Attacks that seek to blame climate-change policies such as the Renewable Energy Target (RET) and carbon pricing for skyrocketing energy bills are becoming increasingly shrill. However, if you look beyond the hyperbole and confected outrage you will quickly find a very different scenario that may prove to be an inconvenient truth for some.
Organisations such as the Institute of Public Affairs (IPA) have long been champions of deregulation and open markets claiming that consumers will be better off because of increased competition. Generally this is true, however there may be times when markets are in transition that the opposite may occur.
Up until 15 years ago the Australian energy market was primarily owned by state governments who had gold-plated energy network investment and put in place a series of cross subsidies that ensured consumers paid the same “postage stamp” price for energy regardless of the actual cost of generation and transmission.
With deregulation and privatisation of the energy market progressing over the past decade or so, consumers are now starting to see the true cost of energy that previously they were shielded from by state-owned utilities.
A recent report prepared by the Australian Industry Group (AIG) clearly shows that rapidly escalating network costs have been the primary reason for increased power bills over the past five years. This reflects the fact that network operators have adopted an “invest in time” strategy as opposed to pre-emptive investment that most state government utilities adopted in the past. As privatised entities with responsibilities to shareholders, this is a reasonable course of action.
The AIG report revealed another significant factor was increased costs associated with running and maintaining existing fossil fuel power stations. Private investors who must get a return on their investment will pass these costs through to consumers whereas in the past consumers would have been spared this as state governments absorbed these costs in the pursuit of providing a public service.
In stark contrast, it has been demonstrated time and again that climate change policies such as the RET will have a minimal comparative impact on energy prices. According to official estimates by the Australian Treasury Department, the RET is likely to result in an increase in energy bills of just 2% to 4% by 2020.
A further interesting insight from the AIG report was the identification of the main drivers of future energy cost increases. Costs associated with renewable energy are several orders of magnitude below the level of cost increases driven by rising consumer demand and escalating fuel costs due to the continued globalisation of our energy markets, in particular the impact of international gas prices on the Australian energy market.
While addressing climate change isn’t cost free, it is perfectly clear that the cost of producing and transmitting energy will continue to rise over the coming years and that a majority of these cost increases have comparatively little to do with existing climate change or renewable energy policy settings.
What we are seeing at the present time is a resetting of the Australian energy market from one where governments invested in the public good and prices were highly regulated to one where investments are made to maximise profitability and prices gradually moving to reflect the true cost of delivering energy to consumers.
It is therefore quite disingenuous for groups such as the IPA to blame a soft target like RET or carbon pricing for increased energy costs when in fact a majority of these increases have been driven by the policy principles of deregulation, privatisation and globalisation that they hold so dearly.
It is highly likely that long-term benefits of deregulation and privatisation of the energy market will materialise for consumers but not before a transition period that will be characterised by higher energy prices than we are accustomed to. During this period it will be easy for people to blame soft targets such as climate change policy but this finger pointing is at best misguided and at worst designed to deflect attention away from the true cause.