The cost of energy is a significant part of the cost of living and has risen sharply in recent years.

A local family looking at an electricity bill. Photo: Val Kay

As electricity increasingly comes from renewable sources (mainly wind and solar, including rooftop solar), the wholesale price of electricity has started to come down.

Some people will see this reflected in their electricity bills, which may come down this year.

Others, however, will not – and may pay more.

In general, those who are likely to see their bills go down are those who have average or above average consumption of electricity, but don’t have rooftop solar.

Those who are likely to see their bills stay the same or go up are those who only use small amounts of electricity from the grid (the system that brings electricity to us through poles and wires).

This includes people on low incomes, renters and apartment dwellers, people who live alone, and also people who have rooftop solar and therefore don’t use much electricity from the grid.

How are the bills changing?

Electricity bills include usage charges and supply charges.

This year some retailers are reducing usage charges but putting supply charges up. Some supply charges have increased by as much as 70% this year.

Usage charges are based on how much electricity we use from the grid. They may be a flat rate per every kWh (kilowatts per hour) of electricity we use, or a variable rate that changes depending on the time of day. Either way, they reflect how much we actually use.

Supply charges are the charges we pay for connection to the grid. We can’t reduce them by using less electricity. Different electricity retailers and retail plans have different supply charges, but supply charges are not related to how much electricity you use.

So a person who is a pensioner, renter or low income earner living in a small flat and limiting how much electricity they use, can end up paying the same daily supply charge as a person in a large house with a heated swimming pool and air-conditioning running all night.

This is why people who don’t use much electricity from the grid may find that their bills don’t go down, or even go up. They don’t benefit much from the reduced usage charge because they don’t use much electricity, but they do have to pay the increased supply charge.

Why is this unfair?

While some costs of providing electricity are fixed, it is nonsensical to say that supply costs are unrelated to how much electricity is used. More electricity requires a system with increased capacity to carry it.

So the idea that supply charges can be completely divorced from how much electricity you use does not make sense and is essentially unfair.

For people who have invested money and time in installing rooftop solar (and batteries), the savings they can expect are reduced because of increased supply charges. This is a disincentive for installing solar and at odds with achieving Victoria’s targets for renewable energy.

More people will be stuck with high gas prices

The government is urging people to get off gas and electrify their homes. It is also encouraging them to install renewables and batteries if they can.

But we have a price structure where the savings from electrification and rooftop solar will be reduced, meaning fewer people will be able to do this. They will be stuck with gas and steeply rising gas prices, which have risen over 50% in the last five years, while average earnings have risen less than 20%.

In addition, we will all be harmed by continuing greenhouse gas emissions from this situation.

The overall impacts are:

• The pricing structure is disadvantaging small users, including low income groups and people who have installed rooftop solar
• Increasing supply charges are at odds with achieving Victoria’s renewable targets and electrification

I have written to the Victorian minister for energy, Jaclyn Symes, about this situation. My letter was forwarded on to a public servant, who acknowledged that the pricing system was disadvantaging small users including low income groups, but did not address the further issues of fairness around this. These issues are rightfully the province of politicians, not public servants.

We need to take this issue up with politicians (and would-be politicians in the coming election). If the system is unfair and at odds with our renewable targets, what will they do about it?

Representatives of Climate Action Merri-bek will be meeting with the Minister for Energy soon and will try to get answers to some of these questions. We will also try to follow them up in the coming election.

For more information see the Q and A below. Your comments and questions on this topic are also welcome.

This post was written by Valerie Kay, with assistance from James Clough, a professional engineer working in this field. Much of the information available in this area is complex and full of jargon. I have tried to write this in plain language as a non-specialist, so that everyone can understand it. Please note the views expressed in this post are my own and may not reflect the views of Climate Action Merri-bek.

Please note this post has not tried to cover the impact of the ‘three hours of free power’ because that is also complex, but we will try to discuss it in a later post if possible.

Q and A

How is the cost of electricity set?

The electricity system is made up of producers (generators), transmission systems, network distributors and retailers. In Victoria, the system is mainly run by for-profit companies, with a smaller role for the State Electricity Commission of Victoria (SEC), which is owned by the state government.

Companies set their prices but they are also regulated by the Australian Energy Regulator (AER) and in Victoria, the Essential Services Commission (ESC).  For Victorians, these two bodies essentially determine the maximum prices that can be charged and the maximum ‘rate of return on investment’ that companies can make.

The AEC was warned that increasing supply charges could have unfair effects when they were first proposed early this year. They have acknowledged concerns, but they don’t seem to have done anything about it.

How does this relate to company profits?

Return on investment includes what most ordinary people would call profit. The amount of profit that companies are allowed to make affects the prices they can charge, as well as affecting inequality in society overall.

This situation is complex, especially now that some of the biggest investors may include superannuation funds who expect to make returns on investment in order to pay their retired members a pension.

The topic is more complicated than can be covered in depth in this post, but we do need some clarity on how the AER and the ESC decide what is a socially and environmentally allowable return on investment.

I have not been able to find information on this on either the AER or the ESC website. The available information from the AER is highly technical and does not appear to consider issues of fairness and inequality, nor the broader social and environmental impacts.

Why can’t we fix this by ‘shopping around’?

A common response to this situation in the media and from authorities is to tell people to “shop around” and look for a better retail offer.

The ability to ‘shop around’ was supposed to be the benefit of competition when our electricity was privatised in the 1990s in Victoria – competition would mean retailers would have to offer lower prices in order to attract customers.

In practice, it doesn’t simply work that way. In a general sense it does not because markets respond to money, not to individuals. Companies don’t necessarily make the most profit by selling a lower-priced item to more people, as this theory of competition suggests. They may make more by selling a higher-priced item to people who can afford to buy more.

In the case of electricity, it also does not work that way because electricity is an essential service, not a discretionary one. Companies are required to provide electricity to everyone, but by the same token, people can’t just stop buying it.

The theory of market competition is that if a provider charges too much, people will stop buying their product. In the case of electricity, we can’t stop buying it. We might be able to shop around amongst retailers, but we can’t stop buying electricity altogether, unless we can go off the grid – not an option for most people.

A third factor is that government now relies on the companies to keep the system running. The government can’t just stand by and let electricity companies fail, as free market ideology might suggest, because that could have very severe consequences for the people served by those companies. So there is an incentive to keep the companies functioning, but this could lead to a lack of necessary supervision and regulation.

What can be done about this?

Firstly, government should require the system to be transparent. At the moment, it is complex, confusing and very hard for ordinary people to understand. Clear guidelines around plain language information, fairness and accountability could help.

A further potential action could be to take the electricity system back into public ownership or make it not-for-profit. A combination of public and community ownership (including local networks), might be possible.

Some people, including trade unions, have called for renationalisation of the system, but as the current Victorian government has high levels of debt, it seems unlikely at present.

The Labor government did set up the new SEC, but it is small and a long way from the full public ownership that unions were calling for. It does, however, represent a step in the direction of public and community ownership.