10 July 2014 — From The Conversation: If you heard Clive Palmer and his Palmer United senators say today that they will only scrap the carbon tax with stronger rules to protect consumers, you might have thought they sounded quite fair and reasonable. Actually, it’s populist hokum.
And if you’re expecting to see your power bills go down when the carbon tax is eventually repealed, rather than keep rising, get ready to be disappointed.
Standing up for consumers?
In a chaotic day in Parliament, the Senate has defeated the government’s carbon tax repeal. That came after Palmer surprised everyone at a media conference earlier in the morning by claiming he and his senators had been “double-crossed” by the Coalition over amendments to ensure carbon tax savings are passed on in full to Australian families and businesses.
Palmer United Senator Glenn Lazarus declared this week that his party’s “historic” amendment would:
deliver a toughened obligation for suppliers of electricity, natural gas and synthetic greenhouse gases to pass on all cost savings resulting from the carbon tax repeal; it also requires suppliers to clearly explain to the ACCC [Australian Competition and Consumer Commission] and customers the way in which cost savings have been calculated and passed on to consumers.
But are the Palmer United amendments really necessary? And will you save money on your power bills thanks to their proposed changes? On both counts, from what I’ve seen the answer is no.
Instead, it looks more like making sure that when the carbon tax is eventually repealed, the Palmer United Party can gain credit for what is already included in the legislation.
The ACCC will have new powers to monitor prices and take action against businesses that attempt to exploit other businesses and consumers by charging unreasonably high prices or making false or misleading claims about the effect of the carbon tax repeal on prices.
So at best the PUP’s “historic amendment” is adding some detail to obligations that are already in the legislation.
However, even these obligations are unnecessary. To see this, it is important to know how electricity prices are set.
Understanding your power bills
Roughly speaking, retail electricity prices paid by households are either set by a regulator or are set by the market. As the Australian Energy Regulator notes:
In Queensland, New South Wales, the ACT and Tasmania, you can ask for a contract with a regulated electricity price.
When the carbon tax is repealed, these regulated prices will be adjusted for the reduction in cost. However, this may not occur immediately. It will depend on the regulatory process. The prices will be changed at the next “reset” unless the regulator made provision for the potential removal of the carbon tax the last time it set the prices.
So there is little point in having either the ACCC monitor this process or electricity retailers explain it. Any delay depends on the regulators, not “business exploitation”.
Alternatively, large business customers and households in Victoria and South Australia do not have regulated tariffs but rely on retail competition. But even for these unregulated tariffs, the ACCC monitoring is unlikely to make a real difference.
Electricity retailers buy their power in two ways. They can either buy on the spot market or through “forward” contracts with generators.
The spot prices are arguably the most transparent prices in Australia. But they are also some of the most volatile and can vary between a negative price and a price up to almost $13,000 per megawatt hour. The relatively small change due to the repeal of the carbon tax will be swamped by the normal volatility of power prices in the short term. So even if the ACCC wanted to check the effect, it is not going to be able to do so.
The contracts between retailers and generators will have the carbon price built in. And, when they are renegotiated, the effect of the carbon price will be removed. But that will not be instantaneous. Once this occurs, competition will pass the price fall onto customers. And if you think your electricity retailer is not acting fast enough, then shop around. There are plenty of retailers out there.
So the PUP amendment, and ACCC price monitoring more generally, is an attempt by politicians to claim credit for changes that will happen anyway.
However, these attempts are not without cost.
Why your bills are really rising
Electricity prices are rising, not due to the carbon tax, but due to changing demand for network assets.
Network prices have risen rapidly over the past few years. For example, in New South Wales average annual power bills more than doubled between 2007-08 and 2013-14, soaring from $1000 to $2038, with about $500 or half of that rise due to increased costs for the network of poles and wires. And as the Australian Financial Review reported today, the state-owned NSW network companies are seeking further price rises.
In part these price increases reflect falling demand for network assets. The networks have fixed costs and as consumers buy less power through the network, the cost per unit of power goes up. This feedback loop – from falling demand to higher prices to even further reductions in demand – has been called a “death spiral”.
While the repeal of the carbon tax may be political theatre, it simply distracts attention from the real problems facing Australia’s electricity networks.
With electricity prices set to keep rising after the carbon tax is repealed, due to factors that have nothing to do with the carbon tax, the ACCC will face a lot of pressure to find a culprit to blame. Hopefully, the regulator will stand its ground. But it may also be tempted to find a scapegoat. In that case, watch out if you are an electricity retailer. Unless every ‘i’ is dotted and every ’t’ is crossed, you may be “named and shamed”, destroying significant business value.
But of course, this just creates an implicit regulatory burden. And eventually that will also be reflected in the price households pay for their electricity.
So if you are expecting the repeal of the carbon tax to lead to lower power prices, don’t hold your breath.