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Great big tax on electricity: The money-go-round on discounts

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A few weeks ago at the A2SE Summer Study conference in Sydney, there was a vigorous discussion abut the role of the media in the policy debate about clean energy and energy efficiency. Just why was it so hard to get the message across about the value of new technologies? One answer may be that we are obsessed with the price of everything, and the value of nothing.

John Rolfe, from the Daily Telegraph, gave a solid defence of his paper’s focus on cost of living issues when addressing issues such as climate policies and clean energy initiatives. He was particularly proud of his role in killing off solar feed in tariffs in NSW, which he noted had caused bills for all households, and particularly his paper’s readers, to increase. And he was equally proud of his paper’s support of the One Big Switch program, which had helped tens of thousands of consumers find cheaper electricity contracts with a new provider.

But should he really be proud of that achievement? Is switching really one in the eye for the electricity retailers? Not as much as you would think: The discounts paid to a fraction of the electricity users, and the fees paid to the likes of One Big Switch, and encouraged by the retailers themselves under the name of “competition”, is funded by a massive cross subsidy on all households, including those who either can’t switch suppliers, or are just not aware that they could.

In Queensland, this subsidy is set at 5 per cent of electricity bills to be paid by all. That 5 per cent is added to the bills of every consumer – and it is one and a half times more than the cost of the renewable energy target and other green energy schemes, according to the data provided by the Queensland Competition Authority.

The trouble is, switching between suppliers on the basis of cost only – and funded by a cross subsidy – does absolutely zero to help the energy system evolve from the inefficient, centralised model that rewards dirty and polluting fossil fuels. It merely encourages retailers, networks and generators to produce, transport and sell as many electrons as they can – to the perpetually rising cost of the consumer.

This 5 per cent addition to the electricity bill is known as “headroom”, and is additional to the normal retail ”margin”, which is designed to give electricity retailers enough money to pay their costs and get a decent return. In fact, retail costs, including this “headroom”, account for 20 per cent of the average Queensland electricity bill.

The electricity retailers want this headroom, in Queensland and another regulated state such as NSW, to be made much, much bigger, in the “interests of competition”. The bigger the headroom, the higher the bills paid by all consumers, so the bigger the discount to be offered to a minority of users – to no cost of the retailers.

“Competition in the electricity market is based on discounting – without headroom it will be difficult for retailers to induce customers to switch,” AGL Energy wrote in a submission. It wants a “much higher headroom” allowance than the 5 per cent recommended by the QCA, so it can receive more revenue and use that to offer bigger discounts. The Energy Retailers Association agrees with the principal of this money-go-round. It says “sufficient head room is essential to offer customers with a competitive market offer whilst maintaining costs.”

Large users and consumer groups say this is absurd.

Some groups such as cane growers, who deal with a monopoly regional retailer and have no avenue to switch providers or obtain discounts, are livid that they are being hit with extra costs and subsidising discounts to other users.

MSF Sugar said in a recent submission to the Queensland CompetitionAuthority that the headroom was delivering “millions of dollars’ in extra profits to regional utility, Ergon Energy. AgForce, which represents agricultural employees, said much the same thing: Users in rural and regional areas paying this headroom were simply cross-subsidising other users or delivering extra profits to Ergon.

The Queensland Council of Social Services has questioned the headroom, saying it was neither economically efficient or consistent with the overall transition to more cost- reflective price signals.  It could see “no additional longer term benefits”, said it would merely force prices up until competition drove them back down to where they were before, and disadvantaged those who had no access to competitive offers, or lacked “awareness or understanding” of the other options available to them.

The Public Interest Advocacy Centre is also dismissive of the logic of “increasing prices in order to increase competition and thereby place downward pressure on prices”. It says allowing for headroom in such a way “seems to place the interests of retailers above those of consumers.”

Even the QCA seems to agree with that: “While the Authority notes that including an explicit allowance for headroom in notified prices provides a “free kick” to those retailers with large numbers of non-market customers, those customers able to access a market contract can avoid this additional cost.”

So that’s just too bad for those who can’t. It’s a little like the massive cross subsidies paid by those who don’t have, or can’t afford, air conditioning units to those who do – again to the benefit of the network providers who get paid more money to build more poles and wires, or provide more electricity. It perpetuates a business model that is becoming redundant, or at least should be.

Meanwhile, the value of new technologies – energy efficiency and decentralized generation, such as solar – that could reduce the spiraling costs of the centralized hub and spoke models continue to be ignored. Maybe it’s time that The Daily Telegraph took up the story and did the battler a real favour on cost of living.

 

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  • Alan Pears

    I’ve been making this point with regard to Victoria in particular for some time. great to get some more detail. I was interested that, in responding to a question on this from a Senator in the recent pricing inquiry an energy retailer asssociation commented that it was very rare for marketing costs to go down in a competitve market, but that these costs were much lower than the benefits of a competitive market – and were an insignifant part of recent price increases (ERAA response to questions on notice). A true believer that markets, no matter how badly designed and run must always be more efficient! Especially if it benefits ERAA members.

