NSW’s electricity infrastructure and its high cost of repair and upgrade. We look into Australia’s electricity distribution infrastructure and how it affects the price of electricity now and into the future.
There are a variety of reasons for electricity price increases, many of which do not relate to the wholesale cost of energy. Wholesale energy costs only account for 20% of the average Australian electricity bill – the rest of the costs are divided between retail, distribution and transmission costs, as well as the price of carbon emissions paid by fossil fuel generators and sustainable energy schemes like the NSW Energy Savings Scheme and the NSW Climate Change Fund, the costs of which are passed on either directly or indirectly to consumers.
According to the Department of Resources, Energy and Tourism, networks are the biggest factor driving up the cost of electricity. The expenditure on networks is required for a variety of reasons including:
- Growth in energy demand – Australian households’ energy consumption increased by 14% between 2000 and 2011, with New South Wales consuming by far the most electricity in 2010-11 compared to other states. A particular issue is rising ‘peak demand’; high demand for energy at peak times (for example, on summer afternoons due to the use of air conditioners) can put significant pressure on networks.
- The need for asset replacement – the majority of Australia’s electricity networks were built in the 1960s and 70s, which means that they are reaching the end of their service life and need costly upgrades in order to replace them or extend their working life.
- Other associated costs – these include IT and business support requirements, as well as new obligations to meet safety and climate change standards. Increased standards introduced by New South Wales in recent years have been recognised to have had a significant impact on costs.
What many people are unaware of is the extent to which the cost of this investment in networks is directly passed onto consumers. Around 51% of a household electricity bill is made up of network charges – and the increasing expenditure on networks in recent years has led to a huge leap in electricity prices. In the five years up to 2012, Australia’s retail electricity prices rose by 72% – Australia now has some of the highest electricity prices in the world. The Energy Users Association of Australia (EUAA) estimates that average household electricity prices across Australia are 33% higher than in the European Union and 122% higher than the United States.
Prices in New South Wales have been particularly prone to increases – between 2000 and 2010, NSW changed from having the lowest electricity prices of any state to having prices that were above average. New South Wales had higher electricity prices than 89 of 91 countries analysed by the EUAA; only Denmark and Germany had bills that were higher.
So what does the future hold? The onus is on electricity providers to balance the risk of loss of supply with the increased costs of upgrading the transmission and distribution network – this balance is of key importance as these risks and costs are passed onto consumers. As part of its agreements to progress energy market reform, the Standing Council on Energy and Resources (SCER) has committed to ensuring that network investment is balanced between meeting reliability standards, investing in transmission and electricity generation, and meeting changes in demand – as part of which, any costs or benefits associated with reducing demand can be shared between network businesses and customers.
And the good news is that the rate at which electricity costs in Australia are increasing is already slowing down. The Australian Energy Market Operator (AEMO) forecasts that while electricity prices are likely to increase by approximately 5% per year in the short term due to network infrastructure costs, this should drop to around 1% per year in the medium term.
- 15 Oct, 2013
- Kit Man Chan
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