Soaring Energy Prices in Australia: An Economic Analysis

This article provides an economic analysis of the soaring energy prices in Australia. It discusses the factors contributing to the high prices, including the transition to renewable energy sources, climate policy, and energy export. The article also explains the basic microeconomic concepts of supply, demand, and market equilibrium to analyze the situation.

Running head: ECONOMICS ASSIGNMENT
Economics Assignment
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Table of Contents
Introduction......................................................................................................................................2
Analysis of the article......................................................................................................................3
Rising price of energy..................................................................................................................3
Economic theories to explain high price of energy.....................................................................3
Supply shortage and soaring energy prices in Australia..............................................................7
Conclusion.......................................................................................................................................8
Reference list.................................................................................................................................10

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Introduction
Soaring energy prices in Australia today has become a major cause of concern.
Australians now pay one of the highest electricity bill for residential usage in world. Shortage of
energy is the main factor contributing to growth in prices. Energy shortage in Australia is quite
surprising as the nation is known for its abandoned stock of resources. The transition from coal
based energy supply to a renewable one is often held responsible for high electricity bills of
Australians (Power-technology.com. 2018). Since several decades, Australia is considered as a
lucky country because of the favorable circumstances that contribute to economic prosperity.
Australia possesses one of the biggest stock of coal and natural gas of the world. The nation thus
is blessed with unrestricted availability of energy resources.
In view of growing concern to global warming and pollution, focus of the world has now
shifted to make the energy system decarbonized. In addition to abundant supply of traditional
energy source, the nation also has the potential to utilize renewable energy sources. Australia has
an estimated amount of 5000 exajoules wind and solar energy resources (Finder.com.au 2018).
This is almost 60 percent larger compared to combined supply of coal, oil, gas and uranium
resources. Extensive export of energy is another factor that caused supply shortage in the
domestic market.
The recent event of soaring energy price in Australia is explained using basic
microeconomic concepts of supply, demand and market equilibrium. A recently published article
has expressed great concern towards the issue of sky reaching energy prices in Australia. Several
factors are discussed to explain the price trend of energy. These include transition towards
renewable energy sources, adaptation of climate policy and tendency of energy supplier to export

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over the need in the domestic market. All the relevant aspects are analyzed with the framework
of standard demand and supply model.
Analysis of the article
Rising price of energy
Australia though is considered as one of the energy abundant nation, use of energy for
residential and commercial usage has now become extremely expensive. People living in eastern
states like South Australia, New South Wales, Queensland, Victoria, Queensland and Tasmania
constitute the largest electricity market of Australia are the payers of highest bill of residential
energy usage globally (Hutchens 2018).
At the top list in South Australia, electricity costs AUS 0.50 per kWh. Queensland, New
South Wales and Victoria are among the list of world’s top ten highest paying nation of
electricity prices. For European Union, the average price of electricity is around AUD $0.30 per
kWh. Consumers in US pay a relatively low electricity price with price lying between AUD
$0.10 and AUD 0.20 (Power-technology.com. 2018). As per the published report in June, the
national energy market in Australia experienced a hike of 130 percent in the wholesale prices of
electricity.
The high-energy price not only hurts common people in Australia but also hurt the
businesses those are highly energy dependent. Alchin Long Group, an equipment manufacturer
of Sydney is considering bringing back Chinese operation to Australia following a huge rise in
electricity price (aph.gov.au. 2018). Mining and other companies also express their concern
regarding new investment in Australia because of surging cost of one of the primary input.
Economic theories to explain high price of energy

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In economics, market is considered as a combination of group of sellers and buyers
engage in exchange of a specific good and service. The main features of a market are existence
of a group of buyers and sellers, specific product and voluntary exchange. Market price is the
price that exists in the competitive market (Baumol and Blinder 2015). In some markets, there is
only one identical price. In case of imperfect markets, similar or differentiated products are sold
at different prices. Demand and supply are the two influencing forces of market price.
Demand reflects the relationship between quantity demanded of a good and
corresponding market price. The said relationship is further explained by the derived demand
curve. It shows the how price is related to the quantity demanded of consumers keeping other
factors constant. It is the law of demand that indicates demand and prices of the good are
inversely associated. That is demand rises with falls in prices (Sloman and Jones 2017). Demand
on the other hand decreases with increase in price. Except price, there are different other factors
that affect demand for a product. These factors are income, taste and preferences, price of related
goods, expected price in future, population and demographic factors.
Supply on the other hand captures the relationship between supplied quantity and price.
The supply curve slopes upward indicating a positive relation between price and supply with
other influencing factor remaining the same. Two forces that explain positive relation between
supply and associated price are profit motive and increasing marginal costs (Hill and Schiller
2015). Factors other than price that influence supply are price of inputs, technology of
production, expectation about price and number of sellers in the market.
The combined forces of supply and demand determine equilibrium position and
associated equilibrium price and quantity. Change in demand and supply scenario lead to a
change in price and quantity in the market.

