Explained: What the government is (and isn’t) doing to slash energy bills
Wednesday, September 4, 2019/
There’s been no shortage of attention on small business energy bills over the last 18 months, amid myriad complaints from local entrepreneurs about rising bill prices in recent years.
Minister for Energy and Emissions Reduction Angus Taylor has previously described business energy bills as “unreasonable” and has this year made several promises to deliver relief.
Government efforts to put downward pressure on business power prices can broadly be split into two camps: addressing market information issues on the retail side, and expanding energy supply (that’s gas and electricity) on the wholesale side.
These efforts are being undertaken in the context of Australia’s greenhouse gas emissions, which have been rising in Australia year-on-year since 2015 — but more on that later.
The retail side: Reference pricing
The retail electricity market has traditionally been rife with information problems and can be difficult to navigate for businesses and consumers alike.
For instance, even if a business does find a retailer with a plan that meets its needs, how can it know whether that’s the best plan on the market? Say a retailer offers a discount, how does a business know whether the discount is actually meaningful, or just promotional faff?
There’s no shortage of electricity retailer horror stories out there, and finding last year that the market isn’t functioning as it should, the Australian Competition and Consumer Commission (ACCC) recommended a series of fixes, some of which the federal government has jumped on.
One led to the introduction of a reference price scheme on July 1, which covers electricity markets in previously unregulated areas where retail competition exists — that’s NSW, South East Queensland and South Australia.
In these markets, the Australian Energy Regulator (AER) now determines a price which retailers must then refer to when offering customers deals.
So, if an electricity retailer offers a business two plans, it must say how they compare with the reference price, while any discounts should be measured from the reference price.
In theory, this makes it much easier for consumers to determine what constitutes a good deal, and when they’re being ripped off.
Victoria has its own reference price, called the Victoria Default Offer (VDO). Why does Victoria have its own model? That’s a deep question, dear reader, but it’s (just a smidge) political.
Default Market Offers
Alongside this, businesses who were previously on standing offers in these markets — that is, offers they took on an as-is basis and did not negotiate — moved over to what are now called Default Market Offers (DMOs).
Set at the AER determined price, these plans are intended to act as a safety net for businesses and consumers who don’t negotiate their electricity deals.
The AER predicts the DMO system will deliver annual savings of $457 in South East Queensland, $896 in South Australia, and between $579-878 in NSW, depending on location.
But only about a quarter of businesses in each state (17% in South Australia) were moved onto default offers from now-defunct standing offers on July 1, meaning the vast majority of small businesses in these areas haven’t benefited from this reform.
The government has also allocated more than $11 million to make it easier for businesses to both compare their energy deals and to get access to advice about their power bills.
Four third parties have been given taxpayer dosh to get the job done on this. The NSW Business Chamber is overseeing the creation of one-on-one energy consultations, while a tie-up between accounting software firm Xero, consultancy AlphaBeta and comparison tool Make It Cheaper, has seen the creation of an online bill comparison service.
The energy comparison tool allows businesses to compare their deals against benchmarks relevant to their business type and location, built on the back of insights from Xero and its broader accounting software business.
Make It Cheaper — which has gone unmentioned in government announcements — actually provides the comparison service itself, examining bills and providing a recommendation.
Businesses with between six and 20 employees will qualify for free advice under the NSW Business Chamber program, while pretty much anyone can do an energy comparison online.
Don’t expect any miracles
Guy Dundas, energy fellow at Melbourne-based think tank the Grattan Institute, says the reference price policy is a “step in the right direction” but business owners shouldn’t expect any market miracles.
“What we’re seeing now is that retailers are moving towards that simpler ‘everyday low prices’ kind of model, rather than the more opaque approach of crafting each deal for individual customers,” Dundas tells SmartCompany.
Dundas says this market shift, occurring alongside the implementation of the reference price scheme, has put the ball firmly back in the consumers’ court, but this isn’t necessarily the full solution.
The ACCC found last year that 38% of small business owners hadn’t searched for a new electricity deal in more than five years, even though there are savings available for those who ring around.
“The reality is somewhere in the middle. If you make it easier for customers to get the best deal and you give them useful information then more and more customers will find their way onto the best deal,” Dundas says.
As for whether the government’s July 1 reforms have had a material effect on lowering average power prices, Dundas says it’s still too early to tell.
Earlier this year the government passed legislation introducing what’s known as a Consumer Data Right (CDR). This basically opens the door for businesses and consumers in designated sectors of the economy to share more data with each other — the idea being that better access to information will make these markets more transparent and easier to navigate.
While CDR is being rolled out in the banking sector first (dubbed open banking), it is also being launched in the electricity market in the coming years.
The ACCC and Treasury are still undertaking consultations on what CDR will look like in the energy sector, including the role regulators will play in administering the scheme, and what types of data sets will be included.
Once CDR exists in the electricity market, businesses will be able to request and receive the data their electricity retailer holds on them, or designate a third party to receive this information on their behalf.
The CDR will also create new avenues for the analysis of product data across the market, which has the potential to improve information flows to small businesses.
In theory, this will make it easier for businesses to understand which electricity retailer is offering the best deal for their specific needs, further dealing with the information asymmetry issues which have traditionally plagued the market.
