In countries with expensive electricity like Australia, it’s easy to think that high generation costs are the main cause. However, the Australian Competition and Consumer Commission (ACCC) carried out a detailed study of electricity prices, and the numbers tell a different story: wholesale energy prices paid to generating companies only account for 22% of the power bill. This means electricity becomes almost five times more expensive as it travels from the power plants to client premises.
Environmental regulatory tariffs imposed by the Australian government have also been blamed for driving up electricity prices, but again the ACCC report states otherwise: these costs only represent 7% of residential power bills.
If energy generation and government fees add up less than 30% of the residential power bill in Australia, then where does the rest of the money go? The answer is simple: it is used to cover power network costs, retail costs and energy retailer margins. Australians can normally choose among energy generation companies, but the energy still has to be delivered by the power network, which is divided by territories controlled by single retailers.
According to the ACCC, power network operation accounts for 48% of the residential electricity bill, while other retail costs account for 16% and retailer margins represent 8%. When these three values are added together, the result is 72% of the power bill, and the main reason why electricity prices are so high in Australia. Many homes and businesses have seen their power bills double in less than a decade, and the electricity price increase since 2007 has been 63% higher than inflation.
The National Electric Market spans Queensland, New South Wales, Victoria, South Australia, Tasmania and the Australian Capital Territory. Increasing network costs have been identified as the main cause of higher power bills in all regions, except for South Australia, where generation cost increases have been significant. However, network costs are still the second-highest component of South Australia power bills, and are only slightly lower than generation costs.
Rooftops solar power systems are a very attractive investment for Australian homeowners and businesses because they remove power networks and energy retailers from the energy price equation. If you calculate the total ownership cost of a solar PV system throughout its lifetime and divide it by its total energy output, the resulting cost per kilowatt-hour is only a fraction of the retail price charged by gentailers like AGL, EnergyAustralia and Origin. In addition, the government’s Small Scale Renewable Energy Scheme makes solar power systems much more affordable, and you also have the option of signing a solar Power Purchase Agreement (PPA).
In a PPA, the solar photovoltaic system provider assumes financing, maintenance, operation and equipment replacements, while you are charged based on the amount of kilowatt-hours delivered by the system, at a price much lower than the electricity tariff. This is like negotiating directly with an energy company to legally remove the middleman from business.