Origin And AGL Raise Electricity Prices In South Australia Because They Can

AGL and Origin Energy have just announced price rises in South Australia.

Australia’s two largest electricity retailers have announced they will increase prices in South Australia from the 1st of July.  Origin Energy will raise prices by 6.5% increase and AGL will raise them by around 10%.

Excuses, Excuses…

The reason Origin gives for their price increase is,

“Changes to the electricity generation mix in South Australia has had an impact on the wholesale cost of energy, which in turn flow through to Origin’s retail prices.”

And with regard to their considerably larger 10% rise in prices, AGL said,

“The increase has been partly offset by the decrease in network costs, but is mainly driven by the cost and availability of coal and gas supply for electricity generation as well as the changing mix of generation output.”

The change in generation mix they both refer to is the closure of the brown coal powered Northern Power Station in Port Augusta on the 9th of May.

Has The Coal Plant Closure Raised Electricity Prices?

Whenever a large generator closes it has the potential to raise wholesale electricity prices and the shutdown of the Northern Power station was no exception.  Looking at the average wholesale electricity price since it was closed on the 9th of May until when Origin announced their price increase on the 15th of June, I see it comes to 9.9 cents a kilowatt-hour. Over the same period last year the average wholesale price was 5.2 cents, so there was a substantial 4.7 cents a kilowatt-hour increase.

It is not possible to say that wholesale electricity prices would have remained the same as they were last year if the Northern Power Station had remained open, as they are affected by a variety of factors, with the main one being the weather.  It is quite possible that Origin and AGL expect the increase in wholesale prices to be even higher in the future.

As Origin’s 6.5% price increase will raise the cost of a kilowatt-hour by around 2.1 cents and AGL’s 10% increase will raise it by around 3.1 cents, they seem quite reasonable, as they do not appear to pass on the full increase of 4.7 cents. However, the situation is not as simple as that, as other costs have decreased.

The Increase In Wholesale Prices Is Temporary

Wholesale electricity prices increased with the closure of the Northern Power Station because that’s the way electricity markets work. Competition among generators pushes electricity prices down until the weakest link, which is the generator with the highest costs, is forced to close down because it is not profitable to operate any more.

After a large generator leaves the market wholesale electricity prices spring back up. However, the situation is only temporary, as higher prices attract new generators to the market, which results in more capacity being built, and pretty soon electricity prices are forced back down again.  But it will take time for wholesale electricity prices to fall and so I would expect the increase to be passed on to consumers.

That is how the system works, and it was how the system was designed to work.  But don’t worry, I’m sure it won’t be long before some politician who sincerely believes herself to be in favor of market forces starts complaining about the Northern Power Station’s closure.

The Cost And Availability Of Coal And Gas

In its justification for its 10% price increase, AGL mentioned the,

“…availability of coal and gas supply for electricity generation.”

Now this may seem a little cheeky, because the only coal power used in South Australia is imported from brown coal generators in Victoria and coal is dirt cheap at the moment.  Brown should be especially dirt cheap, as it isn’t much more than a type of flammable dirt.

However, the Victorian government, in an environmentally positive move, has raised the royalty on brown coal from 7.6 to 22.8 cents per gigajoule, which brings it in line with coal royalties in other states.

This is enough to raise the cost of Victorian brown coal power by around 0.2 cents a kilowatt-hour, but since South Australia is likely to only get around 15% or less of its electricity consumption from Victorian brown coal generators, it is only enough to raise the average cost of electricity by an average of around 0.03 cents.  An insignificant amount.  So I am comfortable stating that any claim that South Australian electricity prices need to increase because of the higher cost of brown coal is bullshit.

Natural gas is a little more complicated.  While gas prices should be lower because both domestic and international demand has fallen, it is quite possible the price AGL is paying hasn’t declined on account of contracts it had in place.

Network Costs Are Down

Looking at the increase in wholesale electricity prices that have occurred so far in South Australia, it appears that Origin and AGL have not passed on the full increase to consumers.  However, it only appears that way, as Network costs have declined.

Network costs are the largest component of electricity bills and cover the cost of taking high voltage electricity from long distance transmission lines, transforming it to a lower voltage and then distributing it to homes and businesses using the state’s 720,000 Stobie poles. In South Australia, Network charges were over 40% of the typical electricity bill, but the Australian Energy Commission is cutting them by nearly 28% on account of how the state already has almost all the electrical substations and power lines it needs and, outside of the suburb of Salisbury, there is not much need to go through the expensive process of building more.

A 28% cut in network costs is equal to a decrease of around 3.7 cents a kilowatt-hour for a typical residential electricity bill. Once this is accounted for it means Origin is effectively increasing their price per kilowatt-hour by around 5.8 cents and AGL is increasing it by around 6.8 cents, which is considerably more than the 4.7 cent increase in wholesale electricity prices since the Northern Power Station closed down compared to the same period last year.

Inflation Accounts For Some, But Not Much, Of The Increase

According to the Reserve Bank of Australia, inflation over the first three quarters of this financial year has averaged 1.3%. This is enough to account for around a 0.4 cent increase in electricity prices per kilowatt-hour. This means Origin’s 6.5% increase is in real terms a 5.2% increase and AGL’s 10% increase is an 8.7% increase in real terms.

How Much Of The Price Increase Is Not Accounted For?

Origin and AGL are increasing their electricity prices by an amount greater than what would be expected after allowing for the decrease in network costs, the increase in wholesale electricity prices, and inflation.  This extra increase could be because the companies expect wholesale electricity prices to rise further in the future.  Or maybe they just like money.  The extra increase that is not accounted for comes to roughly an extra 0.7 cents per kilowatt-hour for Origin and 1.7 cents for AGL.

The Real Reason Electricity Prices Have Increased

The main reason for the price increases appears to mainly be higher wholesale electricity prices.  However, that’s not the real reason why AGL and Origin are charging more.  The real reason they are charging more for electricity is because they can

Electricity retailing is a monopoly regulated by the Australian Energy Commission, which sets limits on how much money electricity retailers can collect from consumers. There is some competition between retailers, so shopping around for the best deal can help, but the basic rule of thumb is electricity retailers will pretty much collect as much money as they are allowed to. Expecting electricity retailers to leave money on the table is like expecting to be able to flick a dingo’s uvula and keep all your fingers.

Will Other Electricity Retailers Increase Their Prices?

Other electricity retailers will definitely increase their electricity prices as well.  However, because there is competition, some may not increase their prices by as much as others.

What Can I Do About It?

Besides improving the energy efficiency of your home, there are two main things you can do about the coming electricity price increases.

The first is to make sure you’re not paying any more for grid electricity than you have to. And a convenient way to do that is to check out our tool. SolarQuotes’ electricity price comparison tool can help you find a better deal by comparing offers from different retailers.  It allows you to enter the details of a previous electricity bill and predicts how much other retailers would have charged over the same period.  It also shows what solar feed-in tariffs they offer.

The second thing you can do to protect yourself from price rises is to install rooftop solar or expand an existing rooftop solar system. If you don’t have rooftop solar or your current system isn’t large enough to meet your needs, then you may as well get some quotes while you’re here. It won’t hurt. Or if you are weird and it does hurt, then I suggest you grit your teeth and do it anyway, as your electricity bills are likely to hurt even more.