News & Blog

Blog Post Saturday 01 July 2017

How are Energy Prices Set (and Why are They Rising)?

How are Energy Prices Set (and Why are They Rising)?

Electricity and gas prices have been steadily increasing in recent years and all indications are that prices will continue to rise in the foreseeable future. While many people believe this is because of energy retailers trying to increase profits, these increases actually happen across the board, due in a large part to changes in wholesale costs.

What are you paying for?

Your energy bill is made up of a number of different cost components, each of which contributes to the total amount you pay.

  • Wholesale costs – the costs associated with purchasing electricity and gas from generators and producers
  • Network costs – transmission, metering and maintenance costs associated with the delivery of energy via power lines or gas pipes (these can account for 40-60% of your bill)
  • Retail costs – billing, customer service, connections and other services by energy retailers
  • Other costs – including government-mandated environmental programs such as those aimed at increasing renewable electricity generation.

On your energy bill, you will see what is known as a fixed charge (often called a ‘daily supply charge’ or ‘average daily cost’). This amount goes largely towards wholesale (generation) and network (supply) costs.

There is also a variable or consumption charge, which is shown in cents per kilowatt hour (c/kWh) for electricity and cents per megajoule (c/MJ) for gas. This is the amount you pay for each unit of electricity and gas you consume. This can vary depending on factors such as whether you have solar panels or appliances that operate off-peak.

Other charges which you may be required to pay for your energy can include:

  • Connection and disconnection fees
  • Credit card processing fees
  • Late payment fee – extra charge for paying your bill late or not having adequate funds for a direct debit payment.

Why do prices rise?

Energy price rises are an annual industry event and are driven by recurring factors such as:

  • The need to match supply and demand – supply and demand must be continuously matched in wholesale markets and when this does not occur, more expensive electricity must be generated to meet demand, due to the fact that it cannot be economically stored (apart from hydro electricity).
  • Inaccurate forecasting – energy generators sometimes miscalculate expected future energy consumption requirements, causing wholesale prices to rise.
  • Load profile – when peaks in demand occur, energy generators must increase their potential generation capacity in those areas, which increases both wholesale and network prices.  
  • Generator outages - unexpected outages (other than regular maintenance) can require more expensive energy generation, resulting in sudden increases in wholesale prices.
  • Fuel commodity prices – rising costs for fossil fuels used to generate electricity will push up wholesale prices.
  • Weather – prolonged drought can impact hydro electricity supplies and raise energy prices, along with seasonal temperature extremes that create spikes in demand.

Why are prices rising now?

Energy prices are on the rise this year as in previous years, due not only to the recurring factors mentioned above, but also to more recent developments such as:

  • Greater network investment to maintain and replace ageing infrastructure and to increase capacity to meet rapidly growing demand.
  • Recently introduced government policies to address environmental issues such as the Renewable Energy Target (RET) scheme.
  • The closure of the Hazelwood power station in Victoria's Latrobe Valley has seen wholesale electricity prices more than double in the past year.

What’s being done about it?

Australia has committed to reducing carbon emissions by 26-28% by the year 2030 in line with the worldwide initiative to keep global warming at 2 degrees.

We are currently attempting to achieve this through a Direct Action plan, which pays polluters to reduce emissions. However, many experts are predicting we will not achieve the 2030 goal and must find new ways to reach our target, while maintaining a reliable energy supply and keeping energy costs under control.

One idea finding favour with a number of organisations is a proposed Emissions Intensity Scheme, which is seen as the best way of reducing emissions while keeping energy prices down. The scheme works by penalising electricity generators who pollute above a baseline limit, while rewarding those who stay below the limit with credits they can trade to polluters.

Other proposals to keep future price increases in check include increasing the privatisation of state government-owned electricity networks, adjusting government environmental policies which impact on wholesale costs and increasing retail price deregulation.

What can you do yourself?

Even if such measures are successful in the longer term, energy price rises seem inevitable for the foreseeable future. So what can the average consumer do to reduce their energy bills? 

Here are some useful suggestions:

  • Make sure any discounts you signed up for with your current retailer haven’t expired and if they have, renegotiate or move to another retailer.
  • Make sure those discounts apply to your supply charges as well as your usage charges (supply charges can account for up to half your bill)
  • Pay your bill on time – many retailers offer pay-on-time discounts and all impose late payment penalties.
  • Talk to your retailer – in a competitive marketplace, there is always room for price negotiation, so don’t be afraid to talk to your retailer about getting a better
  • If shopping around, ask for a bill comparison. Send a potential retailer your current bill and they will work out what it will cost you on their plan.

The bottom line is, everyone needs energy, whether it’s electricity, gas or both, but that doesn’t mean we have to pay more for it than we absolutely have to. So while general market forces may be out of our control, choosing the right retailer is not. For more information on choosing the right retailer, check out this post. And here are a few more places you can find tips for reducing your energy bill: