Electricity Price Rises

Electricity prices are a constant source of annoyance for many Australians because they seem to be always rising.

No doubt this has led many of us to change our behaviour so that we use as little as possible. I must admit that I'm not the greatest example of this as my thinking often revolves around the fact that I'd prefer to pay a little extra if it means I can sleep in summer and work at home in winter.My thinking is that I'd prefer to pay an extra hundred on my bill and forego a night out for comfort. Not the most environmentally sound thinking process I know. Prices would have to rise much further for me to change my behaviour.

Living in Brisbane does not mean that you don't get cold in winter. Although the days are generally sunny in winter here (hard to imagine right now given that it seems to have rained every day for a month or more - indeed my backyard flooded for the first time ever yesterday), my house is like a sieve and requires a good deal of heating to be comfortable.

Giles Parkinson is a great writer on environmental issues and in this article he includes three great graphs that show how extensive electricity price rises have been. The data is for Sydney and NSW, but the story is similar Australia wide.

According to Parkinson "The first graph shows electricity prices based on average consumption of 3,300kWh a year. It should be noted that Australian average consumption is about double that, although it is falling."

So if you're living in Sydney, you're not imagining the price rises! Now even though many households have been compensated for the carbon price component of price rises (quite small as will be shown below), I imagine that many people just see the increase in prices and forget about any compensation. Price rises, especially in the form of a bill, are generally more noticeable than price decreases in other areas or increases in disposable income.

Note that the first graph is a growth or flow graph, while the second is a price comparison as at January 2013. According to Parkinson, those cities "featuring at the high end, and with at least a little sun, are proving to be among the most vibrant markets for rooftop solar PV"

The final graph shows the breakdown of price increases and as is now fairly well known, by at least the partly informed, most of the increase is taken up by network improvements (or in more pejorative language"gold plating"). According to Parkinson, the graph "shows the component increase in NSW from 2007/08 to 2012/13. It’s pretty self explanatory, network costs accounted for half the bills five years ago, have accounted for around two thirds of the increase in the ensuing years, and now account for more than half of the current bill." The middle sections show the breakdown of the increases in electricity bills. As you can see carbon pricing is not the major factor.

The problem for the Gillard government is the perception that they are responsible for the price increases, despite all the evidence to the contrary. Obviously we can all use less electricity and those who own their own houses can install solar and be cross-subsidised by others, but up to a point electricity usage is inelastic- that is to say it is difficult to lower our consumption without a corresponding change in lifestyle and this is exactly what environmentalists believe is necessary. Still, I imagine that prices would have to increase a good deal further to make consumers fundamentally change their behaviour, rather than just complain about the government.

The 'good' news is that the costs of renewables are coming down, which will mean that new renewable electricity generation capacity, when it is eventually needed, will be competitive with fossil fuel generation.
According to Parkinson, in an earlier article:

Australia needs no new baseload power plants for another 10 years – that’s according to the Australian Energy Market Operator and the utilities themselves. So this shows that the new plants we are getting built now – wind farms, thanks to the renewable energy target – are the cheapest option. By the time 2020 comes around, solar PV will have well and truly joined wind on the southern side of the cost curve (and will no doubt be competing for space in the RET), and solar thermal – with its ability for storage and dispatchable energy, will be competing vigorously with gas."

I hope this is true but there is so much gas capacity coming on board throughout the world that it is my guess that gas prices will drop significantly over coming years and  make gas also attractive. The gas lobby in Australia and elsewhere will be a fairly powerful force to reckon with and given the scepticism of the Coalition towards renewables, Parkinson's optimistic scenario might face some headwinds (pun intended).

Renewable Energy

Renewable energy sources have been growing rapidly but still constitute a minuscule amount of total primary energy production.

Hydro power still dominates renewable energy production, although solar and wind power have been growing rapidly from a very small base. Hydro power is likely to gradually lose its dominance given the rapid growth of wind and solar power, although both have a long way to go.

From The Economist's Daily Chart.

According to The Economist: "Solar power saw the biggest leap in 2010, with the installed base jumping 70% compared with 2009 to 40 gigawatts. Wind power also grew strongly, adding 24% of generating capacity. Yet the biggest source of renewable electricity, hydropower, and the smallest, geothermal, both only added 3% to capacity".

Not surprisingly North America lags both Europe and Asia.

While these figures sound impressive, it's worth getting a grip on the reality of renewable energy production. To get an idea of the scale of renewables compared to other sources of energy, you can go to the International Energy Agency's website and in particular look at the World Energy Outlook.

The latest report reveals some very interesting graphs both backward and forward looking.

While economists often worry about the level of renewable subsidies they pale into insignificance when compared to fossil fuel subsidies. As the IEA reports:

Energy subsidies – government measures that artificially lower the price of energy paid by consumers, raise the price received by producers or lower the cost of production – are large and pervasive. When they are well-designed, subsidies to renewables and low-carbon energy technologies can bring long-term economic and environmental benefits. However, when they are directed at fossil fuels, the costs generally outweigh the benefits. 

Fossil-fuel consumption subsidies worldwide amounted to $409 billion in 2010, with subsidies to oil products representing almost half of the total. Persistently high oil prices have made the cost of subsidies unsustainable in many countries and prompted some governments to try to reduce them. In a global survey covering 37 countries where subsidies exist, at least 15 have taken steps to phase them out since the start of 2010. Without further reform, the cost of fossil-fuel consumption subsidies is set to reach $660 billion in 2020, or 0.7% of global GDP (at market exchange rates).  

... 

The share of energy subsidies going to renewable energy is poised to continue to grow. Global renewable-energy subsidies increased from $39 billion in 2007 to $66 billion in 2010, in line with rising production of biofuels and electricity from renewable sources. Despite a projected decline in unit production costs due to cost reductions and rising wholesale prices for electricity and transport fuels, subsidies would need to expand even further to meet existing targets for renewable energy production. In all three scenarios most renewable energy sources need to be subsidised in order to compete in the market. 

In 2035, subsidies to renewables reach almost $250 billion in the New Policies Scenario. Onshore wind becomes competitive around 2020 in the European Union and 2030 in China, but not in the United States by the end of the projection period. All other technologies require continuing subsidies.

While the current position is marginal the IEA predicts their use will grow rapidly up to 2035.

Solar, wind, geothermal etc are included under "Other". That's it that red section - can't see it? That's because it's so small. Biofuels and hydro are of course renewables as well. 

The big reduction has been in oil usage (after the twin 1970s oil shocks). "Other" has increased by a factor of 8 but still accounts for less than 1 per cent. Nuclear has grown considerably as well and coal has increased its share.

Some other interesting graphs are below. All latest stats. Remember there is a distinction between electricity and total primary energy supply. 

When it comes to electricity supply, coal still dominates.