Economics Essay: Understanding the Rise in Energy Prices in Australia

This essay provides a comprehensive economic analysis of the soaring energy prices in Australia, a nation paradoxically rich in energy resources. It identifies key factors contributing to the price surge, including the transition from coal-based energy to renewable sources, the impact of climate policies, and the significant volume of energy exports. The analysis employs basic microeconomic concepts of supply, demand, and market equilibrium to explain how supply shortages, driven by these factors, lead to increased energy prices for residential and commercial consumers. The essay also discusses the implications of high energy costs on Australian businesses and suggests potential reforms, such as promoting competition, increasing generation capacity, and implementing price controls, to address the ongoing energy crisis.

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.