic holiday travel up 6.3 per cent and fruit up 9.3 per cent. 

Across New South Wales, we found theaverage annual electricity bill to be just over $1,667. However, we found that bill-payers aged in their 40s reported the highest average bills in NSW at $1,911.76. Those aged 70 or over reported the lowest average bills at $1,466.40.

JULY 2018


This was comprised of $120 due to the [national energy] guarantee and $280 due to new investment in renewable energy that was already planned, mainly because of the Renewable Energy Target, which will run to 2030….

The ESB [Energy Security Board**] proposal increases the annual average saving to $550 on 2018 prices, of which $150 is due to the guarantee and $400 due to renewable energy.


AUGUST 2018


After reading the National Energy Guarantee Consultation Paper as well as the 1 August 2018 Final Detailed Design and listening to statements made by the Turnbull Government, I personally find it hard to believe this change in federal government policy will significantly limit the rate of increases to household energy costs over time when this is based on an assumption that the market will respond by lowering prices across the Australian wholesale and retail sectors of energy supply.

Talk of money 'saved' by households is illusory as It will certainly see no reduction in the actual amounts listed on 2019-20 household electricity and gas bills once this guarantee comes into effect.

*KPMG Economics, November 2017, NEG and Electricity Pricing

Network charges represent on average about half of the electricity supply chain costs, with generation and retail costs (combined into the ‘competitive market’ category) accounting for 42%, and environment policies adding the remaining 8%, based on the latest AEMC Electricity Price Trend report.

The make up of the total average retail cost is shown in Chart 6 which reveals the single largest component of the price of electricity is distribution costs, which represented about 40% of the average cost of electricity. Over the AEMC forecast period to 2018/19, these costs are still expected to represent by far the largest component of the electricity cost stack, albeit fractionally lower in a couple of years’ time.

The next largest component is the wholesale price of electricity, which in 2015/16 represented about 28%. Under the AEMC Base Case scenario – which includes the retirement of the brown coal fired Hazelwood Power station in Victoria – this cost component had been anticipated to rise steadily over the forecast period to represent about 30% of the cost of electricity by 2018/19.

As shown in Chart 7 below, these three jurisdictions experienced higher than anticipated wholesale electricity costs in the order of between 30% and 80% when compared to original forecasts for FY2016/17. When considered on a weighted average basis, using the same methodology applied by the AEMC to estimate the values for the National Summary, wholesale electricity costs have therefore been about 17% to 20% higher than anticipated.
This increase in wholesale electricity costs pushed the bundled cost of electricity to rise by about 5% higher than anticipated by the AEMC, and shifted the relative importance of wholesale prices in the cost stack from about 28% to 31%.


Formed out of the Independent Review into the Future Security of the National Electricity Market (the Finkel Review), the Energy Security Board comprises an independent chair and deputy chair along with the expert heads of the Australian Energy Market Commission (AEMC), the Australian Energy Regulator (AER) and the Australian Energy Market Operator (AEMO).

The current Board membership is Chair Dr Kerry Schott AO,  Deputy Chair Clare Savage, Australian Energy Market Commission Chair John Pierce, Australian Energy Market Operator Chief Executive Audrey Zibelman, and the Chair of the Australian Energy Regulator Paula Conboy.

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