What Will Drive Electricity Prices Over the Next 3 Years?

Over the last several years Australian consumers and businesses have been hit with relentless price increases for electricity.

This trend is now finally abating with the Australian Energy Market Commission (AEMC) predicting falling or stable prices for the next few years.

Electricity Price Trends 2014 to 2017

The graphic below shows the anticipated electricity price trends over the next few years.

"At a national average level, residential electricity prices have declined in 2014/15, and are expected to fall again in 2015/16 followed by a moderate rise in 2016/17. Price trends and drivers vary between states and territories due to local conditions and government policies, as shown by the differences in the annual average movements below." - AEMC

Key Electricity Price Drivers

The recent (2014/15) drop in electricity price is mostly due to the removal of the carbon tax.

But there are much bigger trends at play. For example, well over half of electricity bills are still made up by the regulated 'network' component (often referred to as the "poles and wires").

The repeal of the carbon tax had a fairly obvious and direct impact on electricity prices. Here are some of the less well understood price drivers:

1. Falling electricity consumption = excess capacity = rock bottom prices

This is my favourite trend as it is largely driven by consumers making the choice to be more energy efficient whilst also switching to solar power.

What's more, this is no 'blip' in the data. It's part of a long term trend since the 1960's!

"Declining annual electricity consumption has contributed to excess generation capacity in the National Electricity Market. This, together with additional renewable generation subsidised under the Renewable Energy Target, is putting downward pressure on wholesale electricity prices, which is expected to continue over the reporting period.

Analysis by Frontier Economics shows that if electricity consumption declines further than forecast, wholesale electricity prices are unlikely to fall materially further. Prices in the spot market are currently close to the variable costs of the generators who generally set the wholesale price. This acts as a price floor as generators are unlikely to offer capacity into the market if they are unable to recover these costs." - AEMC

2. Network 'gold plating' = backlash = better network regulation

"Regulated network prices consist of the costs of the transmission and distribution networks, which connect electricity generators and end users, such as households.

For the second year running, the price trends report shows growth in regulated network prices continuing to moderate. This reflects a reduction in factors such as expectations of peak demand and the regulated rate of return. The regulated rate of return is a significant driver of network prices and has been decreasing due to lower financing costs.

The actual trend in regulated network prices over the reporting period will depend on the outcome of a series of revenue determinations to be made by the Australian Energy Regulator." - AEMC

3. Increased retail competition = a better deal for consumers (at least for now)

"Competition has resulted in an increasing number of retail electricity offers and consumers can save on their electricity bills by shopping around for the best deal.

In states and territories where both standing offers and market offers are available, residential consumers that are still on the standing offer can realise substantial savings by switching to a competitive market offer. This saving ranges between 7 per cent in Queensland to 16 per cent in Victoria.

Consumers that are already on a market offer may benefit from switching to another market offer that is more suited to their individual circumstances." - AEMC

See also my recent blog post on how to get a better deal on power and gas.

4. Cost of environmental policies still rising

"While the repeal of the carbon price has seen a drop in environmental policy costs in 2014/15, these are expected to increase across most jurisdictions in the following years due to the Renewable Energy Target and the effect of legacy solar feed-in tariff schemes.

It is expected that Renewable Energy Target costs will make up 5 per cent of the national average price in 2016/17." - AEMC

What Comes Next

All this relatively good news on electricity prices is offset by the fact we still spend a lot of money on energy more broadly. And our energy consumption is still woefully energy inefficient.

Don't forget that gas prices are now likely to experience the same kind of price rises that we saw with electricity over the past few years.

So there is no time to be complacent!

Investing in energy efficiency changes around your home and business is still the most cost effective thing you can do to keep a lid on costs.

By Ryan McCarthy | |
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