    Hmm, I hope some senators read your article Giles!

    Alan Pears

  • Dave Smith

    Giles,

    You are correct. Customers paying different prices for the same product is a sorry state of affairs. Just look at airline tariffs. Customers paying the standard return fare are surely “subsidising” those on special discounted fares. The QCA should step in and place caps on airline tariffs too, and then on every other industry which dares to price discriminate. Hotels must surely be next in line, and mobile phone providers after them.

    • Giles Parkinson

      In reply to this and other comments: Obviously this money go round applies in all industries. The reason some people get cheap mortgages is that others pay higher ones. The point about the electricity industry is that this headroom is regulated, and while people bleat about other regulated additions to the bill (RET, FiTs etc), they don’t bleat about this or the extraordinary cross subsidy in air cons etc.

      • Dave Smith

        But, Giles, a regulated retail price cap is not a regulated addition to the bill. It is a regulated subtraction: because if it wasn’t for the cap, the price (presumably) would be higher. So I don’t think your (implied) analogy holds.

        I am right with you, though, on the cross-subsidies created by flat distribution prices. This is a very poor state of affairs that has been going on for far too long. Despite what some people argue, I am certain that it discriminates primarily against the poor, quite unfairly and unnecessarily.

      • http://Rusty2 Ron Barnes

        With cross subsidies . Not a lot of people knew this. It was always assumed it came from the profit margin by most consumers.

  • Warwick

    This is not a case of a subsidy (nor is it a tax or levy) rather a textbook example of price discrimination in economics. Those who don’t wish to spend their valuable time seeking out a discount either won’t bother or will be happy to effectively pay someone such as One Big Switch to do it for them by taking a fee out of the discount offered. It’s like arguing that business class airfares are subsidising discount economy, so the way to fix it would be to regulate the maximum price of business class airfares on the assumption that it would make economy airfares cheaper.

    It’s also a bit rich for those who complain about only being able to be supplied by Ergon as a retailer and then complaining they are subsidising discounts as those customers in regional areas are receiving a significant (and explicit) cross-subsidy for political reasons to ensure that prices are comparable to SEQ.

    So retailers and One Big Switch are in the business of making money, and consumers should shop around…what’s new? What seems to be missed in all this discussion is that in reality the regulators are woeful at determining what the “fair price” of electricity should be because of significant range of input costs and the great uncertainty in each of those. These days, Victoria seems to manage without the regulator setting the retail default price or headroom. Why do some feel that it’s the role of government to set prices in retail electricity? Communist governments would set the price of bread, milk, eggs and clothing…why not propose default prices on those items here too? Surely the role of government in retail electricity is to provide consumer protection and information…and perhaps get rid of pesky door-to-door salesmen and cold calls.

    • John P Morgan

      None of this should come as a surprise.
      When the Hawke government adopted the economic rationalist fetish back in the eighties, one of the outcomes was to transform the nation from a society into an economy.
      When the electricity assets in Victoria were privatised in the nineties, the effect was amplified.
      Originally the electricity infrastructure was intended to supply a public benefit.
      Now these assets are intended to provide profits to investors, at the expense of the consumers.

    • Claire

      Exactly, well said.
      Ergon customers complaining about cross subsidies is absurd (pot, kettle etc).
      The real problem is that price regulation prevents retailers from offering differentiated products – in QLD and NSW you only get the crude x% discount on the regulated energy charges. In Victoria you can shop around to find an electricity pricing scheme to suit you. Some have low fixed costs and higher unit prices (good if you don’t use much power) and some have higher fixed priced and low unit cost (good if you use lots of power). If you can’t be bothered to do the legwork, you get the standing offer. Seems to me like this is the ultimate option for consumers.

  • colin

    The cost of an airline ticket is a spurious argument. Applying the argument that offpeak and peak charges involve a cross subsidy is more akin to the airline ticket argument. Airline ticket charges have a demand element in their pricing. Once upon a time it was explicit when there were off-peak flight discounts. The electricity market is more product dumping, where a product is being dumped in an attempt to cripple competition in a narrow sector. If you don’t believe this have a look at Lord Howe flights where qantas has a monopoly. Same price structure. If you book ahead in the not so busy times, significant discounts – you can even use your ff points

  • Peter Bysouth

    Giles, the short term “bad” news is as you say the fact that we all have to pay more but the “good” long term news is that the 5% increase will only help in tipping more and more customers into solar water and PV. This will just hasten the retailers ultimate demise just like the carbon tax is meant to do. The biggest short term issue is getting renters/pensioners/odd roofed housing access to solar/PV etc and getting relief for those that cant access competition.

  • Chris Fraser

    While i could agree the issue of headroom is alluding to an anti-competitive problem, i am worried about the alternative. This is where the biggest retailers simply monitor each other and have an unspoken agreement not to vary radically their prices – which is another form of collusion. It reminds me of a certain two grocery stores … but perhaps we won’t go there, that’d be fostering some other conspiracy story.

