Econ3009 Report Essay PDF

Preview

Summary

Econ3009 Report Essay see doc for more info...

Description

Reasons for High Electricity Prices in Australian Electricity Markets

Australian household electricity prices have doubled within the last ten years which has caused financial distress for many households [ CITATION Lud18 \l 3081 ]. Changes in generation and distribution costs are significant aspects for increasing electricity prices. Further, the Australian Competition and Consumer Commission estimates that prices are determined by network prices, retail costs and margins, generation costs and green schemes [ CITATION ACC18 \l 3081 ]. Complicated pricing and diverse products explain the astronomical profit margins in electricity retailing; they are two times higher than what is considered reasonable by regulators [ CITATION Lud18 \l 3081 ]. These complicated pricing schemes inhibit consumers from obtaining a better deal as it is difficult to compare prices. Since deregulation, energy retailers have experienced increases in costs with simultaneous decreases in efficiency.

Additionally, decreases in economies of scales has minimised labour productivity, seen through the number of managers increasing by 217% in 15 years [ CITATION Dav13 \l 3081 ]. Further, lack of competition has facilitated for prices to increase [ CITATION Lud18 \l 3081 ]. Community concerns regarding the ethical impact of fossil fuels on the environment encouraged growth in the renewable energy sector. Australian electricity markets are currently transitioning from a system largely run with fossil fuels towards smaller scaled generators, such as wind and solar technologies [ CITATION Aus201 \l 3081 ]. Studies have concluded that wind power technology reduced wholesale spot prices [ CITATION Lud18 \l 3081 ]. There is a strong tie between production and accessibility of electricity and economic growth [ CITATION Dav20 \l 3081 ]. The transition was motivated by economic factors such as rising electricity prices, technological advancements and development in the renewable energy sector.

Price discrimination is the strategy to charge consumers varied rates for the same product based on what the seller believes they can achieve from the consumer[CITATION RVa \l 3081 ]. This is employed to attain higher profits when adjusting the price for each consumer. Sellers can accomplish this where there is a lack of price transparency[CITATION RVa \l 3081 ]. Price discrimination is common throughout the electricity sector and contributes to high electricity prices in Australia. The electricity market is efficient as the marginal unit produced was produced at marginal cost [CITATION Pau17 \l 3081 ]. Price dispersion is able to occur as consumers with larger discounts use more energy than those on higher tariffs; this indicates that consumers using more electricity find it worthwhile to compare prices to save overall. Price discrimination is seen as unethical as it contradicts equal

opportunity; this is the right to be treated without judgement [ CITATION Saw16 \l 3081 ]. Policies such as regulated tariff have been implemented in certain states to allow the Government to set the price, rather than companies. Other Australian states must comply with the Electricity Retail Code's default market offer price [ CITATION Aus202 \l 3081 ]. Price discrimination facilitates high electricity prices in Australian electricity markets.

Market power is a firm’s ability to influence the price at which a product or service is sold to increase economic profit [ CITATION Wil20 \l 3081 ]. This is mostly seen in highly concentrated markets. Electricity is highly selective and exclusive, allowing for market power to be observed. Market power has been observed through the closure of Hazelwood power station [ CITATION Mou19 \l 3081 ]. After closing, prices more than doubled, market power increased its wholesale market profits by sixty percent and could include these increases in their prices to consumers [ CITATION Mou19 \l 3081 ]. From this arose concern regarding lack of oversight and regulation. The current transition from fossil fuels to renewable energy has observed a new type of market power [ CITATION Bru12 \l 3081 ]. Wind energy cannot increase production with demand, wind is subject to environmental outlook. Therefore, renewable energies gain less than traditional energy in regard to market power [ CITATION Bru12 \l 3081 ].

