The Australian Energy Regulator today published its sixth State of the Energy Market report. The report aims to explain, in accessible language, the factors that have driven up energy prices and the range of policy and regulatory initiatives under way to address the problem.
“The most significant driver of energy bills has been rising costs for using electricity and gas networks, which make up almost half of a typical bill,” AER Chairman Andrew Reeves said.
“However, the recent overhaul of the Rules for setting network charges mean that future network price reviews will ensure energy users pay no more than necessary for an efficient and reliable energy supply.”
The AER has commenced consulting on its implementation of the amended rules, which will apply to network price determinations that take effect after 1 July 2014. This work will focus on the long term interests of consumers, while ensuring the stable climate needed for efficient investment.
Mr Reeves noted the overhaul was just one of a series of reforms underway or recently completed to ease the burden on energy users. Other reforms include:
- a comprehensive review of the merits review arrangements that have added $3.3 billion to network charges since 2008 (expected to be finalised in 2013);
- a move towards a national approach to setting reliability standards to ensure the community pays only for the reliability it requires (significant work progressed in 2012); and
- reforms to empower consumers to manage their energy use and save on energy costs by shifting consumption away from peak times (work continuing in 2013).
This report also looks at other important developments in the market, including Tasmania and the ACT launching national retail reforms in July 2012 (several jurisdictions plan to sign on in 2013). The AER launched an energy price comparison service as part of the reforms (www.energymadeeasy.gov.au).
Mr Reeves said there was a little market volatility when carbon pricing began on 1 July 2012, but prices then settled as expected. He also noted growing evidence that energy demand could remain flat for several years, pushing out investment horizons for generation and networks.
“There is a different story in gas. We may see international sales of LNG putting upward pressure on prices and raising the possibility of restricted supply in eastern Australia from 2016,” Mr Reeves said.
The Australian Energy Regulator (AER) is Australia’s national energy market regulator and an independent statutory authority whose jurisdiction includes the eastern and southern Australian states.
State of the Energy Market 2012
Extract from the Market Overview
Rising energy prices continued as a major focus for the community, business, policy makers and regulators in 2012. Residential electricity prices over the past five years rose nationally by 91 per cent. Gas prices rose by 62 per cent. Governments, policy bodies and regulators are developing and implementing reforms aimed at limiting future price movements to those necessary to deliver an economically efficient and reliable energy supply.
The main driver of higher retail energy prices has been rising charges for using energy networks—that is, the poles and wires, and gas pipelines that transport energy to customers. A number of factors have driven higher network charges. Some factors—forecast growth in peak energy demand, the need to replace ageing equipment, and higher financing costs due to conditions in global financial markets—were largely unavoidable. But other cost pressures were difficult to justify.
In particular, the energy Rules, drafted in 2006, limited the extent to which the Australian Energy Regulator (AER) could amend the revenue proposals put forward by network businesses. While the Rules reflected policy concerns at the time about the adequacy of network investment, they led to unnecessarily high revenue streams for network businesses. Another source of cost pressure has been the stricter reliability standards that some state and territory governments imposed over the past decade. Meeting these standards has required significantly higher investment by the network businesses.
Much regulatory and policy activity in the past 12–18 months aimed to mitigate network cost pressures. In particular, the AER in 2011 proposed Rule changes to ensure customers pay no more than necessary for an economically efficient and reliable supply of energy. Following detailed public consultation, the Australian Energy Market Commission (AEMC) in November 2012 announced significant reforms that address the areas of concern raised by the AER.
The AEMC in 2012 also reviewed whether network reliability standards are being set at higher levels than the community requires, and whether approaches to meeting the standards are cost effective. Additionally, its Power of choice review explored alternatives to network investment in response to rising peak demand. Completed in November 2012, the review recommended empowering consumers to manage their energy use and save on energy costs by shifting consumption away from peak times.
The strategies include: rolling out interval meters on a contestable basis, as part of a package that includes time varying prices; enabling energy customers to sell small scale generation to parties other than their electricity retailer; and offering greater opportunities for customers to engage directly in the wholesale energy market. The Council of Australian Governments (CoAG) in December 2012 approved the adoption in principle of the full set of Power of choice recommendations. It proposed the phasing in of time varying network charges, and a new demand side mechanism for the wholesale market, by July 2014.
Also affecting network charges have been the Australian Competition Tribunal’s reviews of AER decisions. Network businesses sought review of 22 AER decisions between 2008 and 2012; the Tribunal’s decisions on these matters granted the businesses an additional $3.3 billion in revenues, which flowed through to network charges and customer bills.
Concerns about the merits review framework led the Standing Council on Energy and Resources (SCER) in 2012 to appoint an expert panel to review the arrangements. The panel recommended the regime should be limited to a single ground for appeal—that a materially preferable decision exists—and should assess review matters in relation to the national energy objectives set out in the legislation. It also recommended allowing the review body to explore any aspect of an AER decision that it considers relevant; and allowing greater input from consumers. CoAG in December 2012 recommended agreement be reached on a policy response to the review by mid–2013, and an amended regime be in place by the end of 2013 in advance of the next round of AER determinations.
Alongside the significant policy response to escalating network costs has been a change in the operating environment for network businesses. AER decisions made in the past 12–18 months reflect flatter energy demand and lower input costs that eased some pressure on network costs. The decisions also reflect a lowering of business financing costs.
While network costs drove higher retail energy prices over the past five years, there was less pressure from wholesale energy costs. Electricity spot prices fell steadily from 2010 until the introduction of carbon pricing on 1 July 2012. Average spot prices in Queensland and South Australia were at record lows in 2011–12, and prices elsewhere in the National Electricity Market (NEM) were near record lows.
An emerging concern has been an increase in disorderly bidding in the wholesale market (that is, generators making bids without reference to their underlying generation costs). While this behaviour had limited direct impact on energy customers in 2011–12, it could adversely affect competition and market efficiency in the longer term.
Spot gas prices rose sharply during winter 2012. This trend coincided with a tightening in Queensland’s domestic gas contract market, which was associated with liquefied natural gas (LNG) development projects. The eastern gas market is generally expected to remain tight over the next decade, with possible challenges for domestic supply from 2016. Australian governments are considering policy responses, including a new gas trading market at Wallumbilla, which is a major supply hub in Queensland.
Following some initial market volatility, the introduction of carbon pricing on 1 July 2012 caused an uplift in spot electricity prices of around 21 per cent, which was in line with expectations. There was little impact on gas prices. Carbon pricing led to one-off increases in electricity retail bills of 5–13 per cent in 2012–13. Costs associated with other climate change policies (including the renewable energy target (RET) scheme, mandated feed-in-tariffs for rooftop solar photovoltaic (PV) installations, and energy efficiency schemes) were relatively stable for 2012–13.
Governments have responded to community concerns about the impacts of climate change policies on retail prices. Many jurisdictions have removed or reduced mandated feed-in tariffs. The Australian Government reviewed the operation of the RET scheme in 2012 and changed carbon pricing arrangements to establish closer links with international carbon markets. It also introduced a financial assistance package for families, to mitigate the effects of carbon pricing on household budgets.
In addition to policy responses to reduce cost pressures on retail energy prices, state and territory governments are progressively implementing reforms that target the retail sector itself. The National Energy Retail Law applies the reforms, which promote competition and empower customers to select energy contracts that suit their needs. Tasmania and the ACT implemented the reforms during 2012. South Australia and New South Wales set target implementation dates of 1 February 2013 and 1 July 2013 respectively.
On 1 July 2012 the AER launched the Energy Made Easy price comparator (www.energymadeeasy.gov.au) to help small customers compare energy offers available to them. The website also provides information on the energy market, energy use, and consumer rights and obligations.