Australia / Press Releases
White Paper: The Electricity Sector's Failures and the Economy

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by Jason Aravanis
Dec 05 2018

Leading industry research firm IBISWorld has released a new report revealing the electricity sector’s failures and their effects on Australian consumers and businesses. Power shock: Learning from Australia’s mistakes in the electricity sector analyses the systemic failures in the generation, transmission, and retail markets, which have contributed to a 56% increase in electricity prices over the past decade. The report finds that rising electricity costs in Australia pose a significant threat to household spending and business viability. In order to prevent further harm to the economy, the report recommends that the Federal Government deliver a comprehensive policy framework across the electricity supply chain, and put to rest the instability exhibited over the past decade. In particular, any energy policy must accept renewable energy’s inevitable role in future electricity generation, despite the challenges it presents.

Electricity generation

In the generation sector, electricity production costs have risen due to higher fossil fuel costs and the declining efficiency of ageing coal power stations. In addition, the accelerating transition to cheaper renewable power has further threatened the Fossil Fuel Electricity Generation industry’s viability.

“Although renewables now provide electricity at a lower cost than most fossil fuel generators, the intermittent nature of solar and wind power requires investment in expensive electricity storage infrastructure, such as the pumped hydro Snowy 2.0 project. The cost of this infrastructure will ultimately need to be recovered through higher prices charged to consumers,” said IBISWorld Senior Industry Analyst, Jason Aravanis.

Electricity transmission

Mr Aravanis believes the greatest capacity to reduce electricity prices exists in the Electricity Transmission industry, as higher transmission costs have been the largest contributor to rising electricity prices over the past decade.

“Historical failures in policy design by state governments across the eastern seaboard have led to excessive investment in unnecessary infrastructure, which has been funded through higher household electricity bills.

“At the same time, an increasing number of households have used solar panels to reduce their use of the transmission network, and therefore avoid paying for the network through their electricity bills. Consequently, non-solar equipped households have had to shoulder a greater share of the network cost burden,” said Mr Aravanis.

Electricity retailing

In the Electricity Retailing industry, Mr Aravanis has found that market liberalisation efforts over the past two decades have failed to create effective competitive pressure.

“Poor price transparency and confusing discounting practices by large retailers have reduced consumers’ ability to seek out the best electricity offer. As a result, small retailers have failed to capture significant market share, despite offering considerable discounts relative to large retailers,” said Mr Aravanis.

Environmental policies

In addition to problems across the electricity supply chain, the report also finds that environmental policies have placed additional pressure on electricity prices. Although these policies have assisted in reducing emissions related to global warming, they have still accounted for close to 20% of the increase in electricity costs over the past decade.

“Intense political pressure regarding energy and climate policy has resulted in a succession of failed policy frameworks, including the recently abandoned National Energy Guarantee.

“The Federal Government’s ongoing failure to implement a comprehensive policy framework has created considerable uncertainty for the private sector. The risk of adverse regulatory change has dissuaded investment in future electricity infrastructure. As a result, the economy remains unnecessarily dependent on ageing and increasingly unreliable power stations,” said Mr Aravanis.

Outlook on the Australian electricity sector

According to IBISWorld, the outlook for the Australian electricity sector is mixed. Numerous government inquiries have revealed past mistakes in policy design and regulation. However, the report finds that the time for reviews, such as the recently proposed royal commission into the electricity sector, has passed.

“For most of the issues in the electricity sector, policy remedies exist and can be implemented in the short term. In particular, regulation changes in the retail and transmission markets can directly reduce electricity prices.

“However, some drivers of electricity price growth are unavoidable, and higher prices will likely become the new normal. New generation and transmission infrastructure to support renewable resources needs to be developed, and households and businesses will ultimately absorb the cost of this infrastructure. Above all else, cohesive policy at the state and federal levels will be critical to ensuring affordable, reliable, and renewable power in the future,” said Mr Aravanis.

Click here for a PDF copy of the full white paper

IBISWorld Industry Reports used in this release:

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Kim Do

Strategic Media Advisor – IBISWorld Pty Ltd
Tel: (03) 9906 3641 Mobile: 0422 773 995