Rising Power Prices Explained

10th June, 2019 | by ReAmped CEO Jason Donald

Average residential electricity bills are up 35% over the past 10 years, and the main drivers of this increase are higher wholesale prices, network charges, and green charges.

Average residential customer bills are about 35% higher than they were 10 years ago. That’s according to a July 2018 report by the ACCC, analysing power prices from 2007-08 to 2018. Deregulation promised competition and innovation would lead to lower prices, not a 35% increase. So, what’s going on here?

Let’s take a look at a typical power bill to understand what has driven this increase. A customer power bill shows 1) how much power you consumed during the billing period, 2) a usage charge (in cents per kWh), and 3) a daily charge (flat rate cost of delivering power to your home).

To calculate your bill, your electricity retailer multiplies your usage data (measured by your meter) by the usage charge c/kWh. They also multiply the number of days in the billing period by the daily charge. Take the sum of these two equations, add GST, and you’ve got your bill total!

This is the number that the ACCC has told us is on average, 35% higher than it was 10 years ago. But since billing periods haven’t changed, and the average usage is actually 13% lower (due to improved appliance efficiency and increased solar power installation), most customer bills don’t tell us why power bills have risen.

So where can we find the answer?

We get a much better insight if we look at bills from a retailer’s perspective. Like the ACCC report, we’ll break it down into 5 parts. 1) A small retailer like ReAmped Energy needs to buy power from the wholesale market. Wholesale power costs represent 34% of the average residential bill. 2) Power is delivered to customers via network companies (poles and wires) who charge the retailers for this. This delivery cost is about 43% of the bill. 3) Retailers must meet various state and federal environmental schemes, and these add another 6% to the bill. 4) Retailer operational costs represent about 8%. 5) The remaining 9% is gross retail margin - the retailer’s take home pay after bearing all the operational and regulatory risks of being an electricity retailer.

How have these 5 costs changed in the last 10 years?

According to the ACCC report, since 2008, wholesale prices have risen by 21%, which has added 8% to average bills. Most large retailers also own electricity generation, so high wholesale prices improve their profits. Whereas for small retailers like ReAmped, high wholesale prices decrease our profits. That means that we - and our customers - want lower wholesale prices.

Second, the network charges have risen by 27%, adding an additional 12% to average bills. Network companies are monopolies, so their charges are set by the government annually. Over the last 10 years, network companies have argued for higher network charges, to support network infrastructure investment. Retailers have very little say over this.

Green charges vary by state and can change with each change in government. From a low base, these charges have grown by 380% since 2008 and have added 7% to the average bill.

Before tax, retailer operational costs have increased by about 28% which reflects higher compliance and reporting costs, infrastructure investment costs, wages growth, and higher marketing costs. These cost increases have added 2.5% to average bills.

Lastly, retail margins have added 4% to bills, reflecting the increased risk retailers face in the Australian electricity market environment. These risks relate to higher wholesale risks, changing regulations and compliance risks, lack of policy clarity, technology risks, and more.

So, we have our answer: average bills are 35% higher than 10 years ago due mainly to a 27% increase from higher wholesale prices, network charges, and green charges. The remaining 7% increase comes from higher retail operational costs and margins.

Deregulation promised more competition and innovation would lead to lower prices. As a new retailer, ReAmped Energy is excited to be adding competition to the market, and by using innovative technology, we’re reducing our costs to help deliver the promise of lower prices.