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Figure 1: Demand, Supply and Equilibrium
The figure above describes attainment of equilibrium in a free market. Under free market
situation, combined forces of demand and supply determine the stable equilibrium position in the
market (Mochrie 2015). Equilibrium is attained at the point where demand and supply intersect.
In the above figure, this occurs at point E. Deviation from equilibrium price leads to either
shortage or surplus in the market.
Except price, a change in demand and supply condition causes a change in equilibrium
with an associated change in equilibrium price and quantity (Cowen and Tabarrok 2015). The
main factors pushing up energy prices in Australia is the supply shortage of energy for
residential and commercial usage. Given below are some factors that drives down the electricity
supply in the market.

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Transition to renewable energy sources
The transition to a low carbon energy base, lead to an energy shortage following loss of
coal based plants and increasing attention to towards renewables. In response to growing
adaptation of renewable sources, coal lobbyists and some of the government figures react
following political ideology instead of behaving with some economic sense (Twidell and Weir
2015). The left wing ideologists including Malcolm Turnbull, former Prime Minister of Australia
aware people regarding future uncertainty and unaffordable energy prices. There is some truth
about this claim. Increase irregularity of power due to the dependency on renewable energy and
lack of supporting plans lead to power cut in South Australia, one of the leading producers of
wind power.
Climate policy and short termism
In addition to growing issue of energy transition, there are some policy issues regarding
climatic policy. Successive pressures from government regarding climatic policy add to
uncertainty regarding future of the energy companies and reduces investors’ confidence to invest
further in the company to expand their generation capacity (Abdullah, Agalgaonkar and Muttaqi
2014). Climatic policies are taken in the form of initiatives to carbon pricing and scheme aiming
to reduce carbon pollution. Neither of the policy however was effective. Setting of renewable
energy target in Australia has attracted investment in favor of renewable energy. The renewable
energy target stresses that at least 20 percent of electricity supply in Australia should be
generated from renewable energy sources by the year 2020 (Power-technology.com. 2018). This
has attracted investment in renewable sources. Such policies however not backed by supporting
policies of demand- supply management. The renewable energy target though encourages
investment in renewable energy but it distorts investment made for transition from higher to

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lower carbon technologies. Government provided considerable subsidy to support wind and solar
plant installation. The manner in which the subsidy is given was not the right way such that it
can boost the capacity of power generator to meet the demand.
Factors beyond renewables and coals
Transition to renewable energy resources is not the only source of upward pressure on
price. The increasing cost of commodity like natural gas and fuels further adds to increasing cost
burden for common people (abc.net.au 2018). The Grattan Institute reported that these costs
together account for 40 percent hike in electricity prices in the national electricity market for the
period between 2015 and 2017.
The problem of energy shortage is further aggravated by large volume of energy export to
other nations. Australia has almost reached in a position where it is likely to surpass Qatar as the
one of the leading exporter of LNG to the overseas market of Japan and others. The proportion
of energy export in Australia is expected to increase by 80 percent by the year 2020 (Power-
technology.com. 2018). As against this, the corresponding proportion of export in US is only 8
percent. The large domestic availability of energy allows American consumers to enjoy a
cheaper price of energy. The decision energy firms to supply energy to overseas market creates a
considerable energy shortage in Australia and a corresponding increase in energy prices.
Supply shortage and soaring energy prices in Australia
The figure below explains how the shortage of energy leads to an increase in energy
prices using appropriate framework of demand and supply.

