There’s a way to cut power bills, so let’s get on with it

This opinion article by Business Council chief executive Jennifer Westacott was published in the Weekend Australian on Sunday 1 December 2018.

Business wants lower electricity prices. We want Australians to have lower power bills.

Our electricity and gas supplies are the cornerstone of our economy, powering our industries, our cities and our homes. The bulk of electricity and gas produced provides a core input for Australian businesses, affordability and reliability of supply are crucial to support our competitiveness, job creation and prosperity for Australians.

But for the last decade, rises in electricity prices have been much larger than wage growth. We must ask ourselves how we have gone from a country that was built off the back of access to low-cost energy to where we are today.

In June this year, the ACCC completed a comprehensive, 15-month inquiry into the retail electricity market. In almost 400-pages, the final report sets out 56 recommendations that, if adopted, will have a real impact on electricity prices.

The report puts the facts on the table. The ACCC found a 56 per cent rise in power prices in the past decade across the National Energy Market (NEM). 38 per cent of the rise in power prices was driven by network costs, while 27 per cent was due to higher wholesale prices. A further 15 per cent of the increase was from government environmental or green schemes while only 13 per cent increase was due to retail margins and 8 per cent from growth in retail costs.

The ACCC found that if their recommendations are adopted as a package, the average residential customer could achieve savings between $291 and $419, depending on the region. 

Of these potential savings, the networks and wholesale electricity components are the largest by far - $174 and $155 respectively (in NSW).

Recommendations to reduce costs in these components of the bill include state governments taking steps to remedy the past over-investment of network businesses – potentially saving residential customers at least $100 a year.

The ACCC also recommended the federal government wind down and abolish the Small-scale Renewable Energy Scheme (SRES) to reflect the fact that solar PV installation costs have dramatically decreased since its introduction and the need for a subsidy no longer exists. The same goes for the reduction of costs associated with premium solar feed-in tariff schemes in various states. Combined, these could provide savings of over $40 (in NSW).

Unfortunately, governments at all levels are yet to move on these recommendations. Had these recommendations been acted on immediately, we may soon be seeing the first wave of savings flow through to consumers.

The retail component (both retail cost and retail margin combined) would contribute only $37 (in NSW) of savings – the smallest contribution to price increase of all the bill components.

Regardless, this is where the government has decided to focus its energy.

We have supported the ACCC’s recommendation to introduce a default market offer or reference price to help ensure consumers are on the best deal. The electricity retailers have also come to the table to work with the government and regulators to introduce a fit-for-purpose reference price that will protect competition in the market and provide the best outcomes for both consumers and businesses.

Despite the willingness of industry to work with the government on improving affordability, the government has decided that the threat of a ‘big stick’ is preferable to taking action in other areas of the bill that will actually help drive down prices.

Ignoring many of the ACCC’s recommendations and instead going down a path that threatens forced divestment – a measure ACCC itself called “extreme” and warned against – will not reduce electricity prices.

Indeed, legislating to provide the Treasurer with the power to order forced divestment will not solve the problems that have plagued our energy system for a decade. In fact, this legislation has the potential to make things worse, perversely creating even more uncertainty and discouraging new investment in the energy sector.

Our energy system desperately needs a durable policy framework that will create the policy certainty and stability needed to drive new investment and bring on new supply into the system. As the ACCC has identified, wholesale electricity prices have contributed over a quarter of the increase in electricity prices. Reductions in wholesale electricity prices will be achieved by increasing supply in the market. This is dependent on companies making long-term investment decisions in an already risky regulatory environment. 

Bad policy created this mess, and ill-conceived and rushed policy won’t solve it.

What’s more, these proposed interventions set a dangerous precedent for other sectors. Today it is the energy sector, but there is a serious contagion risk.

It is surprising to see this legislation proposed by a Liberal Government. This is the kind of intrusive, heavy-handed intervention into the market you would expect from the Greens. Combine this legislation with the government’s proposal to underwrite new generation investment and you must ask yourself: what has happened to the party of free enterprise?

There is no doubt rising electricity prices are hurting Australian households – they are hurting our businesses and industries too – but lower prices will not be achieved by ad hoc and extreme intervention in the electricity market which brings new risks, unintended consequences and has never worked before.

The investment Australia needs to create jobs, grow the economy and ultimately reduce power prices will be severely compromised by this legislation. The prudent course of action for the government would be to divest itself of this legislation and begin implementing the ACCC’s plan to reduce power prices.