Australia’s gold medal in soaring electricity prices

This week investment bank UBS issued a report comparing electricity prices across the world, and how they have risen sharply in many countries in recent years. The reasons vary – soaring network costs, added taxes and levies (including environmental ones), and rising fossil fuel costs.

UBS put together the analysis because it wanted to assess the risk of government intervention on utilities. The risk was high, but not in the way you might imagine: UBS says there is little chance of governments rowing back on climate or renewable policies (Australia is the one very notable exception), but there was a risk of intervention in price setting.

What we found most interesting were the graphics, and their illustration of just how Australia has managed to propel itself to near the top of the world in electricity prices, and the reasons why.

This first graph shows the increase in electricity prices in aggregate terms over the past seven years, and their causes. Australia is a clear winner, causing average costs up more than US15c/kWh – almost 50 per cent more than its nearest rival, Spain, and three times more than the supposed “dens of renewable iniquity”, Germany and Denmark.

The reason for Australia’s stellar rise, as the graph shows, is mostly due to network costs – which also affected Spain and one of the main grids in the US. Wholesale prices, as a global average, were little changed – falling in developed countries (partly because of the impact of renewables and lower demand) and rising in emerging economies (due to the extra cost of imported fossil fuels and rising demand).

Here is a graph (below) that usually sets off the anti-renewable brigade. It shows a comparison of average electricity tariffs across the globe – those countries with the most ambitious renewable policies (Denmark, Germany, Spain, Portugal) are near the top.

But is this cause or effect? Germany and Denmark, as this next graph (below) shows, had compound average growth rates of electricity prices over the last 7 years well below the average, despite the period cited being at the height of their renewables push, and in the case of Germany with its solar boom, the height of its renewable incentive costs.

The fact is that most of these countries already had high electricity prices, due to their need to import expensive fossil fuels, particularly gas. In the case of Spain and Portugal, prices have had to recapture an historic “tariff deficit” (similar to Western Australia’s and Queensland’s) that had its roots well before the renewable booms.

This next graph (below) is a good illustration of where we have been, and where we are going, in terms of electricity demand. In all the developed economies, Europe, the US, Australia, growth in power demand has been falling for the past two decades, and aggregate demand will fall in the current one.

But it also shows that while electricity demand growth has been huge in emerging economies, the rate of growth is slowing dramatically.

This next graphs brings the focus back on Australia. Given its trend of declining demand growth, and its recent demand falls, what the heck where the network operators and regulators thinking when they committed to $45 billion of upgrades in the latest regulatory period.

As this graph shows, the regulated asset base has grown three-fold on this index as volume remained static. Some estimates have suggested one third of the recent spend was not needed.

This suggests a lot more might have been surplus to requirements, notwithstanding the under-investment in earlier years. Our story earlier this week on why some of these networks of poles and wires no longer make any economic sense is an illustration of this. Whatever the reason, the networks have built an albatross on their necks (as well as the generators and the retailers), because as long as the cost of delivery of electricity remains high, the incentive for consumers to install more solar modules, and then battery storage, will be overwhelming.

What was interesting to note was the UBS conclusion on the impact of renewables.