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Figure 2: Supply shortage and rising price of energy
Demand and supply in the energy market is depicted by the curve DD and SS
respectively. Equilibrium is at the point E with price and quantity at the equilibrium being P*
and Q* respectively. Now, as the above-explained factors cause an interruption in the electricity
market, supply of electricity contracts as reflected from the shift of the supply curve to the
leftward direction (Moulin 2014). Given the demand, the contraction in supply creates an energy
shortage by the amount EF. To meet the demand with limited supply, price in the market
increases to P1 and availability o energy reduces to Q1.
Conclusion
As discussed in the article soaring prices of energy has now become one of the major
concerning factor in a resource rich nation like Australia. Transformation from traditional to
renewable energy sources though mainly held responsible for this there are other factors such as

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political mismanagement and large-scale export of energy create considerable shortage in
national electricity market of Australia. The power shortage results in power outage and rising
electricity price.
Some serious reforms are needed in Australia to overcome the ongoing resource crisis.
Competition among the energy firms should be encouraged by imposing a restriction on mergers
and acquisition. Investment should be made to increase the generation capacity. Government can
also put an upper limit on electricity price. The energy producers should be subsidized to recover
cost and provide electricity at a relatively cheaper price.

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Reference list
Abc.net.au. 2018"One Year On, Victoria Counts the Cost of Hazelwood Closure". 2018. ABC
News. http://www.abc.net.au/news/2018-03-29/hazelwood-electricty-prices-climate-pollution-
gas-supply/9599998.
Abdullah, Md Abu, A. P. Agalgaonkar, and Kashem M. Muttaqi. "Climate change mitigation
with integration of renewable energy resources in the electricity grid of New South Wales,
Australia." Renewable Energy 66 (2014): 305-313.
aph.gov.au. 2018 "Energy Prices—The Story Behind Rising Costs – Parliament Of
Australia".Aph.Gov.Au.https://www.aph.gov.au/About_Parliament/Parliamentary_Departments/
Parliamentary_Library/pubs/BriefingBook44p/EnergyPrices.
Baumol, William J., and Alan S. Blinder. Microeconomics: Principles and policy. Nelson
Education, 2015.
Cleanenergycouncil.org.au. 2018. "Clean Energy Council - Lifting The Lid On Energy Prices".
Cleanenergycouncil.Org.Au.
https://www.cleanenergycouncil.org.au/policy-advocacy/electricity-prices.html.
Cowen, Tyler, and Alex Tabarrok. Modern principles of microeconomics. Macmillan
International Higher Education, 2015.
Finder.com.au 2018. "Why Australian Electricity Prices Have Been Rising For A Decade |
Finder.Com.Au". Finder.Com.Au. https://www.finder.com.au/australian-electricity-prices-rising-
decade.

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Hill, Cynthia, and Bradley Schiller. The Micro Economy Today. McGraw-Hill Higher Education,
2015.
Hutchens, Gareth. 2018. "Australia's High Electricity Prices The 'New Normal', Report
Says". The Guardian. https://www.theguardian.com/australia-news/2018/jul/01/australias-high-
electricity-prices-the-new-normal-report-says.
Mochrie, Robert. Intermediate microeconomics. Macmillan International Higher Education,
2015.
Moulin, Hervé. Cooperative microeconomics: a game-theoretic introduction. Vol. 313.
Princeton University Press, 2014.
Power-technology.com. 2018 "Can Australia Bring Its Sky-High Energy Prices Down To
Earth?".. Power Technology. https://www.power-technology.com/features/australia-energy-
prices/.
Sloman, John, and Elizabeth Jones. Essential Economics for Business. Pearson, 2017.
Twidell, John, and Tony Weir. Renewable energy resources. Routledge, 2015.

