Australians, by switching to more energy efficient appliances and using smart meters, have cut electricity consumption by seven per cent over the last eight years.
The reward? An 85 per cent rise in power bills.
Economics tells us that when demand falls the market is left oversupplied and prices fall.
But the opposite has happened in the electricity market. As consumption has fallen, electricity prices have continued to rise.
In fact, after they grew in line with the rate of inflation for several decades, the rate of growth has accelerated since about 2007.
Public policy think tank the Grattan Institute has analysed the situation in a study, ‘Shock to the system, Dealing with falling electricity demand‘.
Between 2006 and 2013, the average Australian household reduced power consumption by more than seven per cent to 5600 kilowatt hours a year from 6100.
Over the same period, the average annual household power bill increased by more than 85 per cent to $1660 a year from $890 (in real terms in $2012-13, this is an increase of around 60 per cent).
Why are bills rising?
The Grattan Institute says the answer lies in the structure of the electricity market and the way it is regulated and this is where government policy comes into it.
The final price paid for electricity through their power bills has three parts.
Customers pay for the cost of generating electricity at a power station (including the cost of compliance with environmental regulations and climate change policies), the cost to transport electricity through the transmission and distribution networks, and a retail margin.
As consumers use less electricity, power stations produce less.
The biggest losers have been black coal power stations.
In the past few months, two large, state-owned black coal generators in New South Wales, the Bayswater and Liddell power stations, have operated at around 60 and 45 per cent capacity respectively.
In 2008-09, their average operating loads were about 65 per cent of capacity.
However, all the risk is on the electricity end user.
The Grattan Institute:
Under the regulatory arrangements governing Australia’s power networks, the owners of transmission and distribution businesses do not bear the risk of falling asset prices as a result of lower levels of electricity consumption. Power users carry the risk, in the form of higher bills.
In other words, the impact of falling electricity consumption on these regulated businesses is not just a problem for the businesses themselves. It is a critical issue for keeping power prices low, and it is therefore a critical issue for governments.