Implication of High Electricity Prices, Efficiency and Equity Policy

Economic efficiency is reached where resources and production are met with optimal allocation. Equity analyses how society disperses resources. Carbon taxes and emission trading schemes have been implemented by Governments in hopes to reduce energy’s negative externalities. These are aimed to increased efficiency but have caused negative impacts towards low income households because of its regressive traits [ CITATION QEU17 \l 3081 ]. Similarly, perfect competition is where allocation is most efficient and marginal cost equals price. We can infer from this that low income households are encumbered with higher energy prices. Subsequently, higher electricity prices result in welfare losses from the low price elasticities. Moreover, lower income per capita households consume high amounts of energy [ CITATION Roh19 \l 3081 ].

To address efficiency and equity issues, schemes to support vulnerable households to find affordable electricity prices would be effective. Allowing these households to attain purchasing power through

group purchasing schemes. The increasing accessibility of price comparison websites is assisting consumers to understand price differences across energy companies.

Possible Future Policies

It would be beneficial to re-evaluate regulation policies and simultaneously separate large generator providers into retail and generator company’s [ CITATION QEU17 \l 3081 ]. A regulated price should be set which retail companies must adhere to which is based on operation costs and limitations set for maximum approved profit margins. It is important to consider that re- evaluation of regulation policies will likely increase electricity prices [ CITATION QEU17 \l 3081 ]. Basic service offers hint towards causing small retailers to exit the market and discourage new retailers entering the market. Re-regulating to include non-discriminatory policies has found to decrease competition which results in decreased discounts. Regulatory implementation negatively impacted the welfare of consumers [ CITATION Pau17 \l 3081 ].

The Australian Competition and Consumer Commission supplements generation capacity and unravels consolidation of generation assets to encourage policies boosting competition rather than regulation prices. More policy options are to reduce consumer confusion regarding energy product by advising retailers to be more transparent with marketing product and pricing. This can be achieved through increasing funding on price comparison websites and resources accessible to all consumers. Energy retailers should introduce standardised price comparison to allow consumers to easily compare prices and services.

Reference List

ACCC, 2018. Restoring electricity affordability and Australia’s competitive advantage. Retail Electricity Pricing Inquiry—Final Report. Australian Energy Regulator, 2020. Tariff and fees explained. [Online] Available at: https://www.aer.gov.au/consumers/my-energy-bill/tariff-and-fees-explained Australian Energy Regulator, 2020. The Electricity Market in Australia. [Online] Available at: https://www.aer.gov.au/system/files/State%20of%20the%20energy%20market %202020%20-%20Chapter%201%20A3%20spread.pdf Best, R. & Burke, P., 2019. Factors Contributing to Energy-related Financial Stress in Australia. Economic Record. Hal, R. V., 1989. Chapter 10 Price discrimination. Handbook of Industrial Organization, Volume 1, pp. 597-654. Kenton, W., 2020. Market Power. [Online] Available at: https://www.investopedia.com/terms/m/market-power.asp Ludlow, M., 2018. Five ways the energy market is ripping off consumers. [Online] Available at: https://www.afr.com/politics/five-ways-the-energy-market-is-ripping-offconsumers-20180711-h12j1z Mountain, B., 2012. Market Power and Generation from Renewables: The Case of Wind in the South Australian Electricity Market. Australian Economic Report, Volume 2. Mountain, B. & Percy, S., 2019. The exercise of market power in Australia’s National Electricity Market following the closure of the Hazelwood power station. [Online] Available at: https://apo.org.au/node/226956 QEUN, 2017. Electricity financial stress soars. [Online] Available at: https://www.qeun.com.au/pdf/QEUN%20Media%20-%208%20Nov %202017%20-%20Electricity%20financial%20stress%20soars.pdf Richardson, D., 2013. Electricity and privatisation. What happened to those promises?, Volume 22. Ronayne, D., 2020. Price Comparison Websites. Warwick Economics Research Papers, Volume 1056 , pp. 2-13. Sawhill, I. V. & Reeves, R. V., 2016. Modeling Equal Opportunity. RSF: The Russell Sage Foundation Journal of the Social Sciences, 2(2), pp. 60-97. Simshauser, P. & Whish-Wilsonc, P., 2017. Price discrimination in Australia's retail electricity markets: An analysis of Victoria & Southeast Queensland. Energy Economics, Volume 62, pp. 92-103....