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Article
1 OCTOBER 2018
Can Australia bring its sky-high energy prices down to earth?
By Chris Lo
Australia’s energy prices are among the highest in the world, despite the country’s enviable
resources. A slow and rocky transition from coal to renewable energy is often blamed, but is that
the full story?
For decades, Australia has borne the nickname ‘the lucky country’ to describe various fortuitous
circumstances that have played in the country’s favour. The foremost and most-often quoted of
these advantages is an abundance of energy resources, including some of the world’s largest
reserves of coal and natural gas.
Now that the world has turned its attention to decarbonised energy systems, Australia is similarly
blessed in terms of renewable energy potential. According to Australian think tank Beyond Zero
Emissions, the country’s “economically demonstrated solar and wind energy resources are
estimated at over 5,000 exa joules, 75% greater than Australia’s coal, gas, oil and uranium
resources combined”.
Soaring energy prices
The energy numbers look great on paper for the lucky country, but you’d be hard pressed to
convince many Australian families and businesses that their electricity supply, and what they pay
for it, has anything to do with good fortune. Australians – particularly those who live in the
eastern states of South Australia, Queensland, New South Wales, Victoria and Tasmania, which

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together make up the National Electricity Market (NEM) and account for 86% of the country’s
population – pay some of the highest residential electricity bills in the world.
“Australians pay some of the highest residential electricity bills in the world.”
South Australia tops the list with just under A$0.50 per kWh, with New South Wales,
Queensland and Victoria also represented in the world’s top 10 highest electricity prices. As a
comparison point, the European Union average is just over A$0.30 per kWh, while US
consumers, benefiting from a glut of cheap gas, pay between A$0.10 and A$0.20. A report
published in June by the Grattan Institute found that wholesale electricity prices increased by
130% in the NEM between 2015 and 2017.
Energy-intensive Australian businesses are also feeling the strain of high prices. Sydney-based
equipment manufacturer Alchin Long Group told the Australian Financial Review last year that
it might reconsider bringing Chinese operations back to Australia after a massive increase in
electricity prices in a new contract from utility company Origin Energy, which upped the price
from A$55.30 per MWh to A$109.70. Other industrial firms and mining companies have also
expressed their reticence to approve new investments while one of their primary input costs is
surging.
“We have every energy resource you could want – whether it’s old-school or new-school – here
in Australia,” Liberty House Group founder Sanjeev Gupta, who entered the South Australian
steelmaking sector last year, told Bloomberg. “Yet, we have the most expensive power in the
world.”
Are renewables to blame?

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Amid the wider debate around coal-fired power and Australia’s transition to low-carbon
generation, high energy prices have at times been wielded as a political club. The move away
from coal-fired power and towards greater adoption of intermittent renewables, argue coal
lobbyists and some government figures including former Prime Minister Malcolm Turnbull, is
driven more by ideology than economic sense. Moreover, consumers pay the price, both literally
and in energy security, for the loss of baseload coal plants and the growing share in intermittent
renewables.
“We know what happens if you allow left-wing ideology and politics to drive your energy
policy,” said Turnbull at last year’s Liberal National Party state conference in Brisbane. “You get
unreliable and unaffordable power, and business is driven out of your state.”
There is certainly some truth to these claims. High prices and power outages in South Australia,
the country’s leading wind power-producing state, have been exacerbated by the increase of
intermittent resources and the lack of dispatch able backup plants. Similarly, the relatively short-
notice closures of large, heavily polluting coal-fired plants has driven wholesale prices up in
some regions. In the state of Victoria, for example, last year’s closure of the 1.6GW Hazelwood
coal power station prompted a price surge of 85% compared to 2016 prices, according to the
Australian Energy Regulator (AER).
Short-termism and climate squabbles
But the rhetoric from supporters of Australian coal misses the point that many of these issues
stem from the management of the country’s energy transition, rather than the transition itself.
Endless flip-flopping on climate policy by successive governments has created an uncertainty
that makes it difficult for energy companies to invest in bolstering generation capacity and push

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prices down. The Labor governments of Kevin Rudd and Julia Gillard attempted to bring in
climate policy measures such as the Carbon Pollution Reduction Scheme and a carbon pricing
initiative, but they have either died on the vine or been dismantled by the Liberal-National
coalition that came after.
“The Renewable Energy Target has driven investment in renewables deployment across
states.”
As for central policies that have managed to stick it out, implementation has sometimes been ill-
considered. The Renewable Energy Target (RET), which stipulates that at least 20% of
Australia’s electricity supply should come from renewable sources by 2020, has driven
investment in renewables deployment across states – in particular those with supportive local
governments – but little consideration appears to have gone into managing the supply-demand
and price implications of renewable installations.
“While [the RET] has been effective at encouraging wind and solar generation capacity
installation, it has also distorted the investment that has occurred in the transition from higher-
carbon technologies to lower ones,” notes a June 2018 report on retail electricity pricing
published by the Australian Competition and Consumer Commission (ACCC) following a year-
long inquiry. “The subsidies received for installing wind and solar made the business case for
doing so compelling but did so in a way that was indifferent to the ability to provide energy to
the market when demand requires it.”
High prices are about far more than renewables and coal
While Australian politicians focus disproportionately on partisan squabbles over coal and
renewables, this debate is only a single thread in a tapestry of factors that have bumped up

