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Rising electricity prices are saving us from deflation: Kohler

The beautiful thing about the politics of electricity prices is that everything is true.

It’s true that the carbon tax is increasing the price of electricity (that’s the idea of it). It’s true that state governments have been price gouging to some extent, playing the arbitrage between their real cost of capital and what the regulator allows them.

It’s true that regulators and suppliers have not done well in meeting the peak demand from air conditioners on hot days. It’s also true that power distributors have been putting off necessary upgrades and now have to do them in a rush. It’s true that regulators have been increasing reliability requirements, but it’s also true that power companies have been investing more on this than perhaps they need to.

Oh, pure joy.

Politicians can make virtually any claim they like about electricity and it’s true! Yesterday the prime minister got stuck into the states for over-investing: “For too long, some state governments have been increasing their revenue at the expense of the family electricity bill – that has to stop.” Too right!

They then got stuck back into her, along with the federal Coalition, over the carbon tax because it will increase prices 10 per cent this year and beyond. True enough.

Power company CEOs wisely kept their heads down, but were no doubt kicking the furniture in the solitude of their offices and declaring a pox on both of them.

My colleague, Robert Gottliebsen, has long argued that the Labor government was stupid to introduce a carbon tax at the same time as electricity prices were rising rapidly for other reasons, because they would be blamed for the lot.

This message has finally got through to the prime minister, even though Ross Garnaut said the same thing more ponderously a year ago, so she apparently replaced Resources and Energy Minister Martin Ferguson on the ticket at the Energy Policy Institute function yesterday and belatedly produced a wooden spoon and muddied the water.

If everyone is confused about what’s causing power prices to go up, then maybe they won’t blame her quite so much. And anyway, at least she can say that her bit of the increase is being compensated for (that’s true!).

A dinner companion the other night told me how he had recently got out his electricity bills from two years ago and was shocked to discover that the per kilowatt hour price has increased 44 per cent in that time. He seems to have done pretty well, actually, because he lives in Victoria; 48 per cent is said to be the national average.

In fact, last Monday’s inflation gauge from TD Securities reveals that electricity prices have gone up more than 80 per cent in five years.

This has happened mainly because, as the Australian Energy Regulator has revealed, $42 billion is being spent on infrastructure over five years from 2009. That’s mainly because the big post-war installations have reached the end of their life, and also because most households now have air conditioners and everyone expects to turn them on all at once on hot days.

And it’s also because the state governments have an incentive to over-invest because pricing is based on a higher cost of capital than they actually pay, so investment produces a dividend windfall.

But here’s the thing: the TD Securities inflation gauge also showed that inflation was 1.5 per cent in the past 12 months, which is the lowest in three years.

That’s because the increase in power prices has been almost entirely offset by the high Australian dollar, which has produced tradeable goods deflation of 1.4 per cent over the past year. In other words, thanks to the high Australian dollar we are getting a big improvement in energy infrastructure without an overall drop in living standards.

And thank goodness for fast rising power prices – without that, we’d have deflation. It’s true!

Follow @AlanKohler on Twitter. This article first appeared on Business Spectator.

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