ECON7000 Report: Microeconomics Analysis of Energy Prices in Australia

This report analyzes the rising energy prices in Australia, focusing on the microeconomic factors contributing to this trend. The report begins with an introduction to the issue, highlighting the significant increase in energy costs across several eastern states. It then analyzes an article discussing the trend of rising energy prices, illustrating the impact on businesses and consumers. The analysis includes a discussion of the factors responsible for soaring energy prices, such as the transition to renewable energy, political ideologies, supply shortages due to exports, and climate policy uncertainty. The report uses supply and demand diagrams to explain the impact of these factors. The conclusion summarizes the key findings and implications of the analysis. The report also includes references to the sources used.

Running head: MICROECONOMICS ANALYSIS
Microeconomics Analysis
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Table of Contents
Introduction......................................................................................................................................2
Analysis of article............................................................................................................................2
Trend in rising energy prices.......................................................................................................2
Factors responsible for soaring energy price...............................................................................4
Conclusion.......................................................................................................................................6
References........................................................................................................................................7

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Introduction
The sky reaching prices of energy has become one of the major concerns for Australia. It
is very surprising that despite having access to abundant resources, Australia still faces shortage
of electricity resulting in a high energy price. For many decades Australia is known as a lucky
nation because of several favorable circumstances within the domestic economy supporting
steady economic growth. Among these favorable economic circumstances most important
advantage is its abundance supply of energy resources. Australia possesses largest reserve of
natural gas and coal in world. The paper critically evaluates the article named “Can Australia
bring its sky-high energy prices down to earth?” discussing various causes and implication of
high energy price.
Analysis of article
Trend in rising energy prices
Author of the article mainly has mainly discussed various issues related to upward rising
trend in energy prices. The National electricity market made up of eastern state such as South
Australia, Queensland, New South Wales, Tasmania and Victoria are now paying highest
electricity bills in the world. In South Australia, electricity price is just below AUD 0.50 per
kwh. Electricity prices in Queensland, Victoria and New South Wales counted in the list of top
10 regions paying highest electricity prices. When compared to other nations prices are far lower
than that in Australia. For example, electricity price in European Union is just over AUD 0.30. In
case of US, prices ranged between AUD 0.10 and AUD 0.20 (Lo, 2018). Electricity in National
electricity market has increased by more than 130% from 2015 to 2017.

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As energy is one of the primary inputs used in many businesses, high price of energy
hampers productivity of firms. Alchin Long Group, equipment manufacturer in Sydney has
expressed its concern for high electricity price. After facing an increase an electricity price from
AUD 55.30 per MWh to AUD109.70, the company is considering to bring back Chinese
operators to supply electricity at a relatively low price. Mining companies and other industrial
firms are also considering to make new investment following a price increase in one key input
(Aph.gov.au, 2019). The figure below illustrates impact of high energy price on manufacturing,
mining and other business.
Figure 1: Effect of high energy price on business
In figure 1, DD and SS shows the respective demand and supply curve of a business.
Initial equilibrium in the market is at E with the business supplying Q* quantity and charging a
price of P* in equilibrium. Now, increase in price of one key input (energy) hampers
productivity lowering the available supply (Cowell, 2018). Consequently, the supply curve

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shifts to the left S1S1 moving the equilibrium to E1. At the new market equilibrium, price is
higher at P1 while equilibrium quantity is lower at Q1. Rise in energy price thus trickle down to
commodity market in terms of a higher price of goods.
Factors responsible for soaring energy price
The article identifies various factors resulting in high energy price in Australia. The first
factor is to be blamed is Australia’s transition towards renewables to reduce carbon emission
within the targeted limit. Like non-renewable resources, Australia is also blessed with renewable
resources. The transition from coal-fired plants and shifts towards the low carbon emitting
technology takes time hampering the supply of energy.
In addition to required time for making successful transition to renewable, political
ideology in Australia is responsible for high price. The decision of coal lobbyists and other
political parties including decision of prime minister Malcolm Turnbull reflects mostly political
ideology rather than economic sense. The left wing ideology in formulating energy policy and
political interference has resulted in unaffordable and unreliable power generation in Australia.
The argument is definitely based on true claim (Lo, 2018). Power outage and high price of
electricity are resulted from the use of intermittent renewable resources and insufficient back up
plants to support steady supply. Sudden closure of large scale coal fired plants lead to significant
shortage of electricity.
There is considerable mismanagement in the transition of power generation from coal
fired plants to non-renewable energy sources. Continuous changes in climate policy design by
different government has resulted in an uncertainty in the electricity market preventing
companies to make large scale investment to lower price. The Renewable Energy Target (RET)

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suggests that a minimum of 20 percent electricity supply should generated by non-renewable
sources by 2020. This shifts investment to non-renewable resources (Lo, 2018). This however
has been done without giving much attention to manage demand-supply and price implication
behind installation of renewable power generators.
An important factor contributing to soaring energy price is the domestic supply shortage
due to high tendency of extensive energy export. Australia export a significantly high volume of
natural has in the global market and is likely to overtake Qatar as a leading exporter globally. As
most energy firm choses to supply energy to the export market over the domestic demand, this
results in a shortage in domestic market pushing up energy price (Ziffer, 2019).
All the reasons discussed behind the rapidly increasing energy price indicate that the
supply side interruption in energy market is responsible for high price of energy (Aph.gov.au,
2018). This can be explained with aid of the following figure

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Figure 2: Supply shortage in the energy market and high price
D1D1 and S1S1 depict the initial demand and supply of energy in the market. Now,
because of various supply side interruption supply of energy falls which shifts the supply curve
to the left to S2S2. As a result, energy price increases to P2 while available energy supply at
equilibrium falls to Q2.
Conclusion
The article discusses current trend in energy prices in Australia and explains different
factors leading to an unexpected increase in energy price. Price in most of the eastern states have
risen by more than 100 percent. As a result, firms and consumers end up with paying a
significantly higher energy price. Factors resulting in a high price of electricity include transition
to renewable energy, sudden closure of traditional power plant and lack of back up, political
lobbying, uncertainty in climate policy and tendency of energy firm to serve the global market
over national market.

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References
Aph.gov.au. (2018). Energy prices—the story behind rising costs – Parliament of Australia.
Retrieved from https://www.aph.gov.au/about_parliament/parliamentary_departments/
parliamentary_library/pubs/briefingbook44p/energyprices
Cowell, F. (2018). Microeconomics: principles and analysis. Oxford University Press.
Lo, C. (2018). Can Australia bring its sky-high energy prices down to earth?. Retrieved from
https://www.power-technology.com/features/australia-energy-prices/
Ziffer, D. (2019). Jobs gone, power bills soar as gas 'catastrophe' explodes. Retrieved from
https://www.abc.net.au/news/2019-05-17/gas-exports-blamed-for-electricity-price-rises-
job-losses/11121120