Are we being ripped off on power prices?

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Well, yes and no!

A recent report from the Energy Users Association of Australia, available here, has sparked off a rather ill-informed debate. See  herehere, here, and here for a sample. The report is by Bruce Mountain – someone who I have known for many years and whose work is usually high quality.  And that is the case with his report. But it is only correct as far as it goes. And it doesn’t go very far.

So first, does Bruce cover off the relevant limitations of his analysis? In general, yes. For example, exchange rates are a factor in any international comparison of a non-traded good like electricity. Bruce looks both at current and PPP exchange rates. And as expected, the comparison is a lot less stark at PPP rates. As Bruce states in his report:

[A]djusting for Purchasing Power Parity (PPP) based on the OECD’s measures, electricity prices in Australia are currently around 11% lower than in Japan, 14% below EU prices, but 34% higher than U.S. and 117% higher than Canadian prices. Assuming no changes in PPP and that prices in Japan, the EU, the U.S. and Canada continue their trend from 2002, prices in Australia (at PPP) will be higher than these comparators by 2013/14.

This analysis didn’t prevent an Aurora Energy spokesman from stating that the report was flawed:

“The EUAA report findings skew international comparisons due to the exchange rate difference, whereby the Australian dollar is now at historic highs,” he said. “Australian electricity prices are actually cheap by international standards.”

I do wonder if the spokesman actually read the report before making that comment!

The problem with the report is that it doesn’t look at the components of electricity pricing to work out why there are price differences. As a result, self-interested groups (like the EUAA) have been able to use the report to highlight supposed failings in the system without actually having any basis to back up their claims.

So let’s dig a little further.

Let’s look at Canada. I like to use our frosty friends from the North because their currency tends to track our own. So I am less concerned about the ‘correct’ exchange rate when looking at Canada. According to the report, Canada’s energy prices are a lot less than ours, on average. But if the variance of electricity prices in Canada is high, then the average can be pretty useless. And the variance is high. See figure 1 from here, reproduced below.

The names are a bit small but the lowest is Vancouver, at 8c per kWh in 2010 and the highest is Charlottetown at about 18c per kWh. Toronto is around the middle at 12c per kWh.

So point 1 – it is not clear how useful it is to compare country wide average energy prices when there is a large variance within the country.

That said, the prices still appear low compared to Australia. I picked Melbourne and AGL and their residential single rate (excluding taxes, as in the above chart) is 21.38c per kWh plus about $1 per day service charge. See here. This is well above Toronto (where Joshua now resides), so let’s explore a bit further.

I will just focus on energy costs. Obviously power prices include energy prices, network prices, retailer charges, etc. But it is easier just to focus on one bit. Toronto has a regulated energy tariff and ‘competitive’ tariffs. The regulated energy tariff is 7.1c per kWh up to 1000 kWh per month then 8.3c per kWh. See here. But this seems to be below actual cost and there is an ‘adjustment‘ to cover this. So the actual price looks closer to 9c or 10c per kWh.

Bruce notes some of these issues in his report (e.g. in adjusting for Western Australia) but it brings me to:

Point 2 – residential electricity prices are miserably hard to compare because they often have implicit or explicit subsidies.

Perhaps a better way to compare energy prices is to look at the spot energy market. Some information on Toronto’s spot market is here and, if I am reading this right, spot energy prices in Toronto – in the depths of a northern winter – are on average (since January 1 2012) about $22 per MWh. That seems to be cheaper than any part of our National Electricity Market – even Victoria, with all our cheap brown coal. See here. And $22 per MWh is well below what we normally think of as the long run cost of generation for new gas fired generation plant. So how does Toronto do it?

The answer is here. Baseload power supply in Toronto doesn’t use fossil fuels. It is Hydro and Nuclear. Indeed, if we look at Ontario Power by itself:

Our 2010 generation mix consisted of 52 per cent nuclear, 34 per cent hydroelectric and 14 per cent thermal electricity.