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Australian electricity prices. And upward price pressure certainly isn’t the sole domain of
renewable technologies. The recent Grattan Institute report notes the rising commodity costs for
natural gas and black coal, adding further costs to consumers as backup fossil fuel plants were
needed more often. According to the institute, these cost drivers account for 40% of the increase
in the value of electricity traded annually in the NEM between 2015 and 2017.
Australia’s extensive energy exports play a role here. By 2019, Australia is expected to overtake
Qatar as the world’s leading exporter of liquefied natural gas (LNG). In 2016, more than half of
Australia’s natural gas production was exported as LNG to overseas customers including Japan,
and the Energy Market Operator expects that this proportion will increase to 80% by 2020. This
compares to 9% of production exported in the US, which leaves plenty of supply to ensure cheap
energy prices for American consumers.
Energy firms choosing more lucrative export markets over domestic demand has spurred supply
shortages and price increases in Australia, so much so that the Federal Government had to
threaten gas export controls last year to make leading producers such as Origin, Shell and Santos
guarantee to supply enough gas to local markets to cover the expected demand shortfall over the
next two years.
According to the ACCC’s pricing report, wider issues concerning the regulation of networks and
power suppliers have left a string of problems contributing to Australia’s high energy prices.
“At all stages of the supply chain decisions have been made over many years by many
governments that set the NEM on the wrong course,” the report argues.
The relaxation of monopoly oversight has allowed network owners to spend excessively, passing
on billions in added costs to consumers. State governments have also been lax in encouraging

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competition and avoiding concentrated markets, the ACCC notes, giving an example of New
South Wales, where two Macquarie generating units were sold to AGL Energy, “missing an
opportunity to deliver a competitive market structure by selling them to separate buyers”.
The commission also lumps a share of the blame onto electricity retailers themselves, accusing
them of creating confusing pricing structures that vary across the market and leaving many
households paying more for electricity than they need to. Pay on time discounts, the ACCC adds,
“are excessive and punitive for those customers who fail to pay bills on time”.
ACCC report offers a road forward on prices
The ACCC’s report provides a list of recommendations to help reduce prices and improve
outcomes for end users. To curb excess spending, the commission has recommended a rebate
system to compensate customers when there is over-investment. Competition can be boosted by
caps on mergers and acquisitions, empowering the AER to investigate and penalise market
manipulation and the division of Queensland’s regional energy infrastructure into three distinct
generation portfolios.
“The recommendations also include easier utility switching so that consumers can seek the
best deals.”
Investment in generation capacity could be rebuilt by a federal guarantee to purchase electricity
at A$45-A$50 per MWh from generation projects designed to serve large industrial users after
the industrial supply arrangement has run its course, giving more long-term predictability for
investors. The report also strongly recommends bipartisan and state-level backing for the
National Energy Guarantee, which mandates that energy companies provide reliable,
dispatchable power when it’s needed.

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The ACCC also wants to see more transparency brought to consumer discounts, with a
benchmark rate for households and small businesses set by the AER. The recommendations also
include easier utility switching so that consumers can seek the best deals, and a code of conduct
for third-party intermediaries to ensure that deals offered are in the best interests of the customer.
Australia’s affectionate ‘lucky country’ nickname has a sharp smack of irony to it; the phrase
was coined as the title of a 1964 book by social critic Donald Horne, who used it to criticise what
he saw as the country’s inept leadership. The full quote in the book reads: “Australia is a lucky
country run mainly by second-rate people who share its luck.” With politicians bickering along
party lines while consumers and businesses struggle to keep the lights on, there are times when
Horne’s assessment seems sadly relevant. Citizens, businesses and associations are clamouring
for a well-considered, bipartisan energy plan that lowers bills, and they shouldn’t have to rely on
luck to get it.