  • http://groundswellbasscoast.com Bernie

    Below is copy of letter to the editor about mega subsidy, by the rest of us, in VIC and exactly the same in other states:

    This reviews possible cost cut, so Victoria can afford many essential services.

    Electricity cost was recently set, when FiT(Feed in Tarriff) for rooftop solar PV was reduced to 8cents/kWh, at the cost ex Loy Yang. Aluminium smelters are big users, so your 8cents/kWh computes to their $80/MWh. 

    Treasurer Stockdale observed in 1995 that pricing to smelters is unfair on taxpayers at about $15, so subsidy is $65/MWh.

    Smelting aluminium requires 15MWh/tonne so subsidy is 15 x 65 = $975.00 per tonne. Allowing 12% for loss in long transmission lines, actual subsidy is $1092/tonne.

    Total production is 550,000tonnes/year x $1092 = $600.6M/year

    News recently, $400M/year, taxpayer CO2 compensation to VIC smelters. So total subsidy is $600M + $400M = $1.6B.

    Most aluminium output is export, actual prices and customers top secret. Highly automated production means only a few hundred jobs.

    Imagine how much our State could do by cancelling this biggest polluting $1.6B/year corporate scam to invest in a real future?

  • http://rusty2 Ron barnes

    Is it now the time now to say to all retailers and Government,s Energy prices should be fair.
    Industry gets their energy at a the greast discount because of the bulk rates for usage, not us home owners.
    Any incenetive offered by other suppliers at a cost to other users is wrong.
    If an energy supplier can cross discount they should match this to stay with the company you are with.
    Not out of any percentage increase but proffits and income paid to top management and other perks allowed to them followered by reducing discounts to industries.
    This should be the prefered method not by hiking up the average customers bill by any percentage.
    Also anual increases stould stop this is inflationary thus feeding price hikes on other products reliring on electricty that would be all consumers.
    By doing a full costing of government costs and industry costs not a theritical one, giving the public the chance to understand the costs in volved in manufacture and conveying electricty through the grid also when a government is broke they should not expect diverdends from any form of energy as they already get GST from electricty and gas.
    In Australia double dipping by taxes indirect or direct state governments trying to ballance their books, costs a lot so looking at costs it should be able to reduce overheads .
    The state of N.S.W should bow their heads down in shame for increacing charges to the consumer, because of a Gigantic error ,In their costings and return all extra monies paid by consumers.
    By sacking line personel was a FALSE ECONOMY AS IS EMPLOYING CONTRACTERS.
    These people in turn pay tax and use energy.
    Their experiance is then lost to industry for ever .

  • Richardw

    Projections show potential savings from demand reduction of $17bn.

    Trials of peak reduction being run by Ausgrid show that Solar + battery storage can achieve 15.9% peak reduction.

    Solar FIT once battery tech is in place is most likely way to reduce the increase in spending on Poles & Wires which is mostly to cover peak loads.

    And by the way the trials are using commercially available products and not some imagined technology.

    The changes to power use driven by the worries of climate change have reduced demand for power already and eliminated the need for more power stations to be built now in NSW for instance.

    So yes cutting back FIT was not only not very effective short term to reduce costs. It was really expensive long term. We need FIT and we need PV and we need storage that carries the PV output into peak.

    Plus we need legislative change (being looked at) to prevent the over-spend on Poles & Wires, which is the cause of the increased costs. PV did not raise prices, it is just used as the whipping boy by the power industry as it cuts into their control of the market.

  • http://Rusty2 Ron Barnes

    Well its up to the Energy suppliers to re-top up its payment to solar producers,or keep paying a higher rate for it permenitley.

  • Miles Harding

    Claire hits it on the head again!

    I see that the effective competition and its subsequent a lack of choice in supply schemes to be a real issue.

    Customers should be able to choose a plan that suits them in much the same way then can with mobile phone plans.

    I would go further and say that a some of these plans should allow consumers to participate in merit order pricing such that they can supply the grid from a battery bank when the pricing level dictate it to be a good idea.

    Individual consumers, community groups, corporations and state instruments should all be treated equally under a free and fair energy distribution and trading system. (not the case now)

    A few days a go, I commented on various new types of batteries, including Sodium-manganese (water-based). There is a USA based company, Aquion Energy***, that is starting mass production of an affordable and effective battery that looks as if it will deliver on durability, cost and efficiency, making it a true contender in intermittent (renewable) supply and peak lopping applications. I will be interested to see how this company goes with a much better mousetrap.

    Unfortunately, I see the Australian markets as being rigged to discriminate against any disruptive solutions that will be increasingly important as we move towards renewable energy.

    *Sigh* Support here is so poor that Australian research groups have almost no chance of commercialising their good ideas, unlike the USA where this is encouraged, if not expected.

  • Kim Grierson

    Good article giles. The point you make about News Ltd not reporting fairly about the costs of electricity is a very valid one, and reflects on their biased reporting on a whole pile of issues.