Australia / From the Founder
The Energy, Electricity Prices and Profit Conundrum
by Phil Ruthven AM, Founder IBISWorld
Nov 01 2018

The National Energy Guarantee (NEG) was dumped in the last days of the Turnbull Government. Yet the nation still needs a strategic plan to deal with the optimal energy mix, emission levels and prices of electricity given the uproar – justified or not – of recent times.

Australians know the challenge of climate change, yet a minority of politicians and the population are in denial. Extreme weather conditions in recent years, including 2018 with its extraordinary heat waves, droughts and other disasters, are heightening concerns about Planet Earth. Australia is a minor generator of carbon emissions in the world due to its tiny population (0.3% of the world) and small GDP (1.3% of the world). Yet the fact that we have been filibustering with the Paris Agreement goals sends a ‘don’t care’ message, which is also coming more aggressively from the Trump Government in the United States.

We are not impressing caring Australians with an energy mix that is not favouring renewables. Our share of energy production from renewables is miniscule compared with other advanced nations. However, Snowy Mountains 2, wind power, and the Victorian government’s idea of subsidised household solar panel installation are encouraging if they prove cost-effective against other renewable energy options.

Over recent years, the rising price of retail electricity has become a cause célèbre for politicians and much of the media. However, the issues are somewhat complex and confusing.

First, electricity peaked as a share of Australia’s economy (GDP) in 1992, some 26 years ago, as seen in the chart below. Clearly, the demise in the importance of manufacturing, and the ascendancy of lower consuming service industries have been major factors. Better building insulation is another factor. Indeed, all energy consumption (including vehicle fuels) is falling as a share of the economy.

Electricity industry lifecycle

Despite this decline in economic importance, the cost of energy has risen as a share of household incomes over the past decade, as we see below. That said, the rise has been at a smallish 0.3% of household income.

Household energy consumption

It is hardly a devastating impact on households, with overall energy remaining a very small share of household expenditure, as seen in the next chart.

Australian household expenditure

Yet the rise in prices and share of expenditure has aroused anger and accusations of electricity retailers gouging customers. However, our largest electricity retailers have dreadfully low profitability, as seen below.

Electricity profitability in Australia 2017

The big five in electricity retailing controlled over half of the retail market for electricity in 2017, but earned a low return on their capital (5.5%). This is much lower than the 10.5% of the ASX Top 30 or the 8.7% of the nation’s largest 100 corporations, and lower than our nation’s $2.6 billion superannuation average returns.

Would you want your super in this industry?

A conundrum indeed.