SYDNEY — The Australian energy sector is experiencing a disconnect.
Electricity prices have skyrocketed over the past five years, with consumers told they need to pay more because they require more infrastructure, even though electricity usage in the country peaked in 2009 and has actually declined since then.
Despite abundant reserves of cheap coal, which generate more than 90% of Australia’s electricity, power prices across the country have soared by more than 40% since 2007, so that today, Australia generates some of the world’s most expensive electricity.
“The sharp increase in Australian electricity prices combined with changes in exchange rates has meant that average electricity prices to households in Australia are now higher than those in Japan, the EU, US and Canada,” says Bruce Mountain, director of the Melbourne-based consultancy Carbon Market Economics, in a March study conducted on behalf of the consumer advocacy group Energy Users Association of Australia.
Both the Australian government and energy providers claim they are not to blame and, instead, attribute the increased costs to the need to replace or upgrade aging infrastructure.
“High prices result from a range of complex factors, many of which lie outside the control of any single government or regulator,” Resources and Energy Minister Martin Ferguson said earlier this month.
Not true, say energy users, who accuse the government of adding to electricity costs by slapping a price on carbon. On July 1, Australia’s federal government introduced a carbon tax of $23 per ton, which will increase to $24.15 in 2013-14 and to more than $25.40 over the 2014-15 period before shifting to a floating price in mid-2015. Energy Users Association of Australia analyst Nathan Donnelly tells The Financialist that the carbon tax will increase household electricity prices by an average 9% to 10%, depending on the region.
But as prices for electricity have gone up, demand for energy has slumped. A 2012 forecast from the Australian Energy Market Operator (AEMO), the body charged with managing the eastern Australian market, showed a 2.4% drop in annual energy use. But is this simply a response to price hikes or are Australians becoming more energy efficient?
A bit of both, says AEMO managing director and chief executive Matt Zema.
“Consumers have responded to price increases and taken advantage of government feed-in tariffs by installing rooftop solar photovoltaic systems and adopting energy efficiency measures, and that has reduced the amount of energy supplied by the electricity grid,” Zema explains.
The government rebate saw a significant uptake of rooftop photovoltaic systems. The Australian Solar Council reports 4 million Australians, or about one-fifth of the population, now live in houses powered by solar panels.
Tony Wood, energy program director at the Grattan Institute, an independent think tank in Melbourne, tells The Financialist that many considered the slowdown in the growth of energy demand over the past three to four years an aberration, which it clearly was not.
“Even the growth in peak demand has turned,” Wood says.
He attributes this to a combination of factors, including the solar panel uptake, the strong Australian dollar’s dampening effect on manufacturing output, a couple of relatively mild summers, and a government-funded home insulation program.
“There has not been any comprehensive analysis to quantify these factors, and therefore (it is not clear) how much of this is permanent and how much is cyclical. It is certainly not just a response to prices,” Wood says.
“To the extent that Australians are responding to real, long-term price movements, this can only be a good thing,” he adds.
Wood believes that Australia is positioned well in terms of energy security because it has a greater range of energy sources than most countries, and it is seeking to exploit them.
The Australian government has called for the privatization of state-run energy assets to help drive electricity and gas investments. Meanwhile, a recently released government white paper says that by 2050, up to 85% of Australia’s electricity could come from clean sources, such as solar.
On paper, it looks as though energy prices in Australia are likely to go down in the long run, as the country will ultimately be served by extensive solar, wind and possibly geothermal power networks.
In the medium term, however, political interference is likely to impact the efficiency of energy markets, with the states of New South Wales and Queensland resisting the federal government’s push to privatize state-owned electricity assets.
Still, Wood thinks countries that bet on strategies to reduce emissions will reap dividends in the future.
“If one accepts that the work will move to a low-emissions energy system in the coming decades, then those countries and companies that plan for and stake out the territory will inevitably do better than those that try to hold back the tide,” he says.