How Abbott can keep carbon price, and slash power bills

Tony Abbott may not have to repeal the carbon tax after all to save the country from high electricity bills: the latest estimate from the NSW-based Independent Pricing and regulatory Tribunal (IPART) suggests that a transition to a market based scheme in 2015 will likely lower bills by 6.9 per cent.

The estimate is included in IPART’s latest ruling, which forecast a small average rise of just 1.7 per cent for NSW electricity consumers in 2013/14 – which compares to the 20 per cent -plus rises being experienced in Queensland.

Indeed, IPART suggests that future rises will be lower than inflation in coming years, and from July 2015, when Australia moves to a floating carbon price linked to international markets, is expects that prices will fall by 6.9 per cent, as a result of significant falls in the price of European carbon permits. That kind of takes the heat out of the Coalition argument that repealing the carbon price is essential to bring down retail electricity costs.

IPART says that in the latest ruling, wholesale and green energy costs have moderated, as have network costs. Indeed, the only aspect to have risen significantly is the retail costs – and the margin that that retailers are allowed to charge to cover “the costs of acquiring and retaining customers.”

This is an issue we took up last month in our article on the Money-go-round on discounts, later noting that customers were being charged around $140 more than they should so that someone else can pocket a discount.  IPART rejects this is a subsidy – because customers can get the discounts themselves. Curiously, it doesn’t make the same argument about rooftop solar, even though that option is also available for most.

The main piece of good news is on network costs. NSW has been able to secure a lower rise because it has been quicker to stamp on excessive network upgrades, such as the now defunct plan to build a line to Taree on the mid-north coast. This is in contrast to Queensland, which now has the highest connection costs per MW in the country by far.

Queensland over the weekend announced it would merge its two network operators – Ergton and Energex – but said this would deliver savings of just $583 million over 10 years. As a recent report concluded, the government take from networks has ballooned from $47 million to nearly $1 billion. The only way it can reduce the cost may be to take a write-down on the value of excess assts, as is the case in the US, or lower the regulated return.

IPART produces a couple of interesting graphs that put the various costs into context.  The first graph shows the increase in costs over a six year period. The green schemes, which includes the large and small scale renewable targets, and energy efficiency and other climate schemes, has added $87 to the annual bill over that period. That’s one half of the increase in retail costs and just a fraction of the increase in network costs.

 This next graph below gives a breakdown of those green costs in the latest period. As noted, the cost of the large scale scheme is just $40 a year, or 80c a week. Energy insiders say that if IPART had allocated a market price on the renewable energy certificates (as it now belatedly does on the small scale scheme), the cost would have been even lower – around $31. The cost of the small scale scheme are inflated because it includes a “catch up” payment from the previous year. So the costs of the renewable target for 2013/14 should be closer to $75 something rather than $107.

IPART says the costs of the large scale scheme will rise as more renewables are built, and the cost of the small scale scheme will fall. This assumes the Coalition doesn’t scrap or alter the scheme, and IPART has repeated its view that the LRET should be scrapped because it is not complimentary to the carbon tax – which is the opposite view to most other energy market economists. This is an issue we discussed in detail after its draft report – IPART delivers another free kick on energy to utilities.