Cutting through complexity: Why did Australian electricity prices skyrocket, and are recent reforms a useful solution?

Abstract

The main causes of the rapidly rising electricity prices in Australia in the decade to 2017 included excessive concentration of ownership arising from an imperfectly implemented privatisation process, combined with perverse regulatory incentives for wasteful grid investment, weak market misconduct laws and systemic complexity leading to poor consumer understanding of retail electricity pricing. Recent reforms are intended to address these market issues. The 2019 Prohibition of Electricity Market Misconduct (PEMM) laws are intended to ensure that reductions in electricity supply chain costs are passed on to consumers, that gentailers are not able to discriminate against smaller retailers in financial contracts markets, and that generators are not able to manipulate prices in wholesale spot markets. These laws are broadly formulated, and grant strong powers to the Australian Competition and Consumer Commission, including the power to apply to the Treasurer for a divestiture of assets order. State and Commonwealth default offers and retail price caps are intended to prevent excessive costs for customers on standing offers, and confusing and misleading offers labelled as discounts. Increasing solar and wind generation capacity is contributing to steadily reducing electricity costs and concentration of ownership. Despite continuing fossil fuel exploitation in Australia, renewable scale-up is likely further accelerate, for production of clean hydrogen to power low-emissions steel and aluminium production, manufacturing and resource processing. Until late 2021, renewable scale-up underpinned reducing wholesale prices, that were not fully reflected in retail prices. In early 2022, electricity wholesale price rises have been driven by surging coal prices, unplanned outages in aging coal plants, and transmission constraints limiting more widespread use of cheaper renewable power. In the event of future wholesale price declines achieved through increasing renewable penetration, the PEMM laws and default offers/price caps can play a useful role in ensuring cost reductions are passed on to consumers.