Hydro is cheap once the dams are built and nuclear is – well – nuclear. So one way to get power prices down towards Toronto’s level would be to build a bunch of dams and nuclear power plants. Aaaahhhhh. Hmmmm.

Point 3: be careful what you wish for in power production.

Now, I am not suggesting that we go nuclear and I doubt Bruce is suggesting this. Not so sure about the Energy Users Association of Australia, but my real bottom line is simple:

Point 4: Comparing power prices across countries is difficult and unless you get down into the details, any comparisons hide more than they reveal.

So the report made for a nice bunch of news stories. And I think it is worthwhile to look at our power prices to see if they are truly cost reflective. But a high level report like that released by the EUAA really adds little useful material to the debate.

 

 

 

5 Responses to "Are we being ripped off on power prices?"
  1. You do realize that Charlottetown is roughly comparable to Hobart, right?  Small capital city in an isolated island province?  

    There are about 34 million Canadians, of which about 13 million get their power for $0.08/kw (BC, Quebec, Manitoba), and where another 20 million get it for $0.10 – $0.12 / kw.  It’s expensive in PEI, and presumably up North.  

    It’s probably fair to generalize across the country.

  2. Arrow.

    First, geographic isolation and isolation from the grid are not the same thing. Hobart is part of the NEM (due to Basslink) but Perth is isolated from the NEM. So unless you can tell me about transmission capacity to Charlottetown neither you nor I can say if it is isolated or why it has higher prices. That is my key point. The raw numbers without analysis of causes are meaningless.

    Second, even if prices only varied between 8c and 12c that is a 50% variation (or 30% if you want to use the bigger number as numerator). What does the average of these numbers mean? Not much unless you can tell me why there is a 50% variation.

     

  3. There are hidden subsidies in some of those technologies – for example the risk indemnities provided to nuclear power operators.

  4. Not to mention the implicit subsidization of future decommissioning costs (by some other government-in-power)…

  5. Hello Stephen

    This is a predictably interesting critique. I’m not sure I would be as damning of the EUAA as you are, but then again they are my client so you might expect me to say that. On a slightly more serious note on this score, I might suggest making these judgements based on revealed preferences over time. On this score, in the context of so many rat-bag rent seeker associations I suggest the EUAA deserves a great deal of respect  (again you might expect me to say that). 

    Moving on, I too was more than mildly irritated at the patently wrong critique from the likes of Aurora (and others) whom shall remain nameless at this point but are likely to be revealed in the fullness of time.

    My main comment is that I think you dismiss these data a little too lightly.   

    My dataset was the universe of developed economies (except Hong Kong, South Korea and Hawaii). In these economies much effort has been made over long periods of time to ensure tariffs are reasonably cost-reflective and so I think the informational value of national average (or state and provincial average) prices is pretty high. 

    You point to localised variations and indeed this is the case here as elsewhere. But this does not dismiss the value of larger averages. One is able to assess the impact of broader systemic factors (such as exchange rates and regulatory design, ownership and regulatory conduct) when you raise your head and look at higher level averages.

    Now, I think these data are very telling. Leaving aside the headlines of international comparisons, when one looks at the charts of trend rates of change, one gets to see a lot. How can it be that our prices have gone up so much while others have stayed roughly constant at a national average level? What are the systemic reasons for this? 

    In the development of this research I was astounded to find that amongst all OECD countries, Australia alone failed to present  information on residential, commercial and industrial electricity prices. Can we be right (and the rest wrong) that these data are not useful? 

    You have noted that I have not attempted to share my views on what these outcomes in this paper. This is intentional. This sort of evidence should spark a debate, just as it has. I did not want to stamp on this, or guide it, by suggesting what I thought about it.

    I don’t think the regional variations you point to has justified that this information has little value. To the contrary, I would suggest that these high level comparisons  are strongly suggestive of the concerns over the design and conduct of regulation and also of the implications of ownership, that I have examined in sector-specific research. of which you are aware.

    Anyway, keep the debate alive. Its one we really need to have.

    Regards, Bruce. 

     

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