Lane Crockett of wind farm builder Pacific Hydro accuses “groups such as the IPA” of blaming “a soft target like (the Renewable Energy Target) 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”.
He takes refuge in “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”.
There are three issues here. First, what are the facts on energy price increases; secondly, what has caused the increases to date; and thirdly, what are the likely effects of regulations and taxes such as the renewable energy target and a carbon tax?
Over the decade to December 2010, Sydney’s electricity prices more than doubled, those in Brisbane increased by 94% and those in Melbourne and Adelaide, 80% and 64% respectively. During that period prices in general increased about 33%.
Much the greater part of the increases in electricity prices was due to regulatory sanctioned increases in the line charges of the poles and wire businesses. These businesses have near monopolies on this element of supply.
Some of that increase may have been regulatory catch-up but this is controversial. Work by Bruce Mountain and Stephen Littlechild (the latter a former head of the England and Wales regulatory agency) indicates the increases were excessive in Australia. Mountain and Littlechild assemble information that indicates excessive costs in Australian distribution, especially in the supply monopoly areas of government-owned companies in NSW and Queensland. Price increases have been lower in Victoria and South Australia, where private ownership brings greater disciplines on costs.
Though line costs and charges have dominated recent electricity price increases, carbon issues will dictate future price increases.
While Australia has no formal carbon tax at present, we do have a range of measures that have a similar affect to such a tax, the most important being the renewable requirements. The “20% renewable by 2020”
program sets a de facto carbon price by requiring retailers to incorporate a growing number (45,000 gigawatt hours by 2020) of high cost renewable energy into the electricity mix. There is also a requirement for a proportion of extremely high cost solar energy as well as for the more common form of renewables, wind, which has a premium cost over coal based electricity of around $70 per MWh.
Unless treasury’s Pollyanna forecasts of some imminent technology breakthroughs occur, the 20% renewables requirement by 2020 increases the average wholesale price of electricity by 40%. This works out at an average carbon tax equivalent on household electricity of $14 per tonne of CO2. this in itself is a tax rate on the current household bill that approaches 20%.
On top of this is the government’s proposed carbon tax. Eventually this will need to be in the hundreds of dollars per tonne if it were to accomplish the carbon reduction forcing job intended of it. But even at $20 per tonne, when combined with the existing renewable scheme it means a doubling of the costs of generation. For the household this translates into a 50% increase in electricity prices, and perhaps more than this as a result of the investment paralysis the debate has triggered. In addition there are increases in prices resulting form the higher electricity costs entailed in producing the goods and services we buy.
The IPA has a considerable level of expertise in the energy market and has published many well-regarded books, chapters in books and journal articles on the matter. We are fully aware of the drivers of price increases to date and the causes of these. Though businesses dependent for their success on regulations that stymie their competitors may make gains, the costs of the measures driving these particular firms’ profits is a loss of income by the rest of the community.
*Alan Moran is the director, deregulation, at the Institute of Public Affairs.