It will also empower market comparison products and businesses, and while the exact model for the CDR is not yet determined, it’s a pretty safe bet there’s going to be a lot of sales pitches floating into the inboxes of small business owners.
Reducing wholesale prices
On the wholesale side, the government promised earlier this year to deliver a 25% reduction in the average National Electricity Market (NEM) wholesale spot price by the end of 2021.
The wholesale spot price comprises between 30-40% of a retail electricity bill, according to the Australian Energy Market Commission (AEMC). This means the government’s headline target won’t translate to a 25% reduction in retail energy bills.
However, Taylor said earlier this year the target is expected to reduce retail electricity prices for small businesses to about 25c per kilowatt-hour (KW/h) by bringing the NEM spot price below $70 per megawatt-hour (MW/h).
How ambitious is this?
Wholesale spot prices in the 12 months to June 2018 averaged between $73 MW/h in Queensland and $98 MW/h in South Australia, according to Australian Energy Market Operator (AEMO) data.
For the 12 months to June 2019, prices ranged from $80 MW/h in Queensland to $98 MW/H in South Australia.
Forecasts to 2020 currently predict prices to fall over the next 12 months in all major markets, meaning prices have been slated to decrease anyway.
As far as retail prices go, Canstar Blue figures published in August show average retail electricity prices ranged from 23.2c per KW/h (Victoria) to 37.6c per KW/h (South Australia). This means the target isn’t necessarily that ambitious.
The government has flagged projects like the Snowy 2.0 Hydro scheme and plans to underwrite new energy supply to the tune of an extra 4,000 MW/h annually as the crux of its plan to reduce wholesale power prices.
“Getting more dispatchable supply into the market and more competition into the wholesale market, that’s been a very strong focus,” Taylor tells SmartCompany.
“That’s the next phase. We’ve seen progress on that but we’ve got further to go.”
Taylor last week said the government is “advanced” in its assessment of a shortlist 12 projects, which were first flagged before the April budget.
There are five gas and six pumped hydro projects on the list, as well as a proposed upgrade for the Lake Macquarie coal-fired power station in NSW.
There’s also a feasibility study being undertaken for a potential new coal-fired power station in Queensland.
The government has an explicit focus on increasing gas supply and intends to pressure state governments, notably Victoria, to open the doors for liquefied natural gas (LNG) exploration.
Victoria implemented a moratorium on gas exploration in 2017 amid concern about the effect the industry was having on the environment and the state’s agriculture industry.
Taylor said last week increasing LNG supply would be “absolutely critical” to put downward pressure on business energy bills.
“There’s got to be more gas for domestic use,” Taylor says.
Few runs on the board
However, as noted in the figures above, wholesale power prices are already going down, which Dundas says can be attributed to the ongoing renewables investment boom, which saw $20 billion pumped into the sector last year.
“Price changes are business as usual price reductions — they’re not really coming from policy action, they’re coming from renewable energy investment,” he says.
“On the wholesale level, the government doesn’t have a lot of runs on the board.”
Dundas explains the government’s underwriting program has actually created more uncertainty for the sector since it was announced, as key investors still aren’t sure how big subsidies will be, or when they will happen.
Any government support that is provided also won’t have any effect on prices before the government’s 2021 target year because, as it turns out, it takes quite a while to build power stations.
The climate crisis
The government maintains Australia will meet its 2016 promise to reduce 2005 emissions levels by 26-28% by 2030.
But figures released late last month by the Department of Environment and Energy tracked a 0.6% increase in Australia’s greenhouse gas emissions for the year to March 2019. Emissions have been going up year-on-year since 2015.
The increase was driven by gas exports, which Taylor has claimed is actually good news for the global emissions ledger.
The crux of this claim is that Australia’s LNG exports displace “dirtier” types of power generation in other countries like China, such as coal.
Those exports don’t show up in Australian emissions figures, prompting Taylor to claim “global carbon accounting” hasn’t helped Australia in this respect.
This claim is disputed. Climate scientist Bill Hare has described Taylor’s rhetoric on LNG displacing coal as “grossly exaggerated”, as The Guardian has reported.
Encouraging a larger role for LNG in Australia’s domestic energy mix also won’t be good news for Australia’s efforts to reduce its greenhouse gas emissions.
But Taylor says because Australia is somewhat behind the eight ball on storage solutions for renewable power, LNG is a solution to sure up the reliability of the energy market, particularly during peak times.
“The challenge we have versus other countries is we have a limited amount of hydro [storage],” Taylor says.
“Gas is the obvious solution to that.”
Gas creates about half the carbon dioxide emissions of burning coal, but methane, a greenhouse gas which is shorter lasting in the atmosphere but much more potent, is leaked into the atmosphere in the process.
The Intergovernmental Panel on Climate Change (IPCC) has said the world will not only need to reach net-zero CO2 emissions by 2050 to limit global warming to 1.5c, but will also need to achieve “concurrent deep reductions” in non-CO2 gasses, particularly methane.
Academics from Melbourne University have previously claimed there is “significant uncertainty” about the methane emissions reported by oil and gas producers in Australia.
“If methane emissions from unconventional oil and gas production are being significantly underreported, this could have a large impact on Australia’s national greenhouse accounts,” the academics said in a 2016 review.
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