An honest opinion – Why Electricity Prices are Rising

It started, if one cannot express an honest opinion to one another – than we have no freedom. So why was a recent writer not particularly pleased when we said: “The ‘why’ needs a follow up and maybe a sharper focus on the Institute of Public Affairs motivations”? By this was meant they are an institution that makes a claim as the ‘The Voice of Freedom – Freedom and Optimism” – yet they seem so negative to progress and innovation. So we feel it is fair to say what motivates needs a sharper focus.

What was it all about? It started with the comment: “Good article on the ‘what’ – Elegant, eloquent, easy to read. The ‘why’ needs a follow-up and maybe a sharper focus on the Institute of Public Affairs motivations? That regulators tend to anticipate growth and expenditure from information supplied by the networks. Then there is the ‘how’. How did this happen, or at least more detail on the how! For instance: Is falling demand from energy efficiency, or the commercial sector in decline and/or manufacturing slowdowns/showdowns. Will it happen anyway because to be more effective you need to be more efficient? “ The article being commented on was “Why Electricity Prices are Rising, 27 June 2014” – posted by Turlough Guerin. In the preamble he said “When I worked in the telecommunications sector someone told me that you don’t need a PhD to understand how pricing works – but it sure helps. Perhaps the same holds for electricity. However there is no doubt that power prices are rising across Australia. This is clear not only from federal government statistics, but you need look no further than your power bill with the average household now paying close to $1000 each year.”

But, CO2Land org finds a major issue with the use of past data in determining the facts. – For instance the variable are changing in their focus, the model of the business are changing or at least being forced to change. More importantly the changes are being driven by the need to more efficient. All brought about the world wanting us to be measured on comparative advantage of our products. It you do not believe us: Why is carbon a focus elsewhere in the world? Why is it that penalties are being sought against those that do not seriously consider carbon in the world markets? This is not an argument on the setting of the price, it is about the need to be aware that future predictions from past data is dangerous, and you must consider the circumstances are changing.

In the article above, it was good, but only because it was the first installment in what should be a series of facts being presented. For instance we could write about why Victoria sold it assets and that at that time Victoria had an excessive redundant infrastructure available, and this gave rise to ‘a good buy’ to those that buy the asset with a cash cow potential. Bring that forward to today, and those that own the Victorian Assets have a conundrum; the private owners need to find more money to improve the services in a tight market. Now if we move to NSW, today, we see a very different problem; they are trying to sell a run down network that might not be viable to buy. Queensland has another set of problems and the long runs between population centres and the concentration of the southeast corner make dissimilar circumstances that make it difficult to say a common variable affects the business.

All that said what are the variables? We propose a new model the give weight to:

  • What is the costs to maintain the existing the Poles and Wires (Transmission and Distribution networks)
  • What is the costs of stink of politics – Science v’s Fiction argument
  • The reality of a carbon market and its global significance to our local markets
  • The existing infrastructure – new and aging generation coefficients
  • The existing infrastructure – transmission and distribution future needs
  • The infrastructure – gas system – this is a very complex issue as it is sensitive not just to the environment as it is to world politics. In effect we have very little control of what is happening in that industry. Why because the deals done elsewhere are linking the gas price to movements on peak oil price predictions.
  • The potential of the suite of alternative energy sources. This means the current infrastructure is very likely redundant. The really sensitive fact is that the models of distribution will change because of it.
  • The Electricity Demand. Be it new or additional generation, the transmission and distribution constraints, the regulator findings or simply consumer behaviour (despite climate change); the biggest problem is the supply demand balancing equation. The supply demand balancing equation is persistent is being 20% of the time is setting 80% of the costs. It then follows that of that 20 % of time the larger costs are 80% likely to occur 5% of the time. With this sort of issue it become apparent consumer behaviour set the theme. We should also put out there to you business slowdowns affect consumer behaviour.

That last comment leads us to the question: Is electricity a commodity or a service? It is not a new question, and political ideology will elicit different answers. Our point is no mater what you think the provision of electricity does determine if we are third world or not. In the pure sense price is simply the cost of providing? Ironically, when you crunch the numbers of our Treasury recommendations our ‘budget emergency’ does seem to settle on 17% increases in everything as good. Justifying the need is far more complex.

So while we liked the quoted story, it is only the first part of a big story. If you are looking for a really good read of how it all happened in Australia, read: Booth Robert R (2000) Warring Tribes: the story of power development in Australia, West Perth WA: Bardak Group. Robert is no longer with us, but bet you he would have plenty to say – had he been here.

 

 

 

 

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