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Electricity cost dissections: do they reveal – or conceal?

By Geoff Carmody - posted Friday, 20 October 2017


What's the 'official family' feeding the punter about cost increases within the National Electricity Market (the NEM)?

'Official' numbers for effects of different cost components on electricity prices in eastern Australia within the NEM have been released.

In an opinion piece in The Australian on 21 August (provocatively entitled: We're quickly reforming the energy markets with ideas, not ideology), the Energy Minister provided a cost breakdown of household power costs.

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The Minister apportioned electricity costs as follows:

  • Transmission & distribution ('poles and wires'): up to 50%.
  • Power generation: up to 30%.
  • Power retailers: about 12%.
  • Green schemes: up to 8%.

Others, such as the ACCC, have released broadly similar (but far from identical) cost breakdowns.

Recently, transmission/distribution (or 'poles and wires') have copped much of the blame for electricity cost increases according to the ACCC.

Really? Hang on:

  • Large-scale grid-based electricity systems like the NEM are, in the economists' jargon, joint products.
  • Generation without electricity transmission, distribution, and retail sales is production without customers.
  • Retail without generation, transmission, and distribution is customers without a product.
  • Generation and retail without transmission and distribution is production and customers but no way of getting them together.
  • All elements – generation, transmission, distribution and retail – are inter-connected parts of an essential service.
  • Eliminate one (or two), and the whole house of cards collapses. (Really? Try SA last year.)
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The 'official family' statistics don't seem very useful. For the current policy debates (sic), do they conceal more than they reveal?

Is there a better way of breaking down sources of electricity cost increases?

What is the current policy debate about cost increases within the NEM? It has a few key components.

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About the Author

Geoff Carmody is Director, Geoff Carmody & Associates, a former co-founder of Access Economics, and before that was a senior officer in the Commonwealth Treasury. He favours a national consumption-based climate policy, preferably using a carbon tax to put a price on carbon. He has prepared papers entitled Effective climate change policy: the seven Cs. Paper #1: Some design principles for evaluating greenhouse gas abatement policies. Paper #2: Implementing design principles for effective climate change policy. Paper #3: ETS or carbon tax?

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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