As an electricity source, coal is characterised by a very low generation cost, unfortunately combined with significant environmental damage. Since coal is very abundant in Australia and is the main electricity source in the country, you may have wondered why we pay some of the highest power bills in the world? The answer is simple – the cost of generating electricity is only a small fraction of the tariff, and most of the payment covers power network costs and energy retailer profits.
How Australian Energy Retailers Operate
When you pay an electricity bill in Australia, you are not paying directly to the power plants. Instead, energy retailers purchase electricity in the wholesale market, and resell it to you after adding several charges:
- Network costs, which include infrastructure upgrades, operation and maintenance.
- Taxes and regulatory fees.
- Energy retailer profits.
Power networks require maintenance and are constantly being upgraded to meet growing demand. Large-scale network upgrades were carried out in Australia in recent years, and they are the main cause of the drastic electricity price increase. Since energy retailers are businesses, network costs end up being paid by Australian homes and businesses, and they represent around half of the power bill.
Electricity prices are also high because energy retailers have legal monopolies over the power network, and will charge profits as high as the government allows them. There is competition in the generation market (wholesale), since one retailer can purchase energy from multiple power plants. However, energy retailers have a monopoly over their territory – the power market is structured this way to avoid redundant grid infrastructure from competing companies.
Australian utilities have spent billions of dollars in power network upgrades, which means a short-term decrease in electricity prices is unlikely. Solar power now matches coal in terms of generation cost, but utility-scale solar farms will not make electricity cheaper when the problem lies in network costs. Therefore, the business case is normally better for privately-owned solar.
The Effect of Renewable Energy
As more Australian homeowners and businesses deploy solar power and other renewable generation systems, electricity prices can be expected to increase even more:
- A power network has many fixed costs that must be covered by the utility company.
- When homes and businesses generate their own electricity, energy retailers sell a reduced amount of kilowatt-hours.
- To cover the same fixed costs while selling less energy, energy retailers must increase the kilowatt-hour price.
In the case of solar power, widespread adoption causes a very low energy demand around noon, while the demand peak after sunset stays the same. Energy retailers are forced to keep the same generation capacity on standby, making peak-hour electricity more expensive. However, solar PV system owners can avoid these charges by adding energy storage to use solar energy at night.
As more home and businesses go solar, those still connected to the grid will start facing higher electricity prices, in great part because there are now less clients to pay fixed costs. In other words, the savings offered by solar power in Australia improve each year!