Overspending on 'poles and wires' is the key reason why electricity prices have soared in Australia

Photo: Peter Terren/Barcroft USA/Getty Images)
  • The competition watchdog’s preliminary report into power prices found that investment in ‘poles and wires’ makes up 48% of energy bills
  • Between 2007–08 and 2015–16, increases in residential bills were primarily driven by higher network costs. Over this period, wholesale energy costs actually decreased in real terms.
  • Higher wholesale costs during 2016–17 were likely to increase the average bill by a further $167
  • Based on CPI, retail electricity prices increased 80-90% (in real terms) in the past decade

Over-investment in the “poles and wires” infrastructure in Australia’s electricity network is to blame for high power prices, the competition watchdog has concluded in its preliminary report into the national electricity market.

But the 175-page Retail Electricity Pricing Inquiry preliminary report by the Australian Consumer and Competition Commission may also spell the end for a national Clean Energy Target, with the ACCC appearing to contradict chief scientist Ian Finkel’s view that prices would fall by 10% under a CET, with chairman Rod Sims saying it was an “arguable proposition”.

“We don’t judge that it will have that much of an effect on affordability,” Sims told ABC radio’s AM.

The Coalition government is set to decide this week whether to adopt Finkel’s recommendation for a target, although over the past week, various government ministers have appeared to back away from the idea.

Releasing the ACCC report, Sims said there was “much ill-informed commentary” on energy affordability.

“Armed with the clear findings on the causes of the problem, the ACCC will now focus on making recommendations that will improve electricity affordability across the National Electricity Market,” he said. The watchdog’s final report is due in June next year.

The report found the average residential bill was $1,524 (ex. GST) last financial year and network costs make up 48% of that cost. The wholesale cost of power is 22% of the bill, retail and other costs, 16%, with the retail margin at 8%. Environmental costs are just 7% of the bill.

The average residential bills increased by 44% in real terms since 2007-08, while power prices in cents per kWh have increased by 63%.

While wholesale energy costs actually decreased in real terms between 2007–08 and 2015–16, but since July 2016, the ACCC estimates a massive jump in wholesale prices added $167 to the average bill last financial year. Excluding last year, the cost of residential bills increased by 30% in real terms over the decade, while power prices up 47%.

“The main reason customers’ electricity bills have gone up is due to higher network costs, a fact which is not widely recognised. To a lesser extent, increasing green costs and retailer costs also contributed,” Sims said.

Critics of so-called “gold-plating” of the network have long pointed to the $45 billion investment on the “poles and wires” since 2010 as a key factor in soaring power prices.

The Australian Energy Regulator (AER) approved a $45 billion spend on infrastructure in 2010 amid warnings from energy companies that demand was about to spike and blackouts would occur as a result. But instead demand for power fell and consumers were left footing the bill for a “gold-plated” network one expert compared to investing $45 billion in fax technology as the internet era began.

The incentive for the networks was that the more they built, the more they got paid, thanks to a “regulated rate of return” of 10% on the investment, as well as slugging consumers with the $45 billion cost. The NSW was also able to double dip when the AER the NSW distribution networks could claim “cost of capital” on loans at 8.78%, which it passed on to consumers, when it was borrowing for the infrastructure at a much lower rate.

The biggest overspend on the government-owned poles and wires occurred in NSW and Queensland, where network profits also increased the most.

In May this year, the NSW government scored a $3 billion windfall when it controversially sold the state’s “poles and wires” electricity network to a consortium led by Macquarie Group’s infrastructure arm.

The competition watchdog said it will “seek to identify ways to mitigate the effect of past decisions around network investments on retail electricity prices”, but noted they will still “burden electricity users for many years to come”.

The ACCC concluded retail margins increased significantly in NSW, but decreased in others and there was a much larger increase in the effect of retail costs in Victoria than in other states.

Last financial year, Queenslanders paid the most for electricity, followed by South Australians and people living in NSW.

Victorians will have the lowest electricity bills, but the ACCC casts an interesting light on the federal government’s attacks on Victoria over gas exploration and energy costs, concluding “the prevalence of gas usage in Victoria in particular” was a key reason for lower prices there.

But, the watchdog says, the closure of large baseload coal generation plants saw gas-powered generation becoming the marginal source of generation more frequently and higher gas prices contributed to increasing electricity prices.

“We estimate that higher wholesale costs during 2016-17 contributed to a $167 increase in bills,” Sims said.

The ACCC found that smaller retailers struggle to compete against the “big three” – AGL, Origin and EnergyAustralia – which control more than 60% of generation capacity in NSW, South Australia, and Victoria.

The inquiry had more than 150 submissions since it began in April and a key theme was the complexity of the offers made by energy retailers, which made it difficult to make an informed choice.

Sims said the “unnecessarily complex and confusing behaviour” by electricity retailers, in some instances seemed “to be designed to circumvent existing regulation”.

“Consumers and businesses are faced with a multitude of complex offers that cannot be compared easily,” he said.

The ACCC will look at steps that can be taken to reduce complexity and make it easier for people to switch suppliers.

The preliminary report has also offered some recommendations for immediate implementation by governments.

They include:

Additional resourcing to the AER’s price comparison website to make it easier for consumers to compare energy offers.

State and territory governments should review concessions policy to ensure that consumers are aware of their entitlements and that concessions are well targeted.

Improvements to the AER’s ability to effectively investigate possible breaches of existing regulation.

A review into to adequacy of existing infringement notices and civil pecuniary penalties to deter market participants from breaching existing regulations.

Treasurer Scott Morrison said the government will consider the report’s recommendations “including that the costs of any future environmental schemes needed to be in proportion to the benefit they were trying to achieve”.

“The ACCC noted there is no ‘silver bullet’ to ease pressure on prices but endorsed actions already taken by the Turnbull Government including our commitment to removing the Limited Merits Review process and the agreement secured from electricity retailers to move consumers off high standing offers or expired benefit offers, which the ACCC will continually monitor,” he said.

“The report also states that the repeal of the carbon price on 1 July 2014 had the effect of lowering wholesale costs. The Government notes the abolition of the Carbon Tax saw the largest fall in electricity prices on record.”

The treasurer said other key factors identified in the report as key reasons for price increases included insufficient competition in generation and electricity retail markets, recent closures of coal-fired power stations and the cost of environmental schemes.

The full ACCC preliminary report is here.

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