Wednesday, 06 November 2013

Managing energy price expectations

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If, and it’s a large and hairy “if”, the Abbott government manages to repeal the carbon price, electricity prices will not decrease. They will increase.

Tony Abbott nailed his anti-carbon colours to the mast three years ago, when he leapt Julia Gillard’s “no carbon tax under a government I lead” comment on a Sunrise interview during the 2010 election campaign. That one sentence became the rock on which he build his entire anti-Gillard anti-carbon tax campaign.

Relentless repetition overcame science, industry advice, logic and his own willingness to do exactly as Gillard did if it would secure him the Prime Ministership. It was a successful strategy in that it eventually got him to the lodge, but it’s now a burden. Having made such an investment in the carbon tax being the Big Bad of the Australian economy and made his promise signed in blood, he has no option but to press forward with an issue that is no longer particularly pressing.

Worse than that, he’s facing a long and bloody battle to repeal the tax, with Labor now refusing to back the repeal unless it’s replaced with an ETS; a hostile senate before 1 July 2014; and a chaotic one after that.

Even if he does manage to negotiate a repeal however, the result is not going to stand up to his oft repeated assertion that removing the carbon price will reduce energy costs for Australia consumers.

Where residential and small business prices are regulated, (eg QLD) the gazetted tariffs for 2014-15 won’t be published until May 2014. Unregulated markets ( eg Victoria) are even more difficult to predict, but conservative estimates suggest prices will increase by 5% in 2014/15.

The figure most often trotted out was that “the carbon tax has added 10 per cent to household power bills”. So it wouldn’t be unreasonable for most people to assume that the repeal of the carbon price will immediately reduce their electricity bills by 10%.

There’s a number of complex factors at work, however, that will mean any price reduction immediately following a putative repeal is not possible.

Firstly, it assumes that the electricity retailers will immediately stop paying a carbon price to the generators and will thus be able to remove that component from the prices they pass on to their customers. This might be the case if retailers are operating their own generators or buying directly from the wholesale electricity pool, where the carbon component can be stripped out as soon as it is removed.

However, many retailers will have hedged future supply commitments with carbon-inclusive contracts negotiated directly with the generators (where the price is fixed for the duration of the contract, regardless of legislative change) or bought from the futures market (where they’ve paid in advance and cannot ask for or receive a refund for the carbon price).

So, yes, this means that if the carbon price is repealed, some electricity generators will still receive payment for a cost of carbon that they no longer incur and this extra payment will be passed on to consumers.

The electricity retailers are well aware of this problem:

AGL

…due to the level of uncertainty about whether a carbon price will apply in 2014-15 it is likely that some retailers will have incurred costs to hedge their potential exposure to carbon prior to 2014-15. In the event that a carbon price does not apply in 2014-15 these costs faced by retailers should be recognised in setting the WEC and any estimate of the impact of carbon on a customer’s bill.

 

Origin

…the proposed methodology will lead to customer confusion if the Clean Energy Act is repealed. Origin understands that under the proposed approach on repeal there would be no adjustment to the energy cost allowance as a discounted cost has already been applied. This is clearly at odds with customer and Government expectations; indeed customers bills currently note that “Qld Competition Authority estimates the Federal carbon price and renewable energy target add about $259 a year to a typical 6.3MWh household bill-www.qca.org.au.”

Additionally, network prices (the poles and wires costs incorporated into your electricity bill) will increase on 1 July 2014. This happens every year in every state except Victoria, where the network prices are increased at the beginning of the calendar year. Again, we don’t know yet how much the network costs will increase in 2014, but industry estimates are around 10% across the board.

There’s various other complicating factors, but just the two outlined above are enough to cast significant doubt on any suggestion that electricity prices will go down. They won’t. They’ll go up. Even the suggestion that they would not go up by as much as they would if the carbon price was still in place is not true. It will take a couple of years after the repeal for the effect of the carbon price to disappear from the wholesale prices.

Also, the long and difficult changes to business systems built to incorporate the carbon price (adding or removing an extra line item to an electricity bill is a far more complicated and expensive process than you would think) will have to be dismantled, the cost of this will also need to be passed on.

Ignoring all the implications for carbon emission reduction, repealing the carbon price will be politically difficult. Voters who believed the coalition’s assertions that pricing carbon was responsible for their increased electricity bills may punish Abbott for his failure to make any meaningful reduction to their energy costs. Meanwhile, as the Abbott government expends far too much of its resources and political capital on a meaningless gesture, the real push behind electricity price increases will be ignored.

It will be interesting to see how Abbott manages the politics of this fight. His proven strength is in running a negative campaign, but with a far more focussed opposition from Labor, no longer distracted by leadership battles, there is no Great Enemy on which to focus his negativity. And, as Dragonista points out, the coalition government is working hard to stem the flow of information from government to the media. This could end up working against them as the media, deprived of easy column inches, will have to go looking for new chew toys.

Interesting times ahead.

 

Jane Gilmore

Jane Gilmore is the editor of The King's Tribune.

Follow Jane on Twitter: @JaneTribune