Network costs the main driver of electricity prices, consumer watchdog finds
A huge increase in electricity network costs - driven by regulation and over investment - has been the number-one cause of rising household power bills over the last decade.
A lack of competition in both generation and electricity retail markets, the recent closures of coal-fired power stations and the growing cost of environmental schemes have also contributed to "severe" price rises since 2007 that have put homes and businesses under "unacceptable pressure".
These are the preliminary findings of a major Australian Competition and Consumer Commission inquiry ordered by the Turnbull government.
Treasurer Scott Morrison will release the ACCC's report into the National Electricity Market on Monday, setting the stage for another week in Parliament set to be dominated by energy policy.
Cabinet is expected to consider Energy Minister Josh Frydenberg's policy proposals on Monday, with the package to be taken to the Coalition party room as early as Tuesday.
The government has indicated it will not proceed with Chief Scientist Alan Finkel's plan for a clean energy target, amid stiff opposition from the Coalition's right wing. The government will instead emphasise how the package will improve affordability and reliability.
The ACCC report says many households on the NEM - the wholesale market that covers Queensland, NSW, Victoria, South Australia, Tasmania and the ACT - are struggling to absorb price increases.
"What's clear from our report is that price increases over the past 10 years are putting Australian businesses and consumers under unacceptable pressure," ACCC Chairman Rod Sims said. "Residential prices have increased by 63 per cent on top of inflation since 2007-08".
Between 2007–08 and 2015–16, increases in residential bills were primarily driven by higher network costs, the report found.
Network operators need to continually invest in network infrastructure to ensure they meet regulatory obligations and customers receive electricity services without disruption. But operators have also been incentivised to over-invest, leading to the "gold plating" of poles and wires.
"To a significant extent, past decisions relating to network investment are 'locked-in' and will burden electricity users for decades to come," the report says.
The wholesale energy market is also "highly concentrated" and this is likely to be contributing to higher wholesale electricity prices, the report found.
The demand-supply balance for electricity has tightened, making it difficult for standalone retailers to compete with the big three "gen-tailers": AGL, Origin and EnergyAustralia. While most retail markets have around 20 retailers, these three hold large retail market shares in most regions and control in excess of 60 per cent of generation capacity in NSW, South Australia and Victoria.
Large, baseload coal-fired generation has exited the market in recent times - for example Hazelwood in Victoria and Northern in South Australia - continuing a trend of consolidation and increased vertical integration in wholesale markets. This has resulted in a heavier reliance on gas which has coincided with shortages in domestic gas supply which has also driven up prices.
Environmental or 'green' schemes, aimed at achieving sustainability objectives, have also increased costs and created cross-subsidies.
Some of the increase is also attributable to increases in retailer margins - although this has varied significantly by state.
The report found that the average residential bill across the NEM in 2015–16 was $1524, not including GST. That was made up of network costs (48 per cent), wholesale costs (22 per cent), environmental costs (7 per cent), retail costs (16 per cent) and retail profits (8 per cent).
In real terms, average residential bills increased by around 30 per cent - on a dollars per customer basis - between 2007–08 and 2015–16.
The ACCC will deliver recommendations in its final report, due in June 2018. However Mr Morrison said the ACCC's inquiry has already been a key factor in the government's policy development.
The government will this week also put the next tranche of its company tax cuts to a vote in the lower house. It then faces an uphill battle in the Senate.
The Business Council of Australia warns the country is at "imminent risk" of having the third-highest company tax rate in the developed world if Parliament leaves the top rate frozen at 30 per cent, given the US and France are both planning cuts.
"We are kidding ourselves if we think we can impose one of the highest tax rates in the developed world on Australian businesses and expect them to thrive, invest and create jobs," CEO Jennifer Westacott said.
Thursday, October